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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 June 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 Identification No.)
incorporation or organization)
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 August 12, 1996 is 52,028,525
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Page 1 of 30 Pages
Exhibit Index page 29
<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
June 30, 1996 and December 31, 1995 .................. 3
Consolidated Statements of Operations
Three Months Ended June 30, 1996 and 1995 ............ 4
Six Months Ended June 30, 1996 and 1995 .............. 5
Consolidated Statements of Cash Flows
Six Months Ended June 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 ........................... 27
SIGNATURES ............................................................ 28
INDEX TO EXHIBITS ..................................................... 29
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------------- -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 46,421,006 $ 15,516,883
Accounts receivable, net of allowance for doubtful
accounts of $977,000 at June 30, 1996, and
$764,000 at December 31, 1995 22,781,670 19,466,446
Inventories 4,382,065 4,598,954
Prepaid expenses and other 2,314,138 1,093,306
Deferred tax asset 1,650,000 1,650,000
------------- -------------
Total current assets 77,548,879 42,325,589
Intangible assets, net of accumulated amortization
of $10,570,415 at June 30, 1996
and $6,840,000 at December 31, 1995 51,147,142 53,701,055
Property and equipment, net 4,026,757 3,976,195
Investment in joint venture 2,498,391 --
Other assets 5,262,160 256,998
------------- -------------
Total assets $ 140,483,329 $ 100,259,837
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable:
Other $ 6,297,909 $ 9,080,000
Related party -- 750,000
Current portion of long term-debt 1,085,407 100,160
Current portion of obligations under capital leases 371,497 327,770
Accounts payable 3,922,726 4,935,601
Accrued expenses and other liabilities 10,152,510 17,024,828
Customer deposits 2,153,020 3,504,980
Unearned income 13,731,316 15,608,705
------------- -------------
Total current liabilities 37,714,385 51,332,044
Long-term debt, net of current portion 12,238,759 18,924,000
Obligations under capital leases, net of
current portion 551,499 806,255
------------- -------------
Total liabilities 50,504,643 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 June 30,1996 and 15,750 shares
outstanding at December 31,1995 10 157
Common stock, $.01 par value, 75,000,000 shares authorized,
52,018,484 shares issued and outstanding at
June 30,1996 and 42,937,147 shares issued
and outstanding at December 31, 1995 520,185 429,371
Additional paid-in capital 183,436,735 129,728,821
Accumulated deficit (93,978,244) (100,960,811)
------------- -------------
Shareholders' equity 89,978,686 29,197,538
------------- -------------
Total liabilities and shareholders' equity $ 140,483,329 $ 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 June 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Software license fees $ 7,275,346 $ 2,580,641
Hardware revenue 5,982,791 2,004,326
Maintenance, communication fees and other 8,610,123 3,869,276
------------ ------------
21,868,260 8,454,243
Cost of Revenues:
Hardware 3,998,293 1,257,426
Software, maintenance, communication fees and other 4,640,016 1,981,314
------------ ------------
8,638,309 3,238,740
------------ ------------
Gross margin 13,229,951 5,215,503
Operating expenses:
Research and development 1,111,389 569,500
Selling and marketing 1,950,791 474,892
General and administrative 4,504,764 2,663,368
------------ ------------
7,566,944 3,707,760
------------ ------------
Interest (income) expense:
Interest income (158,202) (96,994)
Interest expense 643,289 282,405
------------ ------------
485,087 185,411
------------ ------------
Income before income tax expense and
loss on equity investment 5,177,920 1,322,332
Income tax expense 1,087,363 35,000
------------ ------------
Income before loss on equity investment 4,090,557 1,287,332
Loss on equity investment, net of taxes (422,650) --
------------ ------------
Net income $ 3,667,907 $ 1,287,332
============ ============
Primary and fully diluted earnings per common share $ 0.07 $ 0.03
============ ============
Primary weighted average number of common shares outstanding 53,539,693 42,498,453
============ ============
Fully diluted weighted average number of common shares outstanding 53,630,705 42,498,453
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Software license fees $ 13,193,068 $ 5,799,629
Hardware revenue 11,883,698 2,706,581
Maintenance, communication fees and other 17,818,442 6,405,895
------------ ------------
