FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________ to __________________
Commission file number 0-20183
Medic Computer Systems, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
North Carolina 56-1306083
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
</TABLE>
8601 Six Forks Road, Suite 300, Raleigh, North Carolina 27615
(Address of principal executive offices, including zip code)
(919) 847-8102
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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<CAPTION>
Class Number Outstanding Date
<S> <C>
Common Stock 24,396,308 November 11, 1996
$.01 par value
</TABLE>
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
Index to Form 10-Q
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<CAPTION>
Pages
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1995 and 3
September 30, 1996
Statements of Operations for the three months and nine months 4
ended Septem4er 30, 1995 and 1996
Statements of Cash Flows for the nine months
ended September 30, 1995 and 1996 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
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2
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MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited) (unaudited and
restated)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $38,375 $38,935
Short-term investments 15,667 11,461
Accounts receivable, trade, net 52,187 41,189
Inventories and maintenance parts 11,489 12,294
Prepaid expenses 5,575 6,190
Other current assets 1,309 1,237
Deferred income tax benefit 2,255 2,515
- ---------------------------------------------------------------------------------------- -------------------------------
Total current assets 126,857 113,821
Property and equipment, at cost, net 9,257 7,075
Intangible assets, at cost, net 19,206 20,445
Other assets 99 122
- -----------------------------------------------------------------------------------------------------------------------
Total assets $155,419 $141,463
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term notes $1,446 $2,677
Accounts payable, trade 9,995 7,336
Customer deposits and deferred maintenance revenue 9,123 13,396
Income taxes payable 970 1,676
Accrued expenses:
Commissions 2,118 1,604
Compensation and related items 5,403 3,963
Other 2,930 3,075
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 31,985 33,727
Long-term notes, less current portion 1,805 3,127
Other long-term liabilities 117 172
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock, $.01 par value; 40,000,000 shares authorized; 24,355,695
and 24,210,264 shares issued and outstanding in 1996 and 1995, respectively 244 242
Additional paid-in capital 70,005 68,628
Retained earnings 51,263 35,567
- -----------------------------------------------------------------------------------------------------------------------
121,512 104,437
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $155,419 $141,463
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
3
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MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except share data)
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<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30 September 30 September 30 September 30
------------ ------------ ------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
(restated) (restated)
<S> <C>
NET REVENUES:
Systems $24,373 $20,769 $65,861 $55,614
Maintenance, forms and other services 25,699 19,208 72,169 53,866
---------------------------------------------------------------------
Total Net Revenues 50,072 39,977 138,030 109,480
===============================================================================================================================
COST OF REVENUES:
Systems 14,625 12,898 39,513 34,778
Maintenance, forms and other services 15,768 11,318 43,609 31,071
---------------------------------------------------------------------
Total Cost of Revenues 30,393 24,216 83,122 65,849
- -------------------------------------------------------------------------------------------------------------------------------
Gross Margin 19,679 15,761 54,908 43,631
===============================================================================================================================
OPERATING EXPENSES:
Sales and marketing 4,512 3,921 12,909 10,669
General and administrative 2,584 2,233 7,446 5,898
Amortization of intangible assets 442 780 1,334 2,292
Research and development 2,602 2,242 7,395 5,928
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 10,140 9,176 29,084 24,787
===============================================================================================================================
Income from Operations 9,539 6,585 25,824 18,844
===============================================================================================================================
Other Income:
Interest income 481 625 1,599 1,331
- -------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 10,020 7,210 27,423 20,175
- -------------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 3,934 2,509 10,254 7,100
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $6,086 $4,701 $17,169 $13,075
===============================================================================================================================
Pro forma data:
Income before pro forma income
tax provision $6,086 $4,701 $17,169 $13,075
Pro forma income tax expense for the period
prior to May 31, 1996 for CompuSystems -- 314 489 871
- -------------------------------------------------------------------------------------------------------------------------------
Pro forma net income $6,086 $4,387 $16,680 $12,204
===============================================================================================================================
Pro Forma Earnings per Share:
Net income per share $0.25 $0.18 $0.67 $0.51
===============================================================================================================================
Weighted average common
shares and equivalents used in
computing net income per share 24,815,880 24,513,230 24,786,994 23,736,416
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
