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 MARCH 31, 1997
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 INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER 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 MAY 14, 1997 IS 51,436,154
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PHYSICIAN COMPUTER NETWORK, INC.
1997 FORM 10-Q
TABLE OF CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 3
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Earnings
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13
Results of Operations 16
Financial Condition and Liquidity 18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities 21
ITEM 3. Defaults upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
INDEX TO EXHIBITS 23
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PART I - FINANCIAL INFORMATION
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1997 1996
---- ----
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CURRENT ASSETS:
Cash and cash equivalents $ 15,332,798 $ 34,291,166
Accounts receivable, net of allowance for doubtful
accounts of $3,197,000 at March 31, 1997, and
$3,428,000 at December 31, 1996 24,292,120 21,102,878
Inventories 7,364,729 5,798,153
Prepaid expenses and other 3,648,410 2,974,490
Deferred tax asset 2,933,000 2,933,000
Total current assets 53,571,057 67,099,687
Intangible assets, net of accumulated amortization
of $16,754,000 at March 31, 1997
and $14,826,000 at December 31, 1996 68,906,274 69,076,020
Property and equipment, net 7,045,770 6,234,295
Investment in joint venture 2,930,766 2,015,888
Other assets 5,512,863 5,739,428
------------- -------------
Total assets $137,966,730 $150,165,318
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 7,901,495 $ 7,934,518
Current portion of long term-debt 1,132,747 1,153,413
Current portion of obligations under capital leases 507,150 289,229
Accounts payable 4,898,475 6,183,103
Accrued expenses and other liabilities 5,497,108 6,301,576
Customer deposits 834,274 1,043,072
Unearned income 10,394,590 13,068,726
------------- -------------
Total current liabilities 31,165,839 35,973,637
Long-term debt, net of current portion 4,344,230 4,672,118
Obligations under capital leases, net of
current portion 1,129,000 612,650
------------- -------------
Total liabilities 36,639,069 41,258,405
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 March 31,1997 and 1,000 shares
outstanding at December 31,1996 10 10
Common stock, $.01 par value, 75,000,000 shares authorized,
53,761,154 shares issued and outstanding at
March 31, 1997 and 52,982,484 shares issued and
outstanding at December 31, 1996 537,612 529,825
Additional paid-in capital 193,069,876 193,281,643
Accumulated deficit (81,584,837) (84,904,565)
Treasury stock, at cost 2,325,000 shares (10,695,000) -
------------- -------------
Shareholders' equity 101,327,661 108,906,913
------------- -------------
Total liabilities and shareholders' equity $137,966,730 $150,165,318
============= =============
<FN>
See accompanying notes to the consolidated financial
statements.
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PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31,
1997 1996
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Revenues:
Software license fees $ 6,880,266 $ 5,917,722
Hardware revenue 5,493,204 5,900,907
Maintenance, communication fees and other 11,708,765 9,208,319
------------ ------------
24,082,235 21,026,948
Cost of Revenues:
Hardware 3,567,578 3,756,539
Software, maintenance, communication fees
and other 6,125,835 5,038,353
9,693,413 8,794,892
------------ ------------
Gross margin 14,388,822 12,232,056
Operating expenses:
Research and development 2,106,733 1,111,487
Selling and marketing 2,468,601 1,704,769
General and administrative 3,092,096 2,396,060
Amortization of acquired intangible assets 1,754,348 1,688,471
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9,421,778 6,900,787
------------ ------------
Interest (income) expense:
Interest income (175,315) (59,508)
Interest expense 299,121 695,118
------------ ------------
123,806 635,610
------------ ------------
Income before income tax expense and loss on equity investment 4,843,238 4,695,659
Income tax expense 1,017,120 986,000
------------ ------------
Income before loss on equity investment 3,826,118 3,709,659
Loss on equity investment, net of income tax benefit (506,390) (395,000)
------------ ------------
Net income available to common shareholders 3,319,728 3,314,659
============ ============
Primary and fully diluted earnings per common share $ 0.06 $ 0.07
============ ============
Primary weighted average number
of common shares outstanding 56,867,259 49,864,464
============ ============
Fully diluted weighted average number
of common shares outstanding 56,867,259 50,102,432
============ ============
<FN>
See accompanying notes to the consolidated financial statements.