42,895,208 14,912,105
Cost of Revenues:
Hardware 7,754,832 1,589,286
Software, maintenance, communication fees and other 9,678,369 2,995,378
------------ ------------
17,433,201 4,584,664
------------ ------------
Gross margin 25,462,007 10,327,441
Operating expenses:
Research and development 2,222,876 1,008,820
Selling and marketing 3,655,560 761,578
General and administrative 8,589,295 5,385,306
------------ ------------
14,467,731 7,155,704
------------ ------------
Interest (income) expense:
Interest income (217,710) (159,538)
Interest expense 1,338,407 711,288
------------ ------------
1,120,697 551,750
------------ ------------
Income before income tax expense, loss on equity
investment and extraordinary item 9,873,579 2,619,987
Income tax expense 2,073,363 62,000
------------ ------------
Income before loss on equity investment and extraordinary item 7,800,216 2,557,987
Loss on equity investment, net of taxes (817,650) --
------------ ------------
Income before extraordinary item 6,982,566 2,557,987
Extraordinary item:
Loss on extinguishment of debt -- (180,000)
------------ ------------
Net income $ 6,982,566 $ 2,377,987
============ ============
Primary and fully diluted earnings per common share before and
after extraordinary item $ 0.14 $ 0.06
============ ============
Primary weighted average number of common shares outstanding 51,703,221 40,936,769
============ ============
Fully diluted weighted average number of common shares outstanding 51,710,586 40,936,769
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 6,982,566 $ 2,377,987
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,463,836 1,459,359
Amortization on loan discount -- 60,000
Amortization of deferred charges -- 33,333
Gain on disposition of equipment (3,524) (52,708)
Provision for doubtful accounts 300,000 33,957
Non-cash compensation expense -- 15,000
Non-cash provision for income taxes 1,777,156 --
Loss on equity investment 817,650 --
Extraordinary loss on extinguishment of debt -- 180,000
(Increase) decrease in assets:
Accounts receivable (3,615,224) (2,664,575)
Inventories 497,526 (203,713)
Prepaid expenses and other assets 284,586 370,577
Decrease in liabilities, net
Accounts payable (1,012,875) (521,277)
Accrued expenses and
other liabilities (5,726,317) (118,391)
Customer deposits and unearned income (3,229,349) (1,068,333)
------------ ------------
Net cash provided by (used in) operating activities: 1,536,031 (98,784)
------------ ------------
Cash flows provided by (used in) investing activities:
Purchase of equipment (1,106,003) (285,092)
Proceeds from disposal of equipment 3,524 52,708
Acquisition of licensing rights
and other intangible assets (1,801,120) (521,486)
Purchase of business, net of cash acquired (2,095,871) (3,450,000)
Investment in joint venture and related costs (3,533,390) --
------------ ------------
Net cash used in investing activities: (8,532,860) (4,203,870)
------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments of
long-term debt (1,353,301) (16,050,000)
Principal payments of
notes payable (3,699,523) --
Net proceeds from issuance of notes payable
and long-term debt 204,359 9,852,649
Principal payments under
capital lease obligations (211,029) (139,027)
Net proceeds from issuance
of common stock, preferred stock and
exercise of stock options 42,960,446 22,340,370
------------ ------------
Net cash provided by financing activities 37,900,952 16,003,992
------------ ------------
Net increase in cash and cash equivalents 30,904,123 11,701,338
Cash and cash equivalents,
beginning of period 15,516,883 2,512,047
------------ ------------
Cash and cash equivalents,
end of period $ 46,421,006 $ 14,213,385
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
1. Basis of Presentation
The information presented at June 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 six month periods ended June 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 of 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). The Consolidated
Balance Sheets and the Consolidated Statements of Operations are inclusive of
Calyx, Wallaby, the DOM/2 Business, the Acclaim Business, PMSC and Versyss for
the six months ended June 30, 1996 and are inclusive of Calyx, Wallaby, the
DOM/2 Business, the Acclaim Business and PMSC for the six months ended June 30,
1995. All significant intercompany transactions have been eliminated.
7
<PAGE>
2. Net Income Per Common Share
Net income per common share for the three and six month periods ended June
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 six
month periods ended June 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 three and six month periods
ended June 30, 1996 upon its conversion into 1,932,217 shares of Common Stock on
May 10, 1996.
