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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 No. 0-19666
PHYSICIAN COMPUTER NETWORK, INC.
(Exact name of Registrant as specified in its charter)
New Jersey 22-2485688
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 The American Road
Morris Plains, N.J. 07950
(Address of principal executive offices) (Zip Code)
(201) 490-3100
(Registrant's telephone number, including area code)
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 outstanding of Registrant's Common Stock, $.01 par
value, as of November 11, 1996 is 52,982,294
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Page 1 of 31 Pages
Exhibit Index page 30
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
1996 FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS .................................. 3
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 .................. 3
Consolidated Statements of Earnings
Three Months Ended September 30, 1996 and 1995 ............ 4
Nine Months Ended September 30, 1996 and 1995 ............. 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 ............. 6
Notes to Consolidated Financial Statements .................. 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ......................................................... 19
Results of Operations ....................................... 22
Financial Condition and Liquidity ........................... 25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings .................................................. 27
ITEM 2. Changes in Securities .............................................. 27
ITEM 3. Defaults upon Senior Securities .................................... 27
ITEM 4. Submission of Matters to a Vote of Security Holders ................ 27
ITEM 5. Other Information .................................................. 27
ITEM 6. Exhibits and Reports on Form 8-K ................................... 28
SIGNATURES ................................................................. 29
INDEX TO EXHIBITS .......................................................... 30
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------------- -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 37,999,731 $ 15,516,883
Accounts receivable, net of allowance for doubtful
accounts of $1,047,000 at September 30, 1996, and
$764,000 at December 31, 1995 25,336,679 19,466,446
Inventories 5,654,166 4,598,954
Prepaid expenses and other 465,571 1,093,306
Deferred tax asset 1,650,000 1,650,000
------------- -------------
Total current assets 71,106,147 42,325,589
Intangible assets, net of accumulated amortization
of $12,678,000 at September 30, 1996
and $6,840,000 at December 31, 1995 72,729,880 53,701,055
Property and equipment, net 6,313,656 3,976,195
Investment in joint venture 2,843,961 --
Other assets 5,647,442 256,998
------------- -------------
Total assets $ 158,641,086 $ 100,259,837
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable:
Other $ 7,343,045 $ 9,080,000
Related party -- 750,000
Current portion of long term-debt 998,671 100,160
Current portion of obligations under capital leases 366,406 327,770
Accounts payable 5,287,265 4,935,601
Accrued expenses and other liabilities 8,946,500 17,024,828
Customer deposits 1,436,547 3,504,980
Unearned income 17,280,584 15,608,705
------------- -------------
Total current liabilities 41,659,018 51,332,044
Long-term debt, net of current portion 12,134,738 18,924,000
Obligations under capital leases, net of
current portion 603,946 806,255
------------- -------------
Total liabilities 54,397,702 71,062,299
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized:
Series A convertible preferred stock, 1,000 shares
outstanding at September 30,1996 and 15,750 shares
outstanding at December 31, 1995 10 157
Common stock, $.01 par value, 75,000,000 shares authorized,
52,982,484 shares issued and outstanding at
September 30,1996 and 42,937,147 shares issued
and outstanding at December 31, 1995 529,825 429,371
Additional paid-in capital 193,203,482 129,728,821
Accumulated deficit (89,489,933) (100,960,811)
------------- -------------
Shareholders' equity 104,243,384 29,197,538
------------- -------------
Total liabilities and shareholders' equity $ 158,641,086 $ 100,259,837
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Software license fees $ 7,390,537 $ 5,197,562
Hardware revenue 6,081,013 1,543,661
Maintenance, communication fees and other 11,839,806 2,872,900
------------ ------------
25,311,356 9,614,123
Cost of Revenues:
Hardware 3,232,330 963,474
Software, maintenance, communication fees and other 6,956,507 1,772,030
------------ ------------
10,188,837 2,735,504
------------ ------------
Gross margin 15,122,519 6,878,619
Operating expenses:
Research and development 1,480,023 593,305
Selling and marketing 2,522,039 490,180
General and administrative 4,630,711 3,149,311
------------ ------------
8,632,773 4,232,796
------------ ------------
Interest (income) expense:
Interest income (237,127) (73,372)
Interest expense 208,496 260,437
------------ ------------
(28,631) 187,065
------------ ------------
Income before income tax expense and
loss on equity investment 6,518,377 2,458,758
Income tax expense 1,368,045 48,051
------------ ------------
Income before loss on equity investment 5,150,332 2,410,707
Loss on equity investment, net of taxes (662,020) --
------------ ------------
Net income $ 4,488,312 $ 2,410,707
============ ============
Primary and fully diluted earnings per common share $ 0.08 $ 0.06
============ ============
Primary weighted average number of common shares outstanding 56,579,959 42,838,420
============ ============
Fully diluted weighted average number of common shares outstanding 56,673,925 42,838,420
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Software license fees $ 20,583,605 $ 10,997,191
Hardware revenue 17,964,711 4,250,242
Maintenance, communication fees and other 29,658,248 9,278,795
------------ ------------
68,206,564 24,526,228
Cost of Revenues:
Hardware 10,987,162 2,552,760
Software, maintenance, communication fees and other 16,634,876 4,767,408
------------ ------------
27,622,038 7,320,168
------------ ------------
Gross margin 40,584,526 17,206,060
Operating expenses:
Research and development 3,702,899 1,602,125
Selling and marketing 6,177,599 1,251,758
General and administrative 13,220,006 8,534,617
------------ ------------
23,100,504 11,388,500
------------ ------------
Interest (income) expense:
Interest income (454,837) (232,910)
Interest expense 1,546,903 971,725
------------ ------------
1,092,066 738,815
------------ ------------
Income before income tax expense, loss on equity
investment and extraordinary item 16,391,956 5,078,745
Income tax expense 3,441,408 110,051
------------ ------------
Income before loss on equity investment and extraordinary item 12,950,548 4,968,694
Loss on equity investment, net of taxes (1,479,670) --
------------ ------------
Income before extraordinary item 11,470,878 4,968,694
Extraordinary item:
Loss on extinguishment of debt -- (180,000)
------------ ------------
Net income $ 11,470,878 $ 4,788,694
============ ============
Primary and fully diluted earnings per common share before and
after extraordinary item $ 0.22 $ 0.12
============ ============
Primary weighted average number of common shares outstanding 53,341,935 41,570,685
============ ============
Fully diluted weighted average number of common shares outstanding 53,341,935 41,570,685
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 11,470,878 $ 4,788,694
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,110,168 2,323,771
Amortization on loan discount -- 60,000
Amortization of deferred charges -- 33,333
Gain on disposition of equipment (148,093) (53,958)
Provision for doubtful accounts 450,000 33,957
Bad debt write-off (166,977) (23,328)
Non-cash compensation expense -- 45,000
Non-cash provision for income taxes 2,949,649 --
Loss on equity investment 1,479,670 --
Extraordinary loss on extinguishment of debt -- 180,000
(Increase) decrease in assets:
Accounts receivable (4,852,442) (5,921,608)
Inventories (905,613) (401,656)
Prepaid expenses and other assets 769,601 413,255
(Decrease) increase in liabilities, net:
Accounts payable (1,714,446) (214,625)
Accrued expenses and
other liabilities (5,569,177) 34,970
Customer deposits and unearned income (4,560,035) (1,503,596)
------------ ------------
Net cash provided by (used in) operating activities: 6,313,183 (205,791)
------------ ------------
Cash flows provided by (used in) investing activities:
Purchase of equipment (1,202,926) (576,995)
Disposal of equipment (390,954) 53,958
Acquisition of licensing rights
and other intangible assets (1,246,883) (508,192)
Purchase of businesses, net of cash acquired (12,567,295) (5,314,284)
Investment in joint venture and related costs (4,716,961) --
------------ ------------
Net cash used in investing activities: (20,125,019) (6,345,513)
------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments of
long-term debt (1,704,798) (16,050,000)
Principal payments of
notes payable (3,225,408) --
Net proceeds from issuance of notes payable
and long-term debt -- 9,852,649
Principal payments under
capital lease obligations (548,118) (176,141)
Net proceeds from issuance
of common stock and
exercise of stock options 41,773,008 23,840,370
------------ ------------
Net cash provided by financing activities 36,294,684 17,466,878
------------ ------------
Net increase in cash and cash equivalents 22,482,848 10,915,574
Cash and cash equivalents,
beginning of period 15,516,883 2,512,047
------------ ------------
Cash and cash equivalents,
end of period $ 37,999,731 $ 13,427,621
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. Basis of Presentation
The information presented at September 30, 1996 and 1995 and for the
periods then ended is unaudited, but includes all adjustments (consisting only
of normal recurring accruals) which the management of Physician Computer
Network, Inc. ("PCN" and together with PCN's subsidiaries, the "Company")
believes to be necessary for the fair presentation of results for the periods
presented. The results for the three and nine month periods ended September 30,
1996 may not necessarily be indicative of results to be expected for the full
year. It is suggested that these consolidated financial statements, note
disclosures and other information be read in conjunction with the consolidated
financial statements and related notes contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
Beginning in 1993, the Company instituted a strategy of developing and
expanding its business by acquiring practice management software businesses
having an installed base of physician practice customers and of acquiring and
developing a common software platform to which such customers could migrate over
time. In execution of this new strategy, the Company acquired two practice
management software entities, Calyx Corporation ("Calyx") of Brookfield,
Wisconsin on September 23, 1993 and Wallaby Software Corporation ("Wallaby") of
Mahwah, New Jersey on December 31, 1993, pursuant to separate stock purchase
agreements. On March 11, 1994, the Company purchased substantially all of the
assets of the practice management business (the "DOM/2 Business") of IBAX
Healthcare Systems. On November 15, 1994, the Company purchased the Acclaim
software maintenance and support business (the "Acclaim" Business) from Sentient
Systems, Inc. On April 24, 1995, the Company, through a wholly-owned subsidiary,
Practice Management Systems Corp. ("PMSC"), acquired substantially all of the
assets of Practice Management Systems, Inc., a business which developed and sold
practice management software products and related equipment, maintenance and
support to physician practices (the "PMS Business") (See Note 3). On October 27,
1995, the Company acquired VERSYSS Incorporated ("Versyss"), through the merger
of a wholly-owned subsidiary of the Company with and into Versyss, with Versyss
as the surviving corporation of such merger (See Note 3). On July 3, 1996, the
Company acquired substantially all of the assets of the medical practice
management software business and certain other software businesses of CUSA
Technologies, Inc. (the "CTI Business") (see Note 3). On September 11, 1996, the
Company acquired Wismer-Martin, Inc. ("Wismer-Martin"), through a merger of a
wholly-owned subsidiary of the Company with and into Wismer-Martin, with
Wismer-Martin as the surviving corporation of such merger (See Note 3). The
Consolidated Balance Sheets and the Consolidated Statements of Operations are
inclusive of Calyx,
7
<PAGE>
Wallaby, the DOM/2 Business, the Acclaim Business, PMSC, Versyss and the results
of the CTI Business from July 3, 1996 (the date of acquisition) and the results
of Wismer Martin from September 11, 1996 (the date of acquisition) for the three
and nine months ended September 30, 1996 and are inclusive of Calyx, Wallaby,
the DOM/2 Business, the Acclaim Business and the results of PMSC from April 24,
1995 (the date of acquisition) for the three and nine months ended September 30,
1995. All significant intercompany transactions have been eliminated.
2. Net Income Per Common Share
Net income per common share for the three and nine month periods ended
September 30, 1996 and 1995 is determined by dividing net income by the weighted
average number of shares of the Company's common stock, par value $0.01 per
share ("Common Stock"), outstanding during the period. The assumed exercise of
dilutive stock options and warrants and the assumed conversion of outstanding
shares of the Company's Series A convertible non-dividend paying preferred stock
(the "Convertible Preferred Stock") has been included in the calculation of
weighted average number of common shares outstanding. The convertible
$10,000,000 principal amount five year promissory note (the "Equifax Note") of
the Company, purchased by Equifax Inc. ("Equifax") on February 15, 1995 (which
note bore interest at a rate of 6% per annum) was not considered an other
dilutive security during the period it was outstanding for the three and nine
month periods ended Septemer 30 1996 and 1995, respectively, since it was
anti-dilutive. Therefore, the Equifax Note was only included in the weighted
average number of common shares outstanding for the nine month period ended
September 30, 1996 from the date of its conversion in full into 1,932,217 shares
of Common Stock on May 10, 1996.
8
<PAGE>
3. Acquisitions
Purchase of Wismer-Martin, Inc. On September 11, 1996, the Company
acquired Wismer-Martin, a provider of practice management systems and healthcare
information systems located in Mead, Washington, pursuant to a merger agreement,
for: (i) $1,980,000 in cash; (ii) 935,000 shares of PCN Common Stock valued at
$9,365,615; and (iii) the assumption of $4,737,154 in liabilities.
Purchase of the CTI Business. On July 3, 1996, pursuant to an asset
purchase agreement, the Company, through a wholly-owned subsidiary, purchased
substantially all of the assets of the medical practice management software
business and certain other software businesses of CUSA Technologies, Inc. for:
(i) $9,150,000 in cash; and (ii) the assumption of $4,130,526 in liabilities and
cancellation of debt owed by CTI to PCN.
Purchase of Versyss. On October 27, 1995, the Company acquired Versyss, a
company located in Needham Heights, Massachusetts, pursuant to a merger
agreement, for: (i) $12,333,000 in cash; (ii) $11,750,000 in the form of a two
year promissory note bearing interest at the rate of 11% per annum issued by
Versyss, as the surviving corporation of the merger, to the Versyss Liquidating
Trust, a liquidating trust formed for the benefit of the former shareholders of
Versyss and; (iii) the assumption of $45,797,000 in liabilities.
Purchase of the PMS Business. On April 24, 1995, PMSC, a newly formed,
wholly-owned subsidiary of the Company, acquired substantially all of the assets
of the PMS Business, a practice management software business located in Needham,
Massachusetts, for: (i) $2,861,003 in cash; (ii) $2,000,000 in the form of a one
year promissory note from PMSC to Practice Management Systems, Inc. ("PMSI"),
the seller of the PMS Business, which note bore interest at the rate of 10% per
annum; and (iii) the assumption of $3,009,163 in liabilities. The promissory
note from PMSC to PMSI was repaid in full on April 24, 1996.