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PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
1997 1996
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Cash flows provided by (used in) operating activities:
Net income $ 3,319,728 $ 3,314,659
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,651,407 2,253,488
Provision for inventory obsolescence 367,644 -
Gain on sale of assets (6,597) (3,524)
Provision for doubtful accounts - 150,000
Non-cash compensation expense - 15,000
Non-cash provision for income tax 1,017,120 846,000
Loss on equity investment 506,390 395,000
(Increase) decrease in assets:
Accounts receivable (3,189,242) (2,150,479)
Inventories (1,934,220) (23,693)
Prepaid expenses and other assets (341,395) 513,424
Decrease in liabilities, net
Accounts payable trade (1,284,628) (335,020)
Accrued expenses and other liabilities (1,132,558) (2,412,556)
Customer deposits and unearned income (2,882,934) (1,408,953)
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Net cash provided by (used in) operating activities: (2,909,285) 1,153,346
------------- ------------
Cash flows (used in) provided by investing activities:
Purchase of equipment (1,708,534) (424,648)
Proceeds from disposal of equipment 7,077 3,524
Acquisition of licensing rights
and other intangible assets (1,342,891) (1,132,578)
Payment of acquisition costs (108,469) -
Investment in joint venture and related costs (1,555,878) (3,564,082)
------------- ------------
Net cash used in investing activities: (4,708,695) (5,117,784)
------------- ------------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt (348,554) (1,146,000)
Principal payments of notes payable (30,816) (1,638,756)
Principal payments under capital lease obligations (283,264) (28,876)
Purchase of treasury stock (10,695,000) -
Net proceeds from issuance
of common stock, preferred stock, and warrants 17,246 1,076,042
------------- ------------
Net cash used in financing activities (11,340,388) (1,737,590)
------------- ------------
Net decrease in cash and cash equivalents (18,958,368) (5,702,028)
Cash and cash equivalents,
beginning of period 34,291,166 15,516,883
------------- ------------
Cash and cash equivalents,
end of period $ 15,332,798 $ 9,814,855
============= ============
<FN>
See Note 9 for supplemental disclosure of cash flow information.
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PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The information presented at March 31, 1997 and 1996 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 month period ended March 31, 1997 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, 1996.
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 strategy, the Company acquired eight practice
management software entities over the period from September 1993 to December
1996. Two of the eight acquisitions were completed in 1996. On July 2, 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 10, 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 for
the three months ended March 31, 1997 are inclusive of the CTI Business and
Wismer-Martin. Any significant intercompany transactions have been eliminated.
2. NET INCOME PER COMMON SHARE
Net income per common share for the three months ended March 31, 1997 and
1996 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 conversion of a
$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 and was converted into 1,932,217
shares of the Company's Common Stock at a conversion price of $5.175 on May
10, 1996, is considered an other dilutive security but is not included in the
weighted average number of common shares outstanding used in the calculation
of fully diluted income per share for the three months ended March 31, 1996 as
such inclusion would have been anti-dilutive. The conversion of the Equifax
Note is included in the weighted average number of common shares outstanding
for the three months ended March 31, 1997.
On March 31, 1997, the Company exercised an option it held and purchased
from IBM Credit Corporation ("ICC"), 2,325,000 shares of its Common Stock at a
price of $4.60 per share. The repurchase of the shares from ICC is included in
the weighted average number of common shares outstanding for the three months
ended March 31, 1997 (see Note 6).
3. ACQUISITIONS
Purchase of Wismer-Martin, Inc. On September 10, 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 $9,365,895; and (iii) the assumption of $4,733,154 in
liabilities.