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<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
(restated)
<S> <C>
Cash flows from operating activities:
Net income $17,169 $13,075
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 1,740 1,008
Amortization of intangibles 1,334 2,292
Deferred income taxes 260 0
Accounts receivable, trade (net) (10,998) (13,910)
Inventories and maintenance parts 805 (463)
Prepaid expenses 543 (487)
Other 23 (43)
Accounts payable, trade 2,659 (2,159)
Customer deposits and deferred maintenance revenue (4,273) 767
Income taxes payable (706) (137)
Accrued expenses 1,809 1,514
Payments on long-term note payable to vendor (1,289) 0
Other long-term liabilities (55) (49)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,021 1,408
=====================================================================================================================
Cash flows from investing activities:
Purchases of short-term investments (22,597) (7,559)
Proceeds from the sale of short-term investments 18,391 0
Payments for purchases of property and equipment (3,918) (2,459)
Payments for acquisitions made, net of cash acquired (95) (4,909)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,219) (14,927)
=====================================================================================================================
Cash flows from financing activities:
Proceeds from issuance of common stock 334 35,586
Distributions to CompuSystems' shareholders (1,475) (1,564)
Payments on long-term notes (1,264) (57)
Tax benefits from stock options exercised 1,043 1,638
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,362) 35,603
=====================================================================================================================
Net change in cash and cash equivalents (560) 22,084
Cash and cash equivalents:
Beginning of period 38,935 16,644
- ---------------------------------------------------------------------------------------------------------------------
End of period $38,375 $38,728
=====================================================================================================================
Cash paid for interest and income taxes was as follows:
Interest $ 13 $14
=====================================================================================================================
Income taxes $9,141 $5,543
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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MEDIC COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1996 and for all
periods presented have been made. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, but the Company believes that the disclosures
made are adequate to make the information presented not misleading. For more
complete financial information, these financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Results for interim periods are not necessarily indicative of the results for
any other interim period or for the full fiscal year.
On June 10, 1996, the Company declared a two-for-one stock split of the
Company's Common Stock effective June 24, 1996, pursuant to which each
shareholder of record received one additional share of Common Stock for each
share held as of that date. The financial statements have been restated to
reflect the effect of the split.
2. BUSINESS COMBINATIONS
On May 31, 1996, the Company acquired all of the outstanding stock of
CompuSystems, Inc. ("CompuSystems"), a privately held company based in Columbia,
South Carolina, through an exchange of stock in a merger transaction. Medic
issued 718,886 shares of its Common Stock to the shareholders of CompuSystems in
the merger. The transaction was accounted for as a pooling of interests, and
accordingly, the Company's financial statements for the periods prior to the
merger have been restated to include the results of CompuSystems for all periods
presented. Certain details of the results of operations of the previously
separate companies before the acquisition are as follows:
<TABLE>
<CAPTION>
January 1 - May 31, 1996 January 1 - September 30, 1995
------------------------ ------------------------------
Medic CompuSystems Total Medic CompuSystems Total
----- ------------ ----- ----- ------------ -----
<S> <C>
Revenue $63,181 $ 4,085 $67,266 $102,156 $ 7, 324 $109,480
Net income $ 5,660 $ 1,167 $ 6,827 $ 10,894 $ 2,181 $ 13,075
Pro forma income
tax expense $ 489 $ 489 $ 871 $ 871
Pro forma
Net income $ 5,660 $ 678 $ 6,338 $ 10,894 $ 1,310 $ 12,204
</TABLE>
6
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3. INVENTORIES AND MAINTENANCE PARTS
Ending inventories consisted of the following (in thousands):
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<CAPTION>
September 30, December 31,
1996 1995
---- ----
(unaudited) (unaudited and
restated)
<S> <C>
New and used computer hardware and parts $ 9,939 $ 10,865
Inventory shipped to customers for which
revenue recognition criteria has not been met 1,031 1,007
Forms, FastBill and FastClaim 519 422
------- -------
$11,489 $12,294
======= =======
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4. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
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<CAPTION>
Amortization Method Estimated Life September 30, 1996 December 31, 1995
(unaudited) (unaudited and
restated)
<S> <C>
Excess of purchase price over
net assets acquired and
other intangible assets Straight-line 15 years $ 25,873 $ 25,769
Noncompetition agreement Straight-line 5 years 374 374
----------- ---------
26,247 26,143
Less accumulated amortization 7,041 5,698
---------- ---------
$ 19,206 $ 20,445
========== =========
</TABLE>
The Company continually monitors events and changes in circumstances that could
indicate carrying amounts of intangible assets may not be recovered. When events
or changes in circumstances are present that indicate the carrying amounts of
intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value
of such intangible assets will be recoverable through the future cash flows
expected from the use of the asset and its eventual disposition. No impairment
losses on intangible assets were recorded by the Company during the nine month
periods ended September 30, 1996 and 1995.