8
<PAGE>
3. Acquisitions
Purchase of CTI Business. On June 14, 1996, the Company and CUSA
Technologies, Inc.("CTI"), a provider of physician practice management and other
industry specific information systems based in Salt Lake City, Utah, signed a
Letter of Intent regarding the acquisition of certain assets and the assumption
of certain liabilities of CTI through a wholly-owned subsidiary of the Company.
On July 3, 1996, pursuant to an asset purchase agreement, the Company purchased
substantially all of the assets of the medical practice management software
business and certain other software businesses of CTI (the "CTI Business") for
$10,100,000 in cash together with the assumption of certain liabilities and
cancellation of debt owed to PCN. The Company has paid $9,150,000 through August
14, 1996 with the remaining balance to be paid pending the receipt of certain
assets and financial reports. The final payment is subject to an adjustment
downward if certain balances do not achieve previously agreed upon levels. The
acquisition will be accounted for under the purchase method of accounting.
Pending Purchase of Wismer-Martin, Inc. On June 20, 1996, the Company and
Wismer-Martin, Inc. ("Wismer-Martin"), a provider of practice management systems
and healthcare information systems located in Mead, Washington, signed a
definitive merger agreement whereby PCN will acquire, pursuant to the merger of
Northwest Acquisition Corp., a wholly-owned subsidiary of the Company, with and
into Wismer-Martin, all of the issued and outstanding capital stock of
Wismer-Martin for $1,980,000 in cash and 935,000 shares of PCN Common Stock. The
number of shares is subject to adjustment depending on variations in the market
price of PCN Common Stock during the 15 trading days immediately preceding the
third business day prior to the transaction date. If such market price is less
than or equal to $9 per share on the third business day prior to the transaction
date, then, at PCN's option, in lieu of the stock and cash consideration, the
acquisition may be paid with $14,000,000 in cash. The transaction is subject to,
among other conditions, regulatory approvals and approval by the Wismer-Martin
shareholders.
Purchase of Versyss. On October 27, 1995, the Company acquired all of the
issued and outstanding capital stock of Versyss, a private 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.
9
<PAGE>
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 bears interest at the rate of 10% per
annum; and (iii) the assumption of $3,009,163 in liabilities.
The Versyss and PMS Business transactions 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:
Versyss PMS
----------- -----------
Consideration:
Cash 12,333,000 2,861,003
Notes Payable 11,750,000 2,000,000
Liabilities assumed 45,797,000 3,009,163
Legal and accounting costs 702,629 79,371
----------- -----------
Total purchase price $70,582,629 $ 7,949,537
=========== ===========
Allocation of Purchase Price:
Tangible assets including receivables,
inventories, and equipment 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) 820,281 267,750
Acquired software products
(amortized over three years) 3,101,000 179,089
Profit on support and update agreements
(amortized over one year) 852,602 123,785
Other intangible assets
(amortized over fifteen years) 37,307,746 4,689,612
----------- -----------
Total $70,582,629 $ 7,949,537
=========== ===========
10
<PAGE>
The following unaudited pro forma financial information represents the
combined results of operations of the Company, Versyss and PMSC as if both
acquisitions had occurred as of January 1, 1995 after giving effect to certain
financing transactions completed in the first and third quarters of 1995 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 and PMSC constituted a single entity during such periods nor does it
represent a basis for assessing future performance.
Six Months Ended
June 30, 1995
-----------------
Operating Revenues $45,969,977
Income before Extraordinary Item $735,464
Net Income $555,464
Income per Common Share before Extraordinary Item $0.02
Net Income per Common Share $0.01
4. Inventories
Inventories were as follows:
June 30, December 31,
1996 1995
---------- ----------
Computer hardware and peripherals $3,013,065 $3,120,969
Customer maintenance parts 1,369,000 1,477,985
---------- ----------
$4,382,065 $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, 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 by the end of
1997. Since implementation of the 1995 Restructuring Plan, the 1995 accrual has
decreased by $1,614,815, 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 1,614,815
----------
Balance at June 30, 1996 $2,307,635
==========
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 $2,655,000, of which $1,805,000 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 June
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 66,000
----------
Balance at June 30, 1996 $ 510,000
==========
13
<PAGE>
6. Shareholders' Equity
On May 10, 1996, the Company completed the public offering of 5,600,000
shares of its Common Stock and on May 24, 1996 an additional 840,000 shares were
issued according to the over-allotment option which was exercised in full, both
at a price of $10 per share (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 $42,823,938.