The acquisitions of Wismer-Martin, the CTI Business, Versyss and the PMS
Business were accounted for by the purchase method of accounting and,
accordingly, the acquired assets and liabilities have, with the help of an
appraiser, been recorded at their fair values at the date of purchase. The
consideration (including acquisition costs) and the allocation of purchase price
for each acquisition are summarized by significant asset category below:
9
<PAGE>
Wismer- CTI PMS
Martin Business Versyss Business
----------- ----------- ----------- ----------
Consideration:
Cash 1,980,000 9,150,000 12,333,000 2,861,003
PCN Common Stock 9,365,615 - - -
Notes Payable - - 11,750,000 2,000,000
Liabilities assumed 4,737,154 4,130,526 45,797,000 3,009,163
Legal and accounting costs 349,405 200,347 702,629 79,371
----------- ----------- ----------- ----------
Total purchase price $16,432,174 $13,480,873 $70,582,629 $7,949,537
=========== =========== =========== ==========
Allocation of Purchase Price:
Tangible assets including
receivables, inventories,
and equipment 3,340,148 2,054,572 13,985,000 2,206,150
Acquired technology in process - - 14,516,000 -
Physician supplier base
(amortized over seven years) - - - 483,151
Profit on future support and
update agreements (amortized
over four years) 537,000 599,000 820,281 267,750
Acquired software products
(amortized over three years) 494,000 - 3,101,000 179,089
Profit on support and update
agreements ( amortized over
one year) 85,000 107,000 852,602 123,785
Other intangible assets
(amortized over fifteen years) 11,976,026 10,720,301 37,307,746 4,689,612
----------- ----------- ----------- ----------
Total $16,432,174 $13,480,873 $70,582,629 $7,949,537
=========== =========== =========== ==========
The following unaudited pro forma financial information represents the
combined results of operations of the Company, Versyss, PMSC, the CTI Business,
and Wismer- Martin as if all acquisitions had occurred as of January 1, 1995
after giving effect to certain financing transactions completed in 1995 and 1996
and are exclusive of the $14,516,000 charge for the acquired technology in
process as this charge is non-recurring and unusual and relates directly to the
acquisition of Versyss. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company, Versyss PMSC, the CTI Business, and Wismer-Martin constituted a single
entity during such periods nor does it represent a basis for assessing future
performance.
10
<PAGE>
Nine Months Nine Months
Ended Ended
September September
30, 1996 30, 1995
------------- -------------
Revenues $79,236,263 $82,652,805
Income before Extraordinary Item $9,347,473 $1,237,937
Net Income $9,347,473 $997,937
Income per Common Share before Extraordinary Item $0.16 $0.02
Earnings per Common Share $0.16 $0.02
4. Inventories
Inventories were as follows:
September 30, December 31,
1996 1995
---------- ----------
Computer hardware and
peripherals $4,208,246 $3,120,969
Customer maintenance parts 1,445,920 1,477,985
---------- ----------
$5,654,166 $4,598,954
========== ==========
11
<PAGE>
5. Restructuring Plan Update
In the fourth quarter of 1995, after the completion of the Versyss
acquisition, management completed a review of the Company's operations, together
with the newly acquired PMSC and Versyss operations, and announced a
restructuring plan (the "1995 Restructuring Plan") designed to eliminate
duplicate administrative responsibilities, consolidate warehousing and
distribution of the Company's products and streamline other core businesses in
order to improve operating efficiencies and increase shareholder value. The
Company recorded a restructuring charge aggregating $3,922,450, for which no tax
benefit was available, partially offset by a recovery of $850,000 from a change
in estimated requirements previously charged against operations as part of the
restructuring accrual recorded in 1993 (see below). The 1995 Restructuring Plan
provision included $2,509,950 for lease termination costs (principally
commencing in July 1996) and $1,412,500 for severance and other employee
reduction-related costs. The 1995 Restructuring charges do not include
additional costs associated with the consolidation of operations such as
re-training, consulting, purchases of equipment and relocation of employees and
equipment. These costs will be charged to operations or capitalized, as
appropriate, when incurred. The implementation of this plan commenced in
December 1995 and it is anticipated to be completed sometime in 1997. Since
implementation of the 1995 Restructuring Plan, the 1995 accrual has decreased by
$2,429,895 principally due to expenditures related to headcount reduction and
lease termination costs from the consolidation and centralization of financial
and administrative functions at the Company's corporate headquarters in Morris
Plains, NJ, the centralization of purchasing, warehousing and order fulfillment
at the Company's Torrance, CA service center and other functional downsizings.
1995 Restructuring Plan
- -----------------------
1995 Provision ....................................... $3,922,450
Cash outflows from reduction in workforce and lease
termination costs .................................. 2,429,895
----------
Balance at September 30, 1996 $1,492,555
==========
12
<PAGE>
In the fourth quarter of 1993, after completing the Calyx and Wallaby
acquisitions, the Company implemented a restructuring plan (the "1993
Restructuring Plan") designed to reduce costs, improve operating efficiencies
and increase shareholder value. The Company recorded a restructuring charge
aggregating $3,165,000, for which no tax benefit was available, for the
consolidation of offices and facilities, where appropriate, the centralization
of administrative and overhead functions and certain other employee
reduction-related costs. The charge included $1,770,000 for lease termination
costs, $192,000 for the write-off of related equipment and leasehold
improvements, $210,000 for office relocation and consolidation costs, and
$993,000 for severance and other employee-related costs. The Company anticipated
that efficiencies related to the restructuring, primarily in the form of reduced
facility and labor-related costs, would be phased in by the end of 1995. Since
implementation of the 1993 Restructuring Plan, the 1993 accrual has decreased by
approximately $2,715,000, of which $1,865,000 was principally due to
expenditures related to the lease termination and consolidation of the Company's
then corporate headquarters in Mahwah, New Jersey in 1994 and the resultant
centralization of certain financial and sales administrative functions
previously performed at the Brookfield, Wisconsin location. However, as of
September 30, 1996, certain restructuring charges related to other lease
termination costs have not yet been paid. The table below summarizes the
activity of the 1993 Restructuring Plan:
1993 Restructuring Plan
1993 Provision ............................................... $3,165,000
1994 Activity:
Reduction in workforce, lease termination
costs and other cash outflows ........................... 975,000
Write-off of equipment and leasehold
improvements ............................................ 165,000
----------
Balance at December 31, 1994 ................................. 2,025,000
1995 Activity:
Reduction in workforce, lease termination
costs and other cash outflows ........................... 572,000
Additional write-off of equipment and
leasehold improvements .................................. 27,000
Non-cash recovery from change in estimated
requirements ................................................. 850,000
----------
Balance at December 31, 1995 ................................. 576,000
1996 Activity:
Reduction in workforce, lease termination
costs and other cash outflows ........................... 126,000
----------
Balance at September 30, 1996 ................................ $ 450,000
==========
13
<PAGE>
6. Shareholders' Equity
On September 11, 1996, as part of the acquistion of Wismer-Martin, the
Company issued 935,000 shares of its Common Stock at a price of $10.017 (See
Note 3).
On May 10, 1996, the Company completed the public offering of 5,600,000
shares of its Common Stock for $10 per share and, on May 24, 1996, issued an
additional 840,000 shares for $10 per share upon the exercise in full of the
underwriters over-allotment option (the "1996 Public Offering"). Included within
the shares of Common Stock sold pursuant to the 1996 Public Offering, were
1,932,217 shares issued by the Company to Equifax upon the conversion in full of
the Equifax Note. As a result of the sale by the Company of the remaining
4,507,783 shares sold as part of the 1996 Public Offering, the Company received
net proceeds of approximately $42 million.
During the first nine months of 1996, 14,750 shares of the Convertible
Preferred Stock, issued on October 20, 1995 pursuant to Regulation S under the
Securities Act of 1933, were converted into 2,107,136 shares of common stock in
accordance with the terms of the Convertible Preferred Stock.