5. INCOME TAXES
The tax provisions for the nine months ended September 30, 1996 and 1995 differ
from the statutory U.S. federal income tax rate primarily due to state income
taxes, nondeductible amortization of intangibles offset by tax-free interest
income, and the tax status of CompuSystems.
7
<PAGE>
Reconciliation between the "expected" income tax expense rate based on the
statutory U.S. federal income tax rate and the actual effective rate of the
expense is as follows:
Nine months ended September 30,
1996 1995
---- ----
Statutory U.S. federal rate 35.0% 35.0%
State income taxes, net of
federal income tax benefit 4.8 4.8
Taxes on CompuSystems, an
S-Corporation prior to May 31, 1996,
paid by former shareholders (1.8) (4.3)
R & D tax credits (0.4) (0.9)
Amortization of intangibles and
other permanent differences (0.2) 0.6
----- ----
37.4% 35.2%
===== ====
Deferred income taxes result from temporary differences in the recognition of
income and expense items for income tax and financial statement purposes. The
components of the deferred tax asset as of September 30, 1996 were as follows:
September 30,
1996
----
Deferred revenue $ 1,519
Inventory reserves and/or writedowns 297
Allowance for bad debts and sales returns and credits 427
Accrued bonuses and vacation 413
Accrued pension and profit sharing plan (425)
Other 24
---------
$ 2,255
6. RELATED PARTY TRANSACTIONS
In June 1996, the Company entered into a software license agreement, valued at
$2,026,000, with a customer that shares common members of the Board of Directors
with the Company and in which certain senior members of management are minority
shareholders. The Company believes that the terms of this agreement were based
on prevailing market pricing and consistent with other transactions of equal
magnitude with unrelated parties. As of September 30, 1996, the Company had
collected all receivables outstanding related to this agreement.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On June 10, 1996, the Company declared a two-for-one stock split of the
Company's Common Stock effective June 24, 1996, pursuant to which each
shareholder of record received one additional share of Common Stock for each
share held as of that date. This is the Company's first stock split since it
became publicly held in 1992 and increased the number of shares outstanding to
approximately 24.3 million. The discussion of operations that follows is based
on the restated balances of shares outstanding given the effect of the split.
On May 31, 1996, the Company acquired all of the outstanding stock of
CompuSystems, Inc. ("CompuSystems"), a privately held company based in Columbia,
South Carolina, through an exchange of stock in a merger transaction. Medic
issued 718,886 shares of its Common Stock to the shareholders of CompuSystems in
the merger. The transaction was accounted for as a pooling of interests, and
accordingly, the Company's financial statements for the periods prior to the
merger have been restated to include the results of CompuSystems for all periods
presented. The discussion of results of operations that follows is based on the
combined operations of the Company and CompuSystems with respect to all periods
presented.
On September 29, 1995, the Company acquired Compudata Professional Systems, Ltd.
("Compudata"), located in Marietta, Georgia, for approximately $2 million in
cash. The transaction was accounted for as a purchase and, accordingly, the
results of operations of CompuData are included in the Company's financial
statements from September 29, 1995.
On August 31, 1995, the Company acquired National Medical Systems, Inc.