During the first six 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 six months of 1996, 598,942 stock options were exercised and 1,043,975
stock options were forfeited due to expiration or termination. There was no
stock warrant activity during the period. As a result, the cumulative number of
stock options and warrants outstanding was 9,096,363 as of June 30, 1996.
14
<PAGE>
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 will operate 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, will oversee 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
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 June 30, 1996, Glaxo Wellcome had contributed
approximately $13.4 million and the Company had contributed approximately $2.7
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 $864,000 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 six months ended June 30, 1996, the Company's share of the
loss incurred by HealthPoint during such period, primarily consisting of
allocable start-up costs, was $1,035,000.
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.
15
<PAGE>
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 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).
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<PAGE>
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.
June 30, December 31,
1996 1995
----------- -----------
Term indebtedness payable to Versyss Liquidating
Trust due annually in October 1996 and 1997 at $11,750,000 $11,750,000
11% (See Note 3)
Convertible subordinated note payable to
Equifax, Inc. due February 2000 at 6% (see -- 10,000,000
Notes 2,6, and 7)
Subordinated term notes due monthly March 1995
through February 2001 at 8% assumed from Versyss 1,764,608 2,004,000
acquisition
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 June 30,
1996) assumed from Versyss acquisition 1,500,000 1,500,000
Debt portion of Equifax Marketing Agreement 4,470,381 --
Term indebtedness payable to non-employee
Wallaby selling stockholders, due January 1996 -- 750,000
at 7%
Other 137,086 100,160
----------- -----------
19,622,075 28,104,160
Less: notes payable-current 6,297,909 9,080,000
----------- -----------
13,324,166 19,024,160
Less: current portion of long-term debt 1,085,407 100,160
=========== ===========
Long-term debt $12,238,759 $18,924,000
=========== ===========
Long-term debt, related party:
Term indebtedness payable Wallaby selling
employed at the Company stockholders, due -- $ 750,000
January 1996 at 7%
----------- -----------
-- 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
June 30, June 30,
1996 1995
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest $1,651,000 $381,000
Cash paid for income taxes $261,000 $79,000
Supplemental non-cash operating, investing and financing activities were
as follows:
* In January 1996, the Company and Equifax EDI amended and restated the
Marketing Agreement. Pursuant to the amended and restated Marketing
Agreement, the Company is obligated to pay $125,000 per month to Equifax
EDI over a period of four years. 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 (See Notes 7 and 8).
* 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).
* Capital lease obligations of $427,344 were incurred during the six months
ended June 30, 1995. None were incurred for the six months ended June 30,
1996.
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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 85,000, 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
19
<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 June 14, 1996, the Company and CUSA Technologies, Inc.("CTI"), a
provider of physician practice management and other industry specific
information systems based in Salt Lake City, Utah, signed a Letter of Intent
regarding the acquisition of certain assets and the assumption of certain
liabilities of CTI through a wholly-owned subsidiary of the Company. On July 3,
1996, pursuant to an asset purchase agreement, the Company purchased
substantially all of the assets of the medical practice management software
business and certain other software businesses of CTI (the "CTI Business") for
$10,100,000 in cash together with the assumption of certain liabilities and
cancellation of debt owed to PCN. The Company has paid $9,150,000 through August
14, 1996 with the remaining balance to be paid pending the receipt of certain
assets and financial reports. The final payment is subject to an adjustment
downward if certain balances do not achieve previously agreed upon levels. The
acquisition will be accounted for under the purchase method of accounting.
On June 20, 1996, the Company and Wismer-Martin, Inc. ("Wismer-Martin"), a
provider of practice management systems and healthcare information systems
located in Mead, Washington, signed a definitive merger agreement whereby PCN
will acquire, pursuant to the merger of Northwest Acquisition Corp., a
wholly-owned subsidiary of the Company, with and into Wismer-Martin, all of the
issued and outstanding capital stock of Wismer-Martin for $1,980,000 in cash and
935,000 shares of PCN Common Stock. The number of shares is subject to
adjustment depending on variations in the market price of PCN Common Stock
during the 15 trading days immediately preceding the third business day prior to
the transaction date. If such market price is less than or equal to $9 per share
on the third business day prior to the transaction date, then, at PCN's option,
in lieu of the stock and cash consideration, the acquisition may be paid with
$14,000,000 in cash. The transaction is subject to, among other conditions,
regulatory approvals and approval by the Wismer-Martin shareholders.