On February 29, 1996, options to purchase an additional 495,000 shares of
Common Stock at an exercise price of $12.625 per share were granted pursuant to
the Company's 1993 Incentive and Non-Incentive Stock Option Plan. During the
first nine months of 1996, 691,394 stock options were exercised and 1,041,775
stock options were forfeited due to expiration or termination. In addition,
warrants for 10,000 shares of Common Stock expired during the first nine months
of 1996. As a result, the cumulative number of stock options and warrants
outstanding was 8,996,111 as of September 30, 1996.
7. Significant Transactions
HealthPoint G.P. Joint Venture. In January 1996, the Company and Glaxo
Wellcome Inc. ("Glaxo Wellcome"), through wholly-owned subsidiaries, formed
HealthPoint G.P. ("HealthPoint"), a joint venture partnership, to design and
market clinical information technology products and services. These products and
services are expected to consist of computerized patient records software
products, clinical network capabilities and data analysis. HealthPoint is a
general partnership owned equally by a wholly-owned subsidiary of the Company
and a wholly-owned subsidiary of Glaxo Wellcome and operates independently of
the parent companies. A management committee comprised of management of the
wholly-owned subsidiaries of Glaxo Wellcome and the Company, as well as a
representative of HealthPoint's management, oversees the venture's operations.
The Company has agreed to, generally, use its best efforts to exclusively
distribute HealthPoint's products and services to the Company's customers on an
exclusive basis. Both the Company and Glaxo Wellcome have
14
<PAGE>
contributed product and development assets to HealthPoint and will contribute at
least $50 million in cash to the venture, of which $43 million will be
contributed by Glaxo Wellcome and $7 million will be contributed by the Company.
Of such amounts, as of September 30, 1996, Glaxo Wellcome had contributed
approximately $20.0 million and the Company had contributed approximately $3.9
million, with the remainder to be contributed proportionately by the partners in
semi-annual installments as needed by the venture through December 31, 1998. In
addition, the Company has incurred approximately $855,000 of costs related to
its investment in HealthPoint. Any losses incurred by HealthPoint will be
allocated between Glaxo Wellcome and the Company in proportion to their
respective cash contributions (approximately 85% to Glaxo Wellcome and 15% to
the Company), while profits will, generally be allocated equally between the
partners. For the nine months ended September 30, 1996, the Company's share of
the loss incurred by HealthPoint during such period, primarily consisting of
allocable start-up costs, was $1,873,000.
Equifax. On January 25, 1995, the Company entered into an Exclusive
Marketing Agreement (the "Marketing Agreement") with Equifax Healthcare EDI
Services, Inc. ("Equifax EDI"), an "all payer" electronic claims clearinghouse
and a wholly owned subsidiary of Equifax, to establish "PCN Link", a
communication link between Equifax EDI and users of the Company's practice
management software products. Pursuant to the Marketing Agreement, the Company
agreed to generally promote Equifax EDI to users of the Company's practice
management software products as the exclusive provider of electronic data
interchange services, including claims processing and electronic eligibility and
credit and check authorization. During the term of the Marketing Agreement,
Equifax EDI agreed to make its electronic data interchange services available to
the Company's physician practice customers and to pay to the Company an agreed
upon percentage of the gross revenues earned by Equifax EDI for providing such
services to users of the Company's practice management software products.
On February 15, 1995, pursuant to the terms of the Convertible
Subordinated Note Purchase Agreement between the Company and Equifax (the "Note
Purchase Agreement), Equifax, the parent company of Equifax EDI, purchased the
Equifax Note, a five year convertible subordinated promissory note of the
Company, bearing interest at a rate of 6% per annum, payable quarterly (see Note
8). The Equifax Note was convertible into shares of Common Stock at a conversion
price of $5.175. On May 10, 1996, in accordance with the terms of the Note
Purchase Agreement, Equifax converted the Equifax Note in full into 1,932,217
shares of Common Stock and sold all such shares as part of the 1996 Public
Offering.
On January 12, 1996, the Company and Equifax entered into an amended and
restated Marketing Agreement which, among other things, limited the exclusive
coverage of the services provided by Equifax EDI to claims submission and
related services, on-line eligibility and benefit inquiries for indemnity plans,
credit card and check guarantee and verification services and electronic
remittance services. In connection with such amendment, which has an initial
term of four years, the Company agreed to share with Equifax EDI certain of the
costs and expenses associated with the further development
15
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and enhancement of PCN Link. Accordingly, the Company will reimburse Equifax for
one third of certain of Equifax's development costs with respect to PCN Link up
to $250,000 per year for four years. Further, the Company agreed to pay to
Equifax $125,000 per month for forty-eight months in order to permit the Company
to offer, as a marketing incentive, free one-year introductory service, with
certain limitations, to physician practices who subscribe to the services
offered under the Marketing Agreement (see Note 8).
During the third quarter of 1996, National Data Corporation ("NDC")
acquired all of the outstanding capital stock of Equifax EDI. On September 3,
1996, the Company, Equifax EDI, Equifax and NDC entered into an agreement
whereby, among other things, the Company waived its right to terminate the
Marketing Agreement, pursuant to its terms, as a result of the change of control
of Equifax EDI. The acquisition of Equifax EDI by NDC will not result in any
changes to the Marketing Agreement except that the Company and NDC agreed that
PCN may, in its sole unrestricted discretion, terminate the Marketing Agreement,
on not less than ninety days written notice, at any time on or after July 1,
1997.
8. Notes Payable and Long-Term Debt
In January 1996, the Company and Equifax EDI amended and restated the
Marketing Agreement. As a result, the Company is obligated to pay $125,000 per
month to Equifax EDI over a period of four years. The obligation was recorded at
the net present value of the payments discounted at 11.5% per annum (See Note
7). Also in January 1996, the Company made the final payment to the Wallaby
selling stockholders.
The term indebtedness to PMSI was paid in full on April 24, 1996.
On May 10, 1996, in accordance with the terms of the Note Purchase
Agreement, Equifax converted the Equifax Note in full into 1,932,217 shares of
Common Stock and sold all such shares as part of the 1996 Public Offering.