("National Medical"), located in Westboro, Massachusetts, through an exchange of
stock in a merger transaction valued at approximately $5 million. The
transaction was accounted for as a pooling of interests, but was not material to
the Company's results of operations and financial position. Accordingly, the
results of operations of National Medical are included in the Company's
financial statements from August 31, 1995.
On August 28, 1995, the Company acquired the assets of Script Systems, Inc.
("Script") from Infomed Holdings, Inc. with headquarters in Princeton, New
Jersey, for approximately $3 million in cash and the assumption of certain
liabilities. The transaction was accounted for as a purchase and, accordingly,
the results of operations of Script are included in the Company's financial
statements from August 31, 1995.
This Item 2 contains certain forward-looking statements. The actual results of
operations of the Company might differ materially from those projected in the
forward-looking statements. The Company's revenues and operating results can
vary significantly from quarter to quarter as a result of a number of factors,
including the volume and timing of systems sales and installations, and product
deliveries from the Company's vendors. The timing of such revenues from systems
sales is difficult to forecast because the Company's sales cycle can vary
depending upon factors such as the size of the transaction and the general
economic conditions. Given that a significant percentage of the Company's
9
<PAGE>
expenses are relatively fixed, a variation in the timing of systems sales can
cause significant variations in operating results from quarter to quarter. The
Company's future operating results may fluctuate as a result of these and/or
other factors, such as customer purchasing patterns and the timing of new
product and service introductions and product upgrade releases. Additional
information regarding factors that could cause actual results to differ
materially from those projected in the forward-looking statements contained
herein is contained in certain of the Company's other SEC filings, copies of
which are available from the Company upon request.
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Total Net Revenues
Total net revenues increased by 25.3% from $39,977,000 during the three months
ended September 30, 1995 to $50,072,000 during the three months ended September
30, 1996. Systems sales increased by 17.4% from $20,769,000 during the three
months ended September 30, 1995 to $24,373,000 during the three months ended
September 30, 1996. Systems sales to new customers increased by 30.4% from
$12,004,000 during the three months ended September 30, 1995 to $15,659,000
during the three months ended September 30, 1996, and systems sales to existing
customers for upgrades and add-ons decreased 0.1% from $8,765,000 in that period
in 1995 to $8,714,000 in that period in 1996. The Company believes that because
the general market for personal computers, networking hardware and peripheral
equipment has been subject to increasingly competitive pricing, certain
customers have elected to purchase these types of equipment from other sources.
The Company believes that it still maintains and grows a strong add-on sales
presence in the marketplace, and the Company focuses on providing strong
after-sales support and higher value-added products to its customer base.
The systems sales backlog increased by 64.1% from $23,933,000 at September 30,
1995 to $39,278,000 at September 30, 1996, reflecting an increase in orders
secured during each of the first three quarters of 1996 compared to the first
three quarters of 1995. The increase in backlog relative to the increase in
systems sales revenues also reflects the longer installation process for large
systems installations. Systems sales during a quarter as a percentage of systems
sales backlog as of the end of the preceding quarter can fluctuate materially,
and the Company believes that the backlog may not be indicative of future
results for the following quarter or for any particular period.
Net revenues from maintenance, forms and other services revenues increased by
33.8% from $19,208,000 for the three months ended September 30, 1995 to
$25,699,000 for the three months ended September 30, 1996. This increase was
primarily the result of increases in hardware and software maintenance revenues
of $2,226,000 and other increases in FastBill(SM) revenue of $2,596,000 and in
FastClaim(R) revenue of $1,174,000.
Cost of Revenues
Cost of systems sales increased by 13.4% from $12,898,000 for the three months
ended September 30, 1995 to $14,625,000 for the three months ended September 30,
1996, due primarily to increased systems sales. Cost of systems sales decreased
as a percentage of related revenues from 62.1% for the three months ended
September 30, 1995 to 60.0% for the three months ended September 30, 1996, due
primarily to more favorable margins on systems sales to new customers resulting
from a higher percentage of software products and professional services
delivered with the new system contracts, primarily sales of the +Medic Vision
system.