Purchase of the CTI Business. On July 2, 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) $9,200,000 in cash; and (ii) the assumption of $4,130,526 in liabilities
and cancellation of debt owed by CTI to PCN.
<PAGE>
The acquisitions of Wismer-Martin and the CTI 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:
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CTI
Business
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Consideration:
- ------------------------------------------------------------------------------
Cash $ 1,980,000 $ 9,200,000
PCN Common Stock 9,365,895 -
Liabilities assumed 4,733,154 4,130,526
Legal and accounting costs 611,558 254,274
Total purchase price $16,690,607 $13,584,800
=========== ===========
Allocation of Purchase Price:
- ------------------------------------------------------------------------------
Tangible assets including receivables, inventories, and equipment
$ 3,340,148
Profit on future support and update agreements (amortized over four years)
537,000
Acquired software products (amortized over three years)
494,000 -
Profit on support and update agreements
(amortized over one year) 85,000
Other intangible assets (amortized over fifteen years)
12,234,459
Total $16,690,607 $13,584,800
=========== ===========
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The following unaudited pro forma financial information represents the
combined results of operations of the Company, the CTI Business, and
Wismer-Martin as if all acquisitions had occurred as of January 1, 1996 after
giving effect to certain financing transactions completed in 1996. The
unaudited pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company, the CTI
Business, and Wismer-Martin constituted a single entity during such periods
nor does it represent a basis for assessing future performance.
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Three Months Ended March 31, 1996:
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Operating Revenues $26,323,459
Net Income $ 1,572,337
Earnings per Common Share $ 0.03
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4. INVENTORIES
Inventories were as follows:
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March 31, December 31,
1997 1996
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Computer hardware and peripherals $5,034,322 $3,377,694
Customer maintenance parts 2,330,407 2,420,459
$7,364,729 $5,798,153
========== ==========
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5. RESTRUCTURING PLAN UPDATE
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1995 RESTRUCTURING PLAN
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Balance at December 31, 1996 86,156
1997 Activity:
Cash outflows from reduction in workforce and lease termination costs
60,515
=======
Balance at March 31, 1997 $25,641
=======
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6. SHAREHOLDERS' EQUITY
On March 31, 1997, the Company exercised an option it held and purchased
from IBM Credit Corporation ("ICC"), 2,325,000 shares of its Common Stock at a
price of $4.60 per share.
On February 11, 1997, options to purchase 894,000 shares of Common Stock
at an exercise price of $9.188 per share were granted pursuant to the
Company's 1993 Incentive and Non-Incentive Stock Option Plan and 36,200 stock
options were forfeited due to expiration or termination. During the first
quarter of 1997, 3,670 stock options were exercised. There were no other stock
warrants exercised during the period. As a result, the cumulative number of
stock options and warrants outstanding were 10,082,716, as of March 31, 1997.
7. HEALTHPOINT JOINT VENTURE
In January 1996, the Company and Glaxo Wellcome, through wholly-owned
subsidiaries, formed HealthPoint, a joint venture partnership, to design and
market clinical information technology products and services. These products
and services 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
partners' operations. The Company has agreed to, generally, use its best
efforts to 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 March 31, 1997, the Company had contributed
approximately $6.3 million, with the remainder to be contributed
proportionately by the partners in semi-annual installments as needed by the
venture through December 31, 1998. 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. The Company accounts for the investment in HealthPoint under the
equity method of accounting. Purchases by the Company from HealthPoint were
considered immaterial for the three months ended March 31, 1997 and March 31,
1996.