The Company's indebtedness as of September 30, 1996 and December 31, 1995
consists of the following:
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September 30, December 31,
1996 1995
----------- -----------
Term indebtedness payable to Versyss Liquidating
Trust due annually in October 1996 and 1997 at
11% (See Note 3) $11,750,000 $11,750,000
Convertible subordinated note payable to
Equifax, Inc. due February 2000 at 6% (see
Notes 2,6, and 7) -- 10,000,000
Subordinated term notes due monthly March 1995
through February 2001 at 8% assumed from Versyss
acquisition 1,708,506 2,004,000
Term indebtedness payable to PMSI due April 1996
at 10% (See Note 3) -- 2,000,000
Term indebtedness payable to IBM due October
1997 at prime plus 2.5% (10.75% at September 30,
1996) assumed from Versyss acquisition 1,500,000 1,500,000
Debt portion of Equifax Marketing Agreement 4,388,221 --
Mortgage payable monthly to U.S. Bancorp Mortgage
Company at 3.0% over the average discount rate of
26-week U.S. Treasury bills (adjusted
semi-annually 8% at September 30 1996), due
November, 1998 assumed from Wismer-Martin
acquisition (See Note 3) 401,608 --
Note payable monthly to the Greater Spokane
Business Development Association and the Small
Business Administration at 9.896%, due October,
2008 assumed from Wismer-Martin acquisition (See
Note 3) 333,812 --
Subordinated term notes due annually July 1998
at 9.0% assumed from Wismer-Martin acquistion
(See Note 3) 22,029 --
Term indebtedness payable to non-employee
Wallaby selling stockholders, due January 1996
at 7% -- 750,000
Other 372,278 100,160
----------- -----------
20,476,454 28,104,160
Less: notes payable-current 7,343,045 9,080,000
----------- -----------
13,133,409 19,024,160
Less: current portion of long-term debt 998,671 100,160
----------- -----------
Long-term debt $12,134,738 $18,924,000
=========== ===========
Long-term debt, related party:
Term indebtedness payable Wallaby selling
employed at the Company stockholders, due
January 1996 at 7% -- $ 750,000
----------- -----------
-- 750,000
Less: current portion of long-term debt -- 750,000
----------- -----------
Long-term debt, related party -- $ --
=========== ===========
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9. Supplemental Disclosures of Cash Flow Information
September 30, September 30,
1996 1995
------------- -------------
Supplemental disclosure of cash
flow information:
Cash paid for interest $1,576,000 $615,000
Cash paid for income taxes $261,000 $142,000
Supplemental non-cash operating, investing and financing activities were
as follows:
o In January 1996, the Company and Equifax EDI amended and restated the
Marketing Agreement. Pursuant to the amended and restated Marketing
Agreement, the Company was obligated to pay $125,000 per month to Equifax
EDI over a period of four years. As a result, the Company recorded an asset
and obligation of $4,791,290, equal to the net present value of the
payments discounted at 11.5% per annum. The acquisition of Equifax EDI by
NDC, during the third quarter of 1996, will not result in any changes to
the Marketing Agreement except that the Company and NDC agreed that PCN
may, in its sole unrestricted discretion, terminate the Marketing
Agreement, on not less than ninety days written notice, at any time on or
after July 1, 1997 (See Notes 7 and 8).
o On May 10, 1996, in accordance with the terms of the Note Purchase
Agreement, Equifax converted the Equifax Note in full into 1,932,217 shares
of Common Stock and sold all such shares as part of the 1996 Public
Offering (See Note 7).
o Capital lease obligations of $427,344 were incurred during the nine months
ended September 30, 1995. None were incurred for the nine months ended
September 30, 1996.
o On September 11, 1996, the Company pursuant to a merger agreement with
Wismer Martin, issued 935,000 shares of PCN Common Stock valued at
$9,365,615. (See Note 3).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included elsewhere in this Quarterly Report on Form 10-Q and the
Company's Annual Report on Form 10-K for the year ended December 31, 1995. The
following discussion and analysis includes certain forward-looking statements.
Forward-looking statements in this report are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Persons
reading this report are cautioned that such forward-looking statements involve
risks and uncertainties that could cause the Company's actual results to differ
materially from the forward-looking statements. Factors that could cause actual
results to differ materially from the forward-looking statements include,
without limitation, the effect of the Company's acquisition strategy on future
operation results; the uncertainty of acceptance of the Company's new product
and migration strategy; the Company's relationship with HealthPoint G.P.; the
effects of government regulation on the Company's business; competition; and the
matters referred to in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
Company Overview
The Company is a leader in developing, marketing and supporting practice
management software products for physician practices. The Company's products
include software which, among other things, automates physician scheduling and
general patient billing, insurance claims billing and other financial reports.
Beginning in 1993, the Company instituted a strategy of developing and
expanding its business by acquiring practice management software businesses
having an installed base of physician practice customers and of acquiring and
developing a common software platform to which such customers could migrate over
time. In order to implement this strategy, the Company strengthened its
management team and abandoned its prior strategy of growth primarily through the
licensing of practice management software, together with computer hardware, to
new physician customers at low prices. The objective of such strategy had been
to develop a network which would generate revenues primarily from advertising
fees paid by pharmaceutical companies. Since September 1993, the Company has
increased the number of physicians associated with sites which have purchased
the Company's practice management software products from approximately 2,000 to
approximately 90,000, thereby making the Company one of the largest providers of
practice management software products in the country.
Acquisition History. On September 23, 1993, the Company acquired Calyx, a
company which develops and has sold practice management software products to
sites having an aggregate of approximately 9,000 physicians, for $4,050,000 in
cash and notes, as well as the assumption of certain liabilities. On December
31, 1993, the Company acquired Wallaby, a company which develops and has sold
practice management software products to sites having an aggregate of
approximately 20,000 physicians, for $12,500,000 in cash and notes, as well as
the assumption of certain liabilities. On March 11, 1994, the Company acquired
the DOM/2 practice management
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<PAGE>
software business, a business which has sold practice management software
products to sites having an aggregate of approximately 9,000 physicians, for
$1,024,000, as well as the assumption of certain liabilities. On November 15,
1994, the Company acquired the Acclaim Business, a business which has sold
practice management software to sites having an aggregate of approximately 6,000
physicians, for $1,200,000 in cash and notes, as well as the assumption of
certain liabilities.
On April 24, 1995, the Company acquired the PMS Business, a business which
develops and, through its own direct sales force, has sold practice management
software products and related equipment, to sites having an aggregate of
approximately 6,000 physicians, for approximately $4,861,000 in cash and notes,
as well as the assumption of certain liabilities. On October 27, 1995, the
Company acquired Versyss, a business which develops and, through both a direct
sales force and through a network of independent resellers, has sold practice
management software products and related equipment to sites having an aggregate
of approximately 30,000 physicians. The purchase price of such acquisition
consisted of $12,333,000 in cash, $11,750,000 in the form of a promissory note
and the repayment or assumption of approximately $45,800,000 in liabilities.
Versyss also provides integrated information systems to certain industries other
than health care, including the construction, timber, fuel oil and publishing
businesses.
On July 3, 1996, pursuant to an asset purchase agreement, the Company,
through a wholly-owned subsidiary, completed the acquisition of the CTI Business
which, through a direct sales force, has sold practice management software
products and related equipment and other commercial software products and
related equipment. The purchase price of such acquisition consists of $9,150,000
in cash together with the assumption of $4,130,526 in liabilities and the
cancellation of debt owed to PCN.
On September 11, 1996, the Company, through a wholly-owned subsidiary,
acquired all of the issued and outstanding capital stock of Wismer-Martin, a
provider of practice management systems and healthcare information systems
located in Mead, Washington, pursuant to a merger agreement, for $1,980,000 in
cash, 935,000 shares of PCN Common Stock valued at $9,365,615 and the assumption
of $4,737,154 in liabilities.
HealthPoint G.P. Joint Venture. In January 1996, the Company and Glaxo Wellcome,
through wholly-owned subsidiaries, formed HealthPoint G.P., a joint venture
partnership, to design and market clinical information technology products and
services. These products and services are expected to consist of computerized
patient records software products, clinical network capabilities and data
analysis. HealthPoint is a general partnership owned equally by a wholly-owned
subsidiary of the Company and a wholly-owned subsidiary of Glaxo Wellcome and
operates independently of the parent companies. A management committee comprised
of management of the wholly-owned subsidiaries of Glaxo Wellcome and the
Company, as well as a representative of HealthPoint's management, oversees the
venture's operations. The Company has agreed to, generally, use its best efforts
to exclusively distribute HealthPoint's products and services to the Company's
customers on an exclusive basis. Both the Company and Glaxo Wellcome have
contributed product and development assets to HealthPoint and will contribute at
20
<PAGE>
least $50 million in cash to the venture, of which $43 million will be
contributed by Glaxo Wellcome and $7 million will be contributed by the Company.