10
<PAGE>
Cost of maintenance, forms and other services revenues increased by 39.3% from
$11,318,000 for the three months ended September 30, 1995 to $15,768,000 for the
three months ended September 30, 1996, due primarily to increased related
revenues. Cost of maintenance, forms and other services revenues increased as a
percentage of related revenues from 58.9% for the three months ended September
30, 1995 to 61.4% for the three months ended September 30, 1996, due primarily
to the increase in FastBill sales as a percentage of maintenance, forms and
other services revenues. FastBill has a relatively lower margin as compared to
the gross margins on maintenance and FastClaim revenues.
Primarily as a result of the factors described above, the total cost of net
revenues remained relatively constant as a percentage of total net revenues at
60.6% for the three months ended September 30, 1995, compared to 60.7% for the
three months ended September 30, 1996.
Sales and Marketing Expenses
Sales and marketing expenses increased by 15.1% from $3,921,000 for the three
months ended September 30, 1995 to $4,512,000 for the three months ended
September 30, 1996, primarily due to increased systems sales. Sales and
marketing expenses decreased as a percentage of net revenues from 9.8% for the
three months ended September 30, 1995 to 9.0% for the three months ended
September 30, 1996, due primarily to increased systems sales per salesperson and
lower systems sales as a percentage of total net revenues in 1996. Sales and
marketing expenses for maintenance, forms and other services revenue, which are
increasing as a percentage of total net revenues, are lower as a percentage of
revenue than sales and marketing expenses for systems sales.
Research and Development
Research and development expenses increased by 16.1% from $2,242,000 for the
three months ended September 30, 1995 to $2,602,000 for the three months ended
September 30, 1996, due primarily to staff additions. Research and development
expenses decreased as a percentage of net revenues from 5.6% for the three
months ended September 30, 1995, compared to 5.2% for the three months ended
September 30, 1996. The Company maintains a high level of investment into
research and development activities primarily directed to developing new
clinical products and enhancements to its practice management systems. The
Company has not capitalized any research and development costs under Statement
of Financial Accounting Standards No. 86 because the amounts that would be
subject to capitalization have not been material.
General and Administrative Expenses
General and administrative expenses increased by 15.7% from $2,233,000 for the
three months ended September 30, 1995, including $295,000 incurred in connection
with the acquisition of National Medical Systems, to $2,584,000 for the three
months ended September 30, 1996, due primarily to the overall Company growth.
General and administrative expenses decreased as a percentage of net revenues
from 5.6% for the three months ended September 30, 1995 to 5.2% for the three
months ended September 30, 1996.
Amortization
Amortization of intangible assets decreased by 43.3% from $780,000 for the three
months ended September 30, 1995 to $442,000 for the three months ended September
30, 1996, due primarily to a reduction in goodwill resulting from the November
1995 expiration of a non-competition agreement with Medic's former parent
company.
11
<PAGE>
Income from Operations
Income from operations increased by 44.9% from $6,585,000 for the three months
ended September 30, 1995 to $9,539,000 for the three months ended September 30,
1996, due to the increase in gross margin of $3,918,000 partially offset by
increased operating expenses of $964,000. Income from operations increased as a
percentage of net revenues from 16.5% for the three months ended September 30,
1995 to 19.1% for the three months ended September 30, 1996, due primarily to
lower operating expenses as a percentage of net revenues as described above.
Other Income
Net interest income decreased from $625,000 for the three months ended September
30, 1995 to $481,000 for the three months ended September 30, 1996 primarily due
to lower available yields on short-term investments and the higher percentage of
such investments held in non-taxable securities.