<PAGE>
8. NOTES PAYABLE AND LONG-TERM DEBT
The Company's indebtedness as of March 31, 1997 and December 31, 1996
consists of the following:
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March 31, December 31,
1997 1996
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Term indebtedness payable to Versyss Liquidating Trust due in
October 1997 at 11% (See Note 3) $ 5,875,000 $ 5,875,000
Subordinated term notes due monthly through February 2001 at
8% assumed from Versyss acquisition 1,506,633 1,611,747
Term indebtedness payable to IBM due June 1997 and October
1997 at prime plus 2.5% (10.75% at March 31,1997) assumed
from Versyss acquisition
Debt portion of NDC Marketing Agreement 3,701,962 3,878,466
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 March 31, 1997), 397,003
due November 1998 assumed from Wismer-Martin acquisition
(See Note 3)
Note payable monthly to the Greater Spokane Business
Development Association and the Small Business
Administration at 9.896%, due October 2008 assumed from 326,451
Wismer-Martin acquisition (See Note 3)
Subordinated term notes due annually July 1998 at 9.0%
assumed from Wismer-Martin acquistion (See Note 3) 10,694
Other 65,375 156,963
13,378,472 13,760,049
Less: notes payable-current 7,901,495 7,934,518
----------- -----------
5,476,977 5,825,531
Less: current portion of long-term debt 1,132,747 1,153,413
Long-term debt $ 4,344,230 $ 4,672,118
=========== ===========
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9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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March 31, March 31,
1997 1996
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 88,500 $376,000
Cash paid for income taxes $225,000 $121,000
</TABLE>
Supplemental non-cash operating, investing, and financing activities were
as follows:
Capital lease obligations of $1,026,426 were incurred during the three
months ended March 31, 1997 and none were incurred for the three months ended
March 31, 1996.
10. SUBSEQUENT EVENTS
On April 1, 1997, the Company acquired the assets of the Healthcare
Division of Data Systems of Texas, a reseller of the Company's hardware and
software products with offices in Waco and Austin, Texas, for: (i) $1,070,000
in cash; (ii) $600,000 in notes payable; and, (iii) the assumption of $109,101
in liabilities.
On April 29, 1997, the Company acquired the assets of the medical practice
management software business of Software Banc, Inc. of Milwaukee, Wisconsin
for $2,613,222 in cash and the assumption of approximately $105,000 in
liabilities.
<PAGE>
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, 1996.
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, 1996.
Company Overview
- ----------------
The Company is a leader in developing, marketing and supporting
practice management software products for physician practices. The Company's
overall business objective is to become the leading provider of integrated
practice management and clinical information software products to office-based
physicians, thereby becoming a major link for the electronic exchange of
information between physician practices and other health care providers and
organizations. In furtherance of this objective, since September 1993, the
Company has acquired ten practice management software businesses which, along
with new system sales, 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 98,000, making the Company one of
the largest providers of practice management software products in the United
States. The Company plans to migrate a substantial majority of its customers
to its most advanced practice management software product, the PCN Health
Network Information System, during the next several years. In an effort to
rapidly and cost-effectively supplement its practice management software
product offerings with knowledge-based clinical products and services, in
January 1996, the Company and Glaxo Wellcome, Inc. ("Glaxo Wellcome") formed a
joint venture. The joint venture, HealthPoint G.P. ("HealthPoint"), was formed
to develop and market clinical information technology products and services
that will provide the clinical information needed at the point of patient care
and assist physicians and other health care providers practice medicine more
efficiently. In March 1996, HealthPoint introduced its first product,
HealthPoint ACS, a product developed for medical offices to enable physicians
to, among other things, manage the clinical information required for treatment
at the point of care. HealthPoint ACS first became commercially available in
December 1996.
<PAGE>
The Company's practice management software products, which, among other
things, automate physician scheduling and generate patient billings, insurance
claims billings and other financial reports, include interactive communication
software that links physician practices with hospitals, Medicare/Medicaid
carriers, commercial insurance carriers, claims clearinghouses, clinical
laboratories, pharmacies, HMOs and other health care organizations who have
established electronic communication links under agreement with the Company
(collectively, "Connecting Service Providers"). The PCN Health Network
Information System is designed to become the common practice management
software platform used by a substantial majority of the Company's physician
practice customers and, as an integrated unit with HealthPoint's products, is
expected to provide physicians with comprehensive financial, administrative
and clinical applications. The PCN Health Network Information System will
primarily manage the business elements of the physician's practice and
HealthPoint's software products and services will primarily provide physicians
with clinical applications and functionality intended to assist physicians in
the clinical aspects of their practices.