20
<PAGE>
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
will operate 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, will
oversee 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 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 June 30, 1996, Glaxo Wellcome had contributed
approximately $13.4 million and the Company had contributed approximately $2.7
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 second half 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 according to the over-allotment option which was exercised in
full. 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 $42,823,938.
21
<PAGE>
Results of Operations
Three Months Ended June 30, 1996
Compared to the Three Months Ended June 30, 1995
Revenues for the three months ended June 30, 1996 were $21,868,260, an
increase of $13,414,017 or 159% over revenues of $8,454,243 for the three months
ended June 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 $4,694,705 or 182% from $2,580,641 for the three months ended June
30, 1995 to $7,275,346 for the three months ended June 30, 1996. Hardware
revenue increased $3,978,465 or 198% from $2,004,326 for the three months ended
June 30, 1995 to $5,982,791 for the three months ended June 30, 1996 primarily
as a result of the acquisitions of Versyss and, to a lesser extent, the PMS
Business, both of which sell computer hardware peripherals and complete systems
(hardware and practice management software). Maintenance, communication fees and
other revenue increased by $4,740,847 or 123% from $3,869,276 for the three
months ended June 30, 1995 to $8,610,123 for the three months ended June 30,
1996 due primarily to the acquisitions of Versyss and, to a lesser extent, the
PMS Business, both of which also generate service fees for software support and
hardware maintenance.
Cost of revenues increased $5,399,569 or 167% from $3,238,740 for the
three months ended June 30, 1995 to $8,638,309 for the three months ended June
30, 1996. Cost of hardware, including installation costs, increased $2,740,867
or 218% from $1,257,426 to $3,998,293, primarily due to increased computer
hardware sales resulting from the acquisitions of Versyss and, to a lesser
extent, the PMS Business. Software, maintenance, communication fees and other
costs of revenue, which include the costs of labor for software support,
hardware maintenance and training, increased $2,658,702 or 134% from $1,981,314
to $4,640,016, primarily as a result of the increased sales of the Company's
recently acquired Versyss and, to a lesser extent, PMS Business practice
management software products and services.
Total cost of revenues increased as a percentage of total revenues from
38% for the three months ended June 30, 1995 to 40% for the three months ended
June 31, 1996 primarily as a result of the higher mix of hardware sales.
Operating expenses increased $3,859,184 or 104% from $3,707,760 for the
three months ended June 30, 1995 to $7,566,944 for the three months ended June
30, 1996. Research and development, selling and marketing, and general and
administrative expenses increased by $541,889, $1,475,899, and $1,841,396,
respectively. The increase in operating expenses can be attributed to the
acquisitions of Versyss and, to a lesser extent, the PMS Business which resulted
from increased headcount, as well as increased facilities and occupancy costs.
22
<PAGE>
Interest income increased $61,208 or 63% from $96,994 for the three months
June 30, 1995 to $158,202 for the three months ended June 30, 1996, primarily as
a result of investing the net proceeds from the 1996 Public Offering of
$42,823,938 received from the sale of 4,507,783 shares of Common Stock. Interest
expense increased $360,884 or 128%, from $282,405 for the three months ended
June 30, 1995 to $643,289 for the three months ended June 30, 1996, primarily as
a result of debt issued in April and October of 1995 in connection with the
acquisitions of Versyss and the PMS Business, the assumption of Versyss' debt
obligations and the recording of the debt portion of the amended and restated
Equifax Marketing Agreement in January 1996, and was partially offset by
converting the Equifax Note on May 10, 1996.
The Company recorded a provision for income taxes of $1,087,363 for the
three months ended June 30, 1996, reflecting an estimated annual effective tax
rate of 21%. In the comparative period ended June 30, 1995, the Company recorded
a 2% effective alternative minimum rate, income tax provision of $35,000. 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
$422,650, net of taxes, for the three months ended June 30, 1996 representing
the Company's share of the loss incurred by the joint venture, primarily as a
result of start-up costs.