Of such amounts, as of September 30, 1996, Glaxo Wellcome had contributed
approximately $20.0 million and the Company had contributed approximately $3.9
million, with the remainder to be contributed proportionately by the partners in
semi-annual installments as needed by the venture through December 31, 1998. In
addition, the Company has incurred approximately $0.9 million of costs related
to its investment in HealthPoint. Any losses incurred by HealthPoint will be
allocated between Glaxo Wellcome and the Company in proportion to their
respective cash contributions (approximately 85% to Glaxo Wellcome and 15% to
the Company), while profits will, generally be allocated equally between the
partners.
In March 1996, HealthPoint introduced its first product, HealthPoint ACS,
which is expected to be commercially available during the fourth quarter of
1996. HealthPoint ACS, which is designed to interface (and is expected to be
integrated) with the PCN Health Network Information System, is developed for
medical offices to enable physicians to, among other things, manage the clinical
information required for treatment at the point of care.
Public Offering of Common Stock and Equifax Note Conversion. On May 10, 1996,
the Company completed the issuance and sale of 3,667,783 shares of Common Stock
pursuant to the 1996 Public Offering and on May 24, 1996 an additional 840,000
shares were issued in full upon the exercise of the underwriters over-allotment
option. In addition, on May 10, 1996, Equifax converted its $10,000,000
principal amount five year convertible subordinated promissory note of the
Company in full into 1,932,217, shares of Common Stock at a conversion price of
$5.175, pursuant to the terms of the Note Purchase Agreement, and sold such
converted shares as part of the 1996 Public Offering. As a result of such sale,
the Company received net proceeds of approximately $42 million.
Equifax Marketing Agreement. During the third quarter of 1996, National Data
Corporation ("NDC") acquired all of the outstanding capital stock of Equifax
EDI. On September 3, 1996, the Company, Equifax EDI, Equifax and NDC entered
into an agreement whereby, among other things, the Company waived its right to
terminate the Marketing Agreement, pursuant to its terms, as a result of the
change of control of Equifax EDI. The acquisition of Equifax EDI by NDC will not
result in any changes to the Marketing Agreement except that the Company and NDC
agred that PCN may, in its sole unrestricted discretion, terminate the Marketing
Agreement, on not less than ninety days written notice, at any time on or after
July 1, 1997.
21
<PAGE>
Results of Operations
Three Months Ended September 30, 1996
Compared to the Three Months Ended September 30, 1995
Revenues for the three months ended September 30, 1996 were $25,311,356,
an increase of $15,697,233 or 163% over revenues of $9,614,123 for the three
months ended September 30, 1995. Revenues from software license fees, which are
derived primarily from the sale of licenses for the PCN Health Network
Information System product and the Company's other practice management software
products, increased by $2,192,975 or 42% from $5,197,562 for the three months
ended September 30, 1995 to $7,390,537 for the three months ended September 30,
1996. Hardware revenue increased $4,537,352 or 294% from $1,543,661 for the
three months ended September 30, 1995 to $6,081,013 for the three months ended
September 30, 1996 primarily as a result of the acquisitions of Versyss, the CTI
Business and, to a lesser extent, Wismer-Martin, all of which sell computer
hardware peripherals and complete systems (hardware and practice management
software). Maintenance, communication fees and other revenue increased by
$8,966,906 or 312% from $2,872,900 for the three months ended September 30, 1995
to $11,839,806 for the three months ended September 30, 1996 due primarily to
the acquisitions of Versyss, the CTI Business and, to a lesser extent,
Wismer-Martin, all of which generate service fees for software support and
hardware maintenance.
Cost of revenues increased $7,453,333 or 272% from $2,735,504 for the
three months ended September 30, 1995 to $10,188,837 for the three months ended
September 30, 1996. Cost of hardware, including installation costs, increased
$2,268,856 or 235% from $963,474 to $3,232,330, primarily due to increased
computer hardware sales resulting from the acquisitions of Versyss, the CTI
Business and, to a lesser extent, Wismer-Martin. Software, maintenance,
communication fees and other costs of revenue, which include the costs of labor
for software support, hardware maintenance and training, increased $5,184,477 or
293% from $1,772,030 to $6,956,507, primarily as a result of the increased sales
of the Company's acquisitions of Versyss, the CTI Business and, to a lesser
extent, Wismer-Martin.
Total cost of revenues increased as a percentage of total revenues from
28% for the three months ended September 30, 1995 to 40% for the three months
ended September 30, 1996 primarily as a result of the higher mix of hardware
sales.
Operating expenses increased $4,399,977 or 104% from $4,232,796 for the
three months ended September 30, 1995 to $8,632,773 for the three months ended
September 30, 1996. Research and development, selling and marketing, and general
and administrative expenses increased by $886,718, $2,031,859, and $1,481,400,
respectively. The increase in operating expenses can be attributed to the
acquisitions of Versyss, the CTI Business and, to a lesser extent,
22
<PAGE>
Wismer-Martin which resulted from increased headcount, as well as increased
facilities and occupancy costs.
Interest income increased $163,755 or 223% from $73,372 for the three
months September 30, 1995 to $237,127 for the three months ended September 30,
1996, primarily as a result of investing the net proceeds from the 1996 Public
Offering of approximately $42 million received from the sale of 4,507,783 shares
of Common Stock. Interest expense decreased $51,941 or 20%, from $260,437 for
the three months ended September 30, 1995 to $208,496 for the three months ended
September 30, 1996, primarily as a result of payment in full of $2,000,000 in
debt issued in April 1995 in connection with the acquisition of the PMS
Business, and the conversion of the $10,000,000 subordinated note payable to
Equifax into 1,932,217 shares of Common Stock as part of the 1996 Public
Offering, partially offset by debt issued in October of 1995 in connection with
the acquisition of Versyss, and the assumption of Versyss' and Wismer Martin's
debt obligations.
The Company recorded a provision for income taxes of $1,368,045 for the
three months ended September 30, 1996, reflecting an estimated annual effective
tax rate of 21%. In the comparative period ended September 30, 1995, the Company
recorded a 2% effective alternative minimum rate, income tax provision of
$48,051. The increase in the Company's effective tax rate in 1996, as compared
to 1995, reflects the annual limitation on the Company's ability to utilize net
operating loss carryforwards against current period income as a result of
previous changes in ownership of the Company (see Financial Condition and
Liquidity below). The Company will realize the benefit of Versyss' net operating
loss carryforwards as a reduction in goodwill. As a result, although benefiting
the Company on a cash basis, utilization of Versyss' net operating loss
carryforwards against current period income does not reduce the income tax
provision. On a cash basis, the Company expects to pay at a rate substantially
less than the 21% estimated annual effective rate.
The Company recorded a loss on its equity investment in HealthPoint of
$662,020, net of taxes, for the three months ended September 30, 1996
representing the Company's share of the loss incurred by the joint venture,
primarily as a result of start-up costs.
Nine Months Ended September 30, 1996
Compared to the Nine Months Ended September 30, 1995
Revenues for the nine months ended September 30, 1996 were $68,206,564 an
increase of $43,680,336 or 178% over revenues of $24,526,228 for the nine months
ended September 30, 1995. Revenues from software license fees, which are derived
primarily from the sale of licenses for the PCN Health Network Information
System product and the Company's other practice management software products,
increased by $9,586,414 or 87% from $10,997,191 for the nine months ended
September 30, 1995 to $20,583,605 for the nine months ended September 30, 1996.