Strategy. The Company's objective is to establish a large installed base of
physician practice customers who use the PCN Health Network Information System
integrated with HealthPoint's clinical information products, thereby becoming
an important link for the electronic exchange of information between physician
practices and other health care providers and organizations. The Company's
strategy for achieving its objective has and will continue to include: (i)
increasing the usage of the PCN Health Network Information System by
continuing to acquire practice management software businesses having an
installed base of physician practice customers; (ii) migrating both the
Company's existing and newly acquired practice management software customers
to the PCN Health Network Information System during the next several years;
(iii) marketing and licensing the PCN Health Network Information System, both
directly and through independent resellers, to additional physician customers,
in particular, large group practices; (iv) marketing HealthPoint's clinical
information system products and other services to the Company's installed base
of PCN Health Network Information System customers, as well as customers of
the Company's other practice management software products; and (v) providing
new and enhanced services, including new Connecting Service Providers, through
the PCN Health Network Information System and HealthPoint's clinical
information technology products.
Acquisition History. The Company has completed the acquisition of ten (10)
practice management software entities since September 1993. The most recent
include the following:
On July 2, 1996, the Company acquired the CTI Business, a reseller of the
Company's hardware and software products and a direct provider of certain
other practice management systems and equipment to sites having an aggregate
of approximately 4,000 physicians, for $9,200,000 in cash, the assumption of
approximately $4,130,000 in liabilities and the cancellation of debt owed by
CTI to PCN.
<PAGE>
On September 10, 1996, the Company, acquired Wismer-Martin, a provider,
through a direct sales force, of practice management and healthcare
information systems, and related equipment, to sites having an aggregate of
approximately 4,000 physicians for $1,980,000 in cash, 935,000 shares of PCN
Common Stock valued at $9,366,000 and the assumption of $4,737,000 in
liabilities.
On April 1, 1997, the Company acquired the assets of the Healthcare
Division of Data Systems of Texas, a reseller of the Company's hardware and
software products with offices in Waco and Austin, Texas, for: (i) $1,070,000
in cash; (ii) $600,000 in notes payable; and, (iii) the assumption of
approximately $109,000 in liabilities.
On April 29, 1997, the Company acquired the assets of the medical
practice management software business of Software Banc, Inc. ("SBI") of
Milwaukee, Wisconsin for $2,613,222 in cash and the assumption of
approximately $105,000 in liabilities. SBI is a regional provider, through a
direct sales force, of practice management systems and related equipment to
sites having an aggregate of approximately 3,000 physicians.
HealthPoint Overview. In January 1996, the Company and Glaxo Wellcome,
through wholly-owned subsidiaries, formed HealthPoint., a joint venture
partnership, to design and market clinical information technology products and
services. These products and services 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 partners' operations. 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 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 March 31, 1997, the Company had contributed
approximately $6.3 million, with the remainder to be contributed
proportionately by the partners in semi-annual installments as needed by the
venture through December 31, 1998. 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 shared equally by the
partners.
In March 1996, HealthPoint introduced its first product, HealthPoint ACS,
which became commercially available in December 1996. HealthPoint ACS, which
interfaces (and is expected to be integrated) with the PCN Health Network
Information System, enables physicians to, among other things, manage the
clinical information required for treatment at the point of care.
<PAGE>
NDC Relationship. In connection with the Company's goal of expanding the
services provided by Connecting Service Providers, on January 25, 1995,
Equifax Healthcare EDI Service, Inc. ("Equifax EDI"), a subsidiary of Equifax,
Inc., entered into an Exclusive Marketing Agreement (the "Marketing
Agreement") with the Company to establish "PCN Link," a communication link
between Equifax EDI and users of the Company's practice management software
products. 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, Inc. 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.