Six Months Ended June 30, 1996
Compared to the Six Months Ended June 30, 1995
Revenues for the six months ended June 30, 1996 were $42,895,208 an
increase of $27,983,103 or 188% over revenues of $14,912,105 for the six months
ended June 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 $7,393,439 or 127% from $5,799,629 for the six months ended June
30, 1995 to $13,193,068 for the six months ended June 30, 1996. Hardware revenue
increased $9,177,117 or 339% from $2,706,581 for the six months ended June 30,
1995 to $11,883,698 for the six months ended June 30, 1996 primarily as a result
of the acquisitions of Versyss and, to a lesser extent, the PMS Business, both
of which sell computer hardware peripherals and complete systems (hardware and
practice management software). Maintenance, communication fees and other revenue
increased by $11,412,547 or 178% from $6,405,895 for the six months ended June
30, 1995 to $17,818,442 for the six months ended June 30, 1996 due primarily to
the acquisitions of Versyss and, to a lesser extent, the PMS Business, both of
which also generate service fees for software support and hardware maintenance.
23
<PAGE>
Cost of revenues increased $12,848,537 or 280% from $4,584,664 for the six
months ended June 30, 1995 to $17,433,201 for the six months ended June 30,
1996. Cost of hardware, including installation costs, increased $6,165,546 or
388% from $1,589,286 to $7,754,832, primarily due to increased computer hardware
sales resulting from the acquisitions of Versyss and, to a lesser extent, the
PMS Business. Software, maintenance, communication fees and other costs of
revenue, which include the costs of labor for software support, hardware
maintenance and training, increased $6,682,991 or 223% from $2,995,378 to
$9,678,369, primarily as a result of the increased sales of the Company's
recently acquired Versyss and, to a lesser extent, PMS Business practice
management software products and services.
Total cost of revenues increased as a percentage of total revenues from
31% for the six months ended June 30, 1995 to 41% for the six months ended June
30, 1996 primarily as a result of the higher mix of hardware sales.
Operating expenses increased $7,312,027 or 102% from $7,155,704 for the
six months ended June 30, 1995 to $14,467,731 for the six months ended June 30,
1996. Research and development, selling and marketing, and general and
administrative expenses increased by $1,214,056, $2,893,982, and $3,203,989,
respectively. The increase in operating expenses can be attributed to the
acquisitions of Versyss and, to a lesser extent, the PMS Business which resulted
from increased headcount, as well as increased facilities and occupancy costs.
Interest income increased $58,172 or 36% from $159,538 for the six months
June 30, 1995 to $217,710 for the six months ended June 30, 1996, primarily as a
result of investing the net proceeds from the 1996 Public Offering of
$42,823,938 received from the sale of 4,507,783 shares of Common Stock on May
10, 1996 and May 24, 1996. Interest expense increased $627,119 or 88%, from
$711,288 for the six months ended June 30, 1995 to $1,338,407 for the six months
ended June 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, the
assumption of Versyss' debt obligations and the recording the debt portion of
the amended and restated Equifax Marketing Agreement in January 1996.
The Company recorded a provision for income taxes of $2,073,363 for the
six months ended June 30, 1996, reflecting an estimated annual effective tax
rate of 21%. In the comparative period ended June 30, 1995, the Company recorded
a 2% effective alternative minimum rate, income tax provision of $62,000. 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.
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<PAGE>
The Company recorded a loss on its equity investment in HealthPoint of
$817,650, net of taxes, for the six months ended June 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 June 30, 1996 the Company had available cash and cash equivalents of
$46,421,006 and working capital of $39,834,494 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 $1,536,031 for the six
months ended June 30, 1996 compared to net cash used in operating activities of
$98,784 for the six months ended June 30, 1995. The increase in cash provided by
operating activities was achieved primarily from the Company's improved results
of operations for the six months ended June 30, 1996, partially offset by
payments of accrued expenses related to the Versyss acquisition and
restructuring.
Cash used in investing activities was $8,532,860 for the six months ended
June 30, 1996 compared to $4,203,870 for the six months ended June 30, 1995 and
primarily resulted from: (i) the initial cash contribution of $2,678,000 and
$855,390 in other charges in connection with the formation of the HealthPoint
joint venture; (ii) $2,095,871 in cash payments related to the acquisition of
the CTI Business and to the pending acquisition of Wismer-Martin; (iii)
$1,801,120 used to acquire licensing rights and other intangible assets; and
(iv) approximately $1,102,479 in net capital investment in equipment.
Cash provided by financing activities for the six months ended June 30,
1996 was $37,900,952 primarily related to $42,960,446 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.