Hardware revenue increased $13,714,469 or 323% from $4,250,242 for the nine
months ended September 30, 1995 to $17,964,711 for the nine months ended
September 30, 1996 primarily as a result of the acquisitions of Versyss and, to
a lesser extent, the PMS Business, the CTI Business
23
<PAGE>
and Wismer-Martin all of which sell computer hardware peripherals and complete
systems (hardware and practice management software). Maintenance, communication
fees and other revenue increased by $20,379,453 or 220% from $9,278,795 for the
nine months ended September 30, 1995 to $29,658,248 for the nine months ended
September 30, 1996 due primarily to the acquisitions of Versyss and, to a lesser
extent, the PMS Business, the CTI Business and Wismer-Martin all of which also
generate service fees for software support and hardware maintenance.
Cost of revenues increased $20,301,870 or 277% from $7,320,168 for the
nine months ended September 30, 1995 to $27,622,038 for the nine months ended
September 30, 1996. Cost of hardware, including installation costs, increased
$8,434,402 or 330% from $2,552,760 to $10,987,162, primarily due to increased
computer hardware sales resulting from the acquisitions of Versyss and, to a
lesser extent, the PMS Business, the CTI Business and Wismer-Martin. Software,
maintenance, communication fees and other costs of revenue, which include the
costs of labor for software support, hardware maintenance and training,
increased $11,867,468 or 249% from $4,767,408 to $16,634,876, primarily as a
result of the increased sales of the Company's recently acquired Versyss and, to
a lesser extent, the PMS Business, the CTI Business and Wismer-Martin practice
management software products and services.
Total cost of revenues increased as a percentage of total revenues from
30% for the nine months ended September 30, 1995 to 40% for the nine months
ended September 30, 1996 primarily as a result of the higher mix of hardware
sales.
Operating expenses increased $11,712,004 or 103% from $11,388,500 for the
nine months ended September 30, 1995 to $23,100,504 for the nine months ended
September 30, 1996. Research and development, selling and marketing, and general
and administrative expenses increased by $2,100,774, $4,925,841, and $4,685,389,
respectively. The increase in operating expenses can be attributed to the
acquisitions of Versyss and, to a lesser extent, the PMS Business, the CTI
Business and Wismer-Martin which resulted from increased headcount, as well as
increased facilities and occupancy costs.
Interest income increased $221,927 or 95% from $232,910 for the nine
months September 30, 1995 to $454,837 for the nine months ended September 30,
1996, primarily as a result of investing the net proceeds from the 1996 Public
Offering of approximately $42 million received from the sale of 4,507,783 shares
of Common Stock on May 10, 1996 and May 24, 1996. Interest expense increased
$575,178 or 59%, from $971,725 for the nine months ended September 30, 1995 to
$1,546,903 for the nine months ended September 30, 1996, primarily as a result
of debt issued in March and October of 1995 in connection with the acquisitions
of Versyss and the PMS Business, and the assumption of Versyss' and
Wismer-Martin's debt obligations.
The Company recorded a provision for income taxes of $3,441,408 for the
nine months ended September 30, 1996, reflecting an estimated annual effective
tax rate of 21%. In the comparative period ended September 30, 1995, the Company
recorded a 2% effective alternative minimum rate, income tax provision of
$110,051. The increase in the Company's effective tax rate
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<PAGE>
in 1996, as compared to 1995, reflects the annual limitation on the Company's
ability to utilize net operating loss carryforwards against current period
income as a result of previous changes in ownership of the Company(see Financial
Condition and Liquidity below). The Company will realize the benefit of Versyss'
net operating loss carryforwards as a reduction in goodwill. As a result,
although benefiting the Company on a cash basis, utilization of Versyss' net
operating loss carryforwards against current period income does not reduce the
income tax provision. On a cash basis, the Company expects to pay at a rate
substantially less than the 21% estimated annual effective rate.
The Company recorded a loss on its equity investment in HealthPoint of
$1,479,670, net of taxes, for the nine months ended September 30, 1996
representing the Company's share of the loss incurred by the joint venture,
primarily as a result of start-up costs.
Financial Condition & Liquidity
At September 30, 1996 the Company had available cash and cash equivalents
of $37,999,731 and working capital of $29,447,129 compared to cash and cash
equivalents of $15,516,883 and a working capital deficit of $9,006,455 at
December 31, 1995. The increase in cash and cash equivalents can be attributed
to cash provided by operations and financing activities, partially offset by
cash used in investing activities.
Net cash provided by operating activities was $6,313,183 for the nine
months ended September 30, 1996 compared to net cash used in operating
activities of $205,791 for the nine months ended September 30, 1995. The
increase in cash provided by operating activities was achieved primarily from
the Company's improved results of operations for the nine months ended September
30, 1996, partially offset by payments of accrued expenses related to the
Versyss acquisition and restructuring.
Cash used in investing activities was $20,125,019 for the nine months
ended September 30, 1996 compared to $6,345,513 for the nine months ended
September 30, 1995 and primarily resulted from: (i) approximately $12 million in
cash payments related to the acquisitions of the CTI Business and Wismer-Martin;
(ii) the cash contribution of $3,861,571 and $855,390 in other charges in
connection with the formation of the HealthPoint joint venture; (iii) $1,246,883
used to acquire licensing rights and other intangible assets; and (iv)
approximately $1,202,269 in net capital investment in equipment.
Cash provided by financing activities for the nine months ended September
30, 1996 was $36,294,684 primarily related to $41,773,008 in proceeds received
from the 1996 Public Offering and cash generated from the exercise of stock
options partially offset by payment in full of the $3,500,000 in promissory
notes issued in connection with the acquisitions of Wallaby and the PMS
Business, plus accrued interest thereon, plus principal payments of various
long-term debt, notes payable and capital lease agreements.
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<PAGE>
Significant payment obligations of the Company subsequent to September 30,
1996 include: (i) the payment in October 1996 of $5,875,000 (which was paid on
October 27, 1996) in connection with the Versyss acquisition, together with
accrued and unpaid interest thereon; (ii) up to approximately $3,116,000 in
capital contributions required to be made by the Company to HealthPoint; and
(iii) the payment of $125,000 per month to Equifax EDI, now owned by NDC, in
accordance with the terms of the Amended and Restated Marketing Agreement, dated
January 12, 1996 between Equifax EDI and the Company.
On May 10, 1996, the Company completed the public offering of 5,600,000
shares of its Common Stock at a price of $10 per share. Included within the
shares of Common Stock sold pursuant to this public offering were 1,932,217
shares of Common Stock issued to Equifax upon conversion by Equifax in full of
the Equifax Note. In addition to the shares issued on May 10, 1996, as part of
the public offering, an over-allotment option was exercised to issue an
additional 840,000 shares on May 24, 1996 at $10 per share. The Company received
net proceeds of approximately $42 million from the sale of the remaining
4,507,783 shares of Common Stock issued pursuant to this public offering, and
will receive the benefit of the elimination of $600,000 per annum in interest
payments under the Equifax Note. The Company expects that its operating cash
flow, together with the proceeds from the sale of Common Stock pursuant to the
1996 Public Offering will be sufficient to fund the Company's working capital
requirements and permit the Company to continue its acquisition strategy.
However, the Company's ability to continue to pursue its acquisition strategy
will be affected by the extent and pace at which the Company utilizes its
available resources for acquisitions.