Results of Operations
- -----------------------
THREE MONTHS ENDED MARCH 31, 1997
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1996
Revenues - Revenues for the three months ended March 31, 1997 were
$24,082,235, an increase of $3,055,287 or 15% over revenues of $21,026,948 for
the three months ended March 31, 1996.
The Company's software license fees are derived primarily from the sale
of licenses for the PCN Health Network Information System and the Company's
other practice management software products. Revenues from software license
fees increased by $962,544 or 16% from $5,917,722 in the first quarter of 1996
to $6,880,266 in the first quarter of 1997 as a result of increased sales of
licenses for the PCN Health Network Information System from both migrations
and new system sales and, to a lesser extent, increased software license sales
from the acquisition of the CTI Business and Wismer-Martin during the second
half of 1996. Hardware revenues decreased by $407,703 or 7% from $5,900,907
for the quarter ended March 31, 1996 to $5,493,204 for the quarter ended March
31, 1997 due to an increase in software only orders experienced in early 1997.
Maintenance, communication fees and other revenue increased by $2,500,446
or 27% from $9,208,319 in the first quarter of 1996 to $11,708,765 in the
first quarter of 1997 primarily due to the acquisition of the more hardware
and software maintenance-intensive CTI Business and Wismer-Martin.
<PAGE>
Cost of revenues - Cost of revenues decreased as a percentage of total
revenues from 42% in the first quarter of 1996 to 40% in the first quarter of
1997 primarily as a result of the higher mix of software sales and maintenance
and communication fees in 1997.
Cost of software, maintenance, communication fees and other revenue,
which includes the costs of labor for software support, hardware maintenance
and training,
increased by $1,087,482 or 22% from $5,038,353 in the first quarter of 1996 to
$6,125,835 in the first quarter of 1997 primarily as a result of the increased
sales of the PCN Health Network Information System and higher maintenance
revenue related to the acqusitions of the CTI Business and Wismer-Martin.
Cost of hardware, including installation costs, decreased by $188,961 or
5% from $3,756,539 for the three months ended March 31, 1996 to $3,567,578 for
the three months ended March 31, 1997 resulting from the lower mix of hardware
sales orders in early 1997.
Operating Expenses - Operating expenses increased $2,520,991 or 37% from
$6,900,787 for the three months ended March 31 1996 to $9,421,778 for the
three months ended March 31, 1997. The increase in operating expenses can be
attributed to the following:
Research and development costs increased by $995,246 or 90% from
$1,111,487 in the first quarter of 1996 to $2,106,733 in the first quarter of
1997 primarily due to (i) the investment in new technology and product
development, (in particular, the development with respect to the integration
of HealthPoint ACS and the PCN Health Network Information System; and, (ii)
the acquisitions of Wismer-Martin and the CTI Business during the second half
of 1996. Increases in expenditures related to core products was partially
offset by savings realized from the elimination of development charges
associated with non-core products.
Selling and marketing expenses increased by $763,832 or 45% from
$1,704,769 in the first quarter of 1996 to $2,468,601 in the first quarter of
1997 primarily as a result of increased headcount attributable to the
Wismer-Martin and the CTI Business acquisitions of 1996, both of which employ
a direct sales force, partially offset by continued efficiency savings
realized from the elimination of duplicate marketing program costs.
General and administrative expenses increased by $696,036 or 29% from
$2,396,060 in the first quarter of 1996 to $3,092,096 in the first quarter of
1997 due to additional headcount and increased facility and occupancy costs
attributable to the acquisitions of Wismer-Martin and the CTI Businesses
during the second half of 1996, partially offset by savings resulting from the
centralization of certain operations, the elimination of duplicate
responsibilities and other functional downsizing.