Significant payment obligations of the Company subsequent to June 30, 1996
include:
(i) the payment in October 1996 of $5,875,000 in connection with the Versyss
acquisition, together with accrued and unpaid interest thereon; (ii) up to
approximately $4,300,000 in capital contributions required to be made by the
Company to HealthPoint; and (iii) the payment of $125,000 per month to Equifax
EDI 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,
25
<PAGE>
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 $42,823,938 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 June 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
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. - None
ITEM 2. CHANGES IN SECURITIES. - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS. - None
ITEM 5. OTHER INFORMATION. - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits - See Index to Exhibits on page 29
B. Reports on Form 8-K:
On June 20, 1996, the Company filed a report on form 8-K, (Item 5 Other
Events) to report that the Company, Northwest Acquisition Corp., a wholly-owned
subsidiary of the Company, and Wismer-Martin, Inc. entered into an Agreement and
Plan of Merger.
27
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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: August 14, 1996 By: /s/John F. Mortell
------------------------------
John F. Mortell
Executive Vice President and
Chief Operating Officer
28
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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. 30
29
EXHIBIT 11
PHYSICIAN COMPUTER NETWORK, INC.
COMPUTATION OF INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME (LOSS)
Net income before extraordinary item $ 3,667,907 $ 1,287,332 $ 6,982,566 $ 2,557,987
Extraordinary loss -- -- -- (180,000)
------------ ------------ ------------ ------------
Primary amd fully diluted net income $ 3,667,907 $ 1,287,332 $ 6,982,566 $ 2,377,987
============ ============ ============ ============
PRIMARY SHARES
Weighted average Common Stock outstanding 49,031,443 40,429,120 46,635,522 38,875,253
Common Stock issuable upon the exercise
of outstanding options and warrants 4,285,407 2,069,333 4,481,541 2,061,516
Common Stock issuable upon the
conversion of Preferred Stock 222,843 -- 586,158 --
------------ ------------ ------------ ------------
Weighted average Common Stock
outstanding as adjusted 53,539,693 42,498,453 51,703,221 40,936,769
============ ============ ============ ============
FULLY DILUTED SHARES
Weighted average Common Stock outstanding 49,031,443 40,429,120 46,635,522 38,875,253
Common Stock issuable upon the exercise
of outstanding options and warrants 4,376,419 2,069,333 4,488,906 2,061,516
Common Stock issuable upon the
conversion of Preferred Stock 222,843 -- 586,158 --
------------ ------------ ------------ ------------
Weighted average Common Stock
outstanding as adjusted 53,630,705 42,498,453 51,710,586 40,936,769
============ ============ ============ ============
Current portion of obligations under capital leases Primary:
Income before extraordinary item per share $ 0.07 $ 0.03 $ 0.14 $ 0.06
Loss from extraordinary item per share -- -- -- --
------------ ------------ ------------ ------------
Net Income per share $ 0.07 $ 0.03 $ 0.14 $ 0.06
============ ============ ============ ============
Fully Diluted:
Income before extraordinary item per share $ 0.07 $ 0.03 $ 0.14 $ 0.06
Loss from extraordinary item per share -- -- -- --
------------ ------------ ------------ ------------
Net Income per share $ 0.07 $ 0.03 $ 0.14 $ 0.06
============ ============ ============ ============
</TABLE>
Physiscian Computer Network Financial Data Tagging Schedule
30
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 46,421,006
<SECURITIES> 0
<RECEIVABLES> 23,758,670
<ALLOWANCES> 977,000
<INVENTORY> 4,382,065
<CURRENT-ASSETS> 77,548,879
<PP&E> 29,965,682
<DEPRECIATION> 25,938,925
<TOTAL-ASSETS> 140,483,329
<CURRENT-LIABILITIES> 37,714,385
<BONDS> 19,622,075
0
10
<COMMON> 520,185
<OTHER-SE> 89,458,491
<TOTAL-LIABILITY-AND-EQUITY> 140,483,329
<SALES> 42,895,208
<TOTAL-REVENUES> 42,895,208
<CGS> 17,433,201
<TOTAL-COSTS> 17,433,201
<OTHER-EXPENSES> 14,467,731
<LOSS-PROVISION> 213,000
<INTEREST-EXPENSE> 1,120,697
<INCOME-PRETAX> 9,873,579
<INCOME-TAX> 2,073,363
<INCOME-CONTINUING> 6,982,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,982,566
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