On September 30, 1996, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $65 million which expire over
the next 14 years. This includes approximately $11,000,000 of net operating loss
carryforwards from Versyss which are subject to separate return limitation year
rules. The Company believes it has previously experienced ownership changes,
which, under the provisions of Section 382 of the Internal Revenue Code of 1986,
as amended, have resulted in a significant annual limitation on the Company's
ability to use net operating losses in the future. Net operating loss
carryforward limitations, combined with recognizing the benefit from utilizing
Versyss' net operating loss carryforwards against goodwill, has resulted in the
Company increasing its provision for income taxes to an effective tax rate of
21% (as compared to the alternative minimum tax rate applied in 1995). However,
as a result of certain tax accounting preference items available to the Company
and the utilization of Versyss' net operating loss carryforwards, the Company's
cash effective tax rate is estimated to be in the range of 2% to 6% for 1996.
26
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Aon Re Inc. v. Physician Computer Network Inc. This action was filed in the
Superior Court of New Jersey, Middlesex County, on November 21, 1994, by the
lessor of the Company's former headquarters in Laurence Harbor, New Jersey. The
plaintiff alleged that the Company defaulted on its obligation under its lease
of the premises in question and sought $1,600,000 of rent through the end of the
term of the lease on December 29, 1996 and approximately $700,000 of other
charges and damages. The Company answered the complaint and asserted
counterclaims against the plaintiff. On October 17, 1996, the Company settled
its litigation with Aon Reinsurance, Inc. for $1,500,000.
ITEM 2. CHANGES IN SECURITIES. - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 11, 1996, the Company held an annual meeting of its
shareholders (the "Meeting") to consider (i) the election of eight (8)
directors, (ii) the approval of the Amendment to the Company's 1993 Incentive
and Non-Incentive Option Plan (the Employee Plan) and (iii) the ratification of
the appointment of KPMG Peat Marwick LLP to continue as independent auditors of
the Company for the next year ended December 31, 1996.
At the meeting, the Company's shareholders elected as directors Jeffry
Picower, Henry Green, Jerry Brager, Frederick Frank, Frederic Greenberg, Richard
Kelsky, John Mortell and Russell Ricci, M.D. .
The Employee Plan was amended to increase the maximum aggregate number of
shares of Common Stock that may be issued from 2,300,000 to 3,300,000 shares of
Common Stock. 35,280,331 shares voted in favor of the Amendment to the Employee
Plan, 9,314,608 voted against and 1,677,010 shares abstained from voting.
KPMG Peat Marwick LLP was appointed as independent auditors of the Company
for the next year ended December 31, 1996.
ITEM 5. OTHER INFORMATION. - None
27
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits - See Index to Exhibits on page 30
B. Reports on Form 8-K:
On July 9, 1996, the Company filed a report on Form 8-K, (Item 2
Acquisitions or Dispositions) to report the purchase of substantially all of the
assets of the medical practice management software business and the commercial
software business of CUSA Technologies, Inc. (the "CTI Business").
On August 7, 1996, the Company filed Amendment No. 1 to the current report
on Form 8-K dated July 9, 1996 in order to provide the audited financial
statements and the required pro-forma consolidated financial information
associated with its acquisition of substantially all of the assets of the
medical practice management software business and the commercial software
business of CUSA Technologies, Inc.
On September 19, 1996, the Company filed a report on Form 8-K, (Item 2 -
Acquisitions or Dispositions) to report that the Company acquired Wismer-Martin,
Inc.("Wismer-Martin"), a provider of practice management systems and healthcare
information systems located in Mead, Washington, through a merger of Northwest
Acquisition Corporation, a wholly-owned subsidiary of the Company, with and into
Wismer-Martin, with Wismer-Martin as the surviving corporation of such merger.
28
<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 of the
undersigned thereunto duly authorized.
PHYSICIAN COMPUTER NETWORK, INC.
(Registrant)
Date: November 14, 1996 By: /s/John F. Mortell
-------------------------------
John F. Mortell
Executive Vice President and
Chief Operating Officer
Date: November 14, 1996 By: /s/Thomas F. Wraback
-------------------------------
Thomas F. Wraback
Senior Vice President and
Chief Financial Officer
29
<PAGE>
INDEX TO EXHIBITS
All exhibits listed below are filed with this Quarterly Report on Form
10-Q:
EXHIBIT NO. PAGE
----------- ----
11 Computation of Income Per Share. 31
EXHIBIT 11
PHYSICIAN COMPUTER NETWORK, INC.
COMPUTATION OF INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME (LOSS)
Net income before extraordinary item $ 4,488,312 $ 2,410,707 $ 11,470,878 $ 4,968,694
Extraordinary loss -- -- -- (180,000)
------------ ------------ ------------ ------------
Primary amd fully diluted net income $ 4,488,312 $ 2,410,707 $ 11,470,878 $ 4,788,694
============ ============ ============ ============
PRIMARY SHARES
Weighted average Common Stock outstanding 52,351,619 40,429,120 48,554,796 39,398,900
Common Stock issuable upon the exercise
of outstanding options and warrants 4,085,483 2,409,300 4,349,827 2,171,785
Common Stock issuable upon the
conversion of Preferred Stock 142,857 -- 437,312 --
------------ ------------ ------------ ------------
Weighted average Common Stock
outstanding as adjusted 56,579,959 42,838,420 53,341,935 41,570,685
============ ============ ============ ============
FULLY DILUTED SHARES
Weighted average Common Stock outstanding 52,351,619 40,429,120 48,554,796 39,398,900
Common Stock issuable upon the exercise
of outstanding options and warrants 4,179,449 2,409,300 4,349,827 2,171,785
Common Stock issuable upon the
conversion of Preferred Stock 142,857 -- 437,312 --
------------ ------------ ------------ ------------
Weighted average Common Stock
outstanding as adjusted 56,673,925 42,838,420 53,341,935 41,570,685
============ ============ ============ ============
Primary:
Income before extraordinary item per share $ 0.08 $ 0.06 $ 0.22 $ 0.12
Loss from extraordinary item per share -- -- -- --
------------ ------------ ------------ ------------
Net Income per share $ 0.08 $ 0.06 $ 0.22 $ 0.12
============ ============ ============ ============
Fully Diluted:
Income before extraordinary item per share $ 0.08 $ 0.06 $ 0.22 $ 0.12
Loss from extraordinary item per share -- -- -- --
------------ ------------ ------------ ------------
Net Income per share $ 0.08 $ 0.06 $ 0.22 $ 0.12
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 37,999,731
<SECURITIES> 0
<RECEIVABLES> 26,383,679
<ALLOWANCES> 1,047,000
<INVENTORY> 5,654,166
<CURRENT-ASSETS> 71,106,147
<PP&E> 32,871,613
<DEPRECIATION> 26,557,957
<TOTAL-ASSETS> 158,641,086
<CURRENT-LIABILITIES> 41,659,018
<BONDS> 20,476,454
0
10
<COMMON> 529,825
<OTHER-SE> 103,713,549
<TOTAL-LIABILITY-AND-EQUITY> 158,641,086
<SALES> 68,206,564
<TOTAL-REVENUES> 68,206,564
<CGS> 27,622,038
<TOTAL-COSTS> 27,622,038
<OTHER-EXPENSES> 23,100,504
<LOSS-PROVISION> 450,000
<INTEREST-EXPENSE> 1,092,066
<INCOME-PRETAX> 16,391,956
<INCOME-TAX> 3,441,408
<INCOME-CONTINUING> 11,470,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,470,878
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