Amortization of acquired intangible assets increased by $65,877 or 4% as
a result of $546,275 in additional amortization expense related to the
Wismer-Martin and CTI Business acquisitions, partially reduced by $480,398 of
amortization expense incurred in the first quarter of 1996 related to other
previously acquired intangible assets that were fully amortized prior to the
beginning of 1997.
<PAGE>
Interest income increased by $115,807 or 195% from $59,508 in the first
quarter of 1996 to $175,315 in the first quarter of 1997, primarily due to the
investment by the Company of the net proceeds from the 1996 Public Offering.
Interest expense decreased by $395,997 or 57% from $695,118 in the first
quarter of 1996 to $299,121 in the first quarter of 1997 primarily as a result
of the decrease in debt service due to the conversion of the Equifax Note at
the time of the Company's public offering of shares of its Common Stock in May
of 1996 and the payment of debt associated with the Versyss and PMS Business
acquisitions, partially offset by debt service assumed as part of the
Wismer-Martin acquisition.
The Company recorded a provision for income taxes of $1,017,120 for the
quarter ended March 31, 1997, an increase of $31,120 or 3% from the $986,000
provision recorded in the first quarter of 1996, reflecting an estimated
annual effective tax rate of 21% for both periods. On a cash basis, the
Company expects to pay at a rate substantially less than the 21% estimated
annual effective rate.
The loss, net of income taxes, on the equity investment in HealthPoint,
which represents the Company's share of the loss incurred by the joint
venture, consisting primarily of start-up costs and development costs,
increased by $111,390 or 28% from a loss of $395,000 in the first quarter of
1996 to a loss of $506,390 in the first quarter of 1997.
Financial Condition & Liquidity
- ----------------------------------
At March 31, 1997 the Company had available cash and cash
equivalents of $15,332,798 and working capital of $22,405,218 compared to cash
and cash equivalents of $34,291,166 and a working capital of $31,126,050 at
December 31, 1996. The decrease in cash and cash equivalents can be
attributed to the following:
Net cash used in operating activities was $2,909,285 for three
months ended March 31, 1997 compared to net cash provided by operating
activities of $1,153,346 for the three months ended March 31, 1996 primarily
due to: (i) an increase in accounts receivable related to the timing of sales
orders and cash collections in the first quarter of 1997; (ii) an increase in
inventory position in support of anticipated PCN Health Network Information
System and HealthPoint ACS sales; and, (iii) payment of accrued expenses and
other liabilities. Accounts receivable are typically collected within sixty
days of the date of sale. The Company believes that cash will be provided
from operations in the remaining three quarters of 1997.
Cash used in investing activities was $4,708,695 in the first
quarter of 1997 and primarily consisted of: (i) a $1,555,878 scheduled cash
investment in HealthPoint; (ii) $1,342,891 used to acquire licensing rights
and other intangible assets; and (iii) $1,708,534 in net capital investment
in equipment.
<PAGE>
Cash used in financing activities in the first quarter of 1997 was
$11,340,388 primarily related to the payment by the Company of $10,695,000 to
ICC for the repurchase of 2,325,000 shares of the Company's Common Stock at a
price of $4.60 per share.
Significant payment obligations of the Company during the remainder of
1997 include: (i) the payment in October 1997 of $5,875,000 in principal
amount under the promissory note issued in connection with the Versyss
acquisition, together with accrued and unpaid interest thereon; (ii) capital
contributions required to be made by the Company to HealthPoint; and (iii) the
payment of $125,000 per month to NDC, as successor to Equifax EDI, under the
amended and restated Marketing Agreement.
The Company expects that its operating cash flow will be sufficient to
fund the Company's working capital requirements (including research and
development) through at least 1998 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. Accordingly, the
Company may in the future be required to seek additional sources of financing,
including borrowing and/or the sale of equity securities. If additional funds
are raised by issuing equity securities, further dilution to shareholders may
result. No assurances can be given that any such additional sources of
financing will be available on acceptable terms or at all.
At March 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $66,000,000 which expire in 1999
through 2009. This includes approximately $15,000,000 of net operating loss
carryforwards from Versyss and $4,500,000 from Wismer-Martin 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 utilize its net
operating losses in the future. As a result, the Company is limited each year
as to the amount of pre-ownership change net operating losses that can be
utilized. However, it is the opinion of management that the losses will be
fully utilized prior to expiration of the carryforward period.
<PAGE>
Impact of New Accounting Pronouncements In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128 , Earnings Per Share ("SFAS
128"). This statement is effective for financial statements issued for periods
ending after December 15, 1997 and will require companies to change the way
they calculate earnings per share ("EPS"). Primary EPS will be replaced by
Basic EPS which excludes dilution and is calculated by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Fully Diluted EPS will be replaced by
Diluted EPS which reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. In addition, SFAS 128 also
requires dual presentation of Basic and Diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the Basic EPS computation
to the numerator and denominator of the Diluted EPS computation.
If SFAS 128 was adopted as of March 31, 1997, EPS would have been as
follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Basic EPS $0.06 $0.07
Diluted EPS $0.06 $0.07
</TABLE>
<PAGE>
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. - None
A. Exhibits - See Index to Exhibits on page 23.
<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: May 15, 1997 By: /s/ John F. Mortell
--------------------
John F. Mortell
Executive Vice President and
Chief Operating Officer
Date: May 15, 1997 By: /s/ Thomas F. Wraback
----------------------
Thomas F. Wraback
Senior Vice President and
Chief Financial Officer
<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. 24
<TABLE>
<CAPTION>
EXHIBIT 11
PHYSICIAN COMPUTER NETWORK, INC.
COMPUTATION OF INCOME PER SHARE
THREE MONTHS ENDED
MARCH 31,
---------
<S> <C> <C>
1997 1996
----------- -----------
INCOME
- ------------------------------------------
Primary and fully diluted net income $ 3,319,728 $ 3,314,659
PRIMARY SHARES
- ------------------------------------------
Weighted average Common Stock outstanding 53,091,931 44,239,022
Common Stock issuable upon the exercise
of outstanding options and warrants 3,632,471 4,675,969
Common Stock issuable upon the
conversion of Preferred Stock 142,857 949,473
----------- -----------
Weighted average Common Stock
outstanding as adjusted 56,867,259 49,864,464
=========== ===========
FULLY DILUTED SHARES
- ------------------------------------------
Weighted average Common Stock outstanding 53,091,931 44,239,022
Common Stock issuable upon the exercise
of outstanding options and warrants 3,632,471 4,913,939
Common Stock issuable upon the
conversion of Preferred Stock 142,857 949,473
----------- -----------
Weighted average Common Stock
outstanding as adjusted 56,867,259 50,102,434
=========== ===========
PRIMARY:
- ------------------------------------------
Net Income per share $ 0.06 $ 0.07
=========== ===========
FULLY DILUTED:
- ------------------------------------------
Net Income per share $ 0.06 $ 0.07
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 15332798
<SECURITIES> 0
<RECEIVABLES> 27489120
<ALLOWANCES> 3197000
<INVENTORY> 7364729
<CURRENT-ASSETS> 53571057
<PP&E> 34534241
<DEPRECIATION> 27488471
<TOTAL-ASSETS> 137966730
<CURRENT-LIABILITIES> 31165839
<BONDS> 13378472
0
10
<COMMON> 537612
<OTHER-SE> 100790039
<TOTAL-LIABILITY-AND-EQUITY> 137966730
<SALES> 24082235
<TOTAL-REVENUES> 24082235
<CGS> 9693413
<TOTAL-COSTS> 9693413
<OTHER-EXPENSES> 9421778
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123806
<INCOME-PRETAX> 4843238
<INCOME-TAX> 1017120
<INCOME-CONTINUING> 3319728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3319728
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