Provision for Income Taxes
The Company's provision for income taxes in absolute terms increased by 39.4%
from $2,823,000, or 39.2% of pretax income, for the three months ended September
30, 1995 to $3,934,000, or 39.3% of pretax income, for the three months ended
September 30, 1996, due primarily to increased pretax income. The tax provision
differs from the U.S. statutory federal income tax rate due primarily to state
income taxes, tax credits for research and development, nondeductible
amortization of intangible assets and tax-free interest income. See Note 5 of
Notes to Consolidated Financial Statements.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Total Net Revenues
Total net revenues increased by 26.1% from $109,480,000 during the nine months
ended September 30, 1995 to $138,030,000 during the nine months ended September
30, 1996. Systems sales increased by 18.4% from $55,614,000 during the nine
months ended September 30, 1995 to $65,861,000 during the nine months ended
September 30, 1996. Systems sales to new customers increased by 30.9% from
$31,183,000 during the nine months ended September 30, 1995 to $40,834,000
during the nine months ended September 30, 1996, and systems sales to existing
customers for upgrades and add-ons increased by 2.4% from $24,431,000 in 1995 to
$25,027,000 in 1996. The Company believes that because the general market for
personal computers, networking hardware and peripheral equipment has been
subject to increasingly competitive pricing, certain customers have elected to
purchase these types of equipment from other sources. The Company believes that
it still maintains and grows a strong add-on sales presence in the marketplace,
and the Company focuses on providing strong after-sales support and higher
value-added products to its customer base.
Net revenues from maintenance, forms and other services revenues increased by
34.0% from $53,866,000 for the nine months ended September 30, 1995 to
$72,169,000 for the nine months ended September 30, 1996. This increase was
primarily the result of increases in hardware and software maintenance revenues
of $7,007,000 and other increases in FastBill revenue of $7,975,000 and
FastClaim revenue of $2,725,000.
Cost of Revenues
Cost of systems sales increased by 13.6% from $34,778,000 for the nine months
ended September 30, 1995 to $39,513,000 for the nine months ended September 30,
1996, due primarily to increased systems sales. Cost of systems sales decreased
as a percentage of related revenues from 62.5% for the nine months ended
September 30, 1995 to 60.0% for the nine
12
<PAGE>
months ended September 30, 1996, due primarily to more favorable margins on
systems sales to new customers resulting from a higher percentage of software
products and professional services delivered with the new system contracts.
Cost of maintenance, forms and other services revenues increased by 40.4% from
$31,071,000 for the nine months ended September 30, 1995 to $43,609,000 for the
nine months ended September 30, 1996, due to increased related revenues. Cost of
maintenance, forms and other services revenues increased as a percentage of
related revenues from 57.7% for the nine months ended September 30, 1995, to
60.4% for the nine months ended September 30, 1996, due primarily to the
increase in FastBill sales as a percentage of maintenance, forms and other
services revenues. FastBill has a relatively lower margin as compared to margins
on maintenance and FastClaim revenues.
Primarily as a result of the factors described above, the total cost of net
revenues remained relatively constant as a percentage of total net revenues at
60.1% for the nine months ended September 30, 1995 and 60.2% for the nine months
ended September 30, 1996.
Sales and Marketing Expenses
Sales and marketing expenses increased by 21.0% from $10,669,000 for the nine
months ended September 30, 1995 to $12,909,000 for the nine months ended
September 30, 1996, primarily due to increased systems sales. Sales and
marketing expenses decreased as a percentage of net revenues from 9.7% for the
nine months ended September 30, 1995 to 9.4% for the nine months ended September
30, 1996, due primarily to increased systems sales per sales person and lower
systems sales as a percentage of total net revenues in 1996. Sales and marketing
expenses for maintenance, forms and other services revenue, which are increasing
as a percentage of total net revenues, are lower as a percentage of revenue than
sales and marketing expenses for systems sales.
Research and Development
Research and development costs increased by 24.7% from $5,928,000 for the nine
months ended September 30, 1995 to $7,395,000 for the nine months ended
September 30, 1996, due primarily to staff additions. Research and development
expenses remained constant as a percentage of net revenues at 5.4% for the nine
months ended September 30, 1995 and September 30, 1996. The Company remains
committed to maintaining a high level of investment in research and development
activities primarily directed to developing new clinical products and
enhancements to its practice management systems.
General and Administrative Expenses
General and administrative expenses increased by 26.2% from $5,898,000 for the
nine months ended September 30, 1995 to $7,446,000 for the nine months ended
September 30, 1996, due primarily to the overall Company growth. Acquisition
related expenses of $243,000 and $295,000 were expensed in 1996 in connection
with the acquisition of CompuSystems and in 1995 in connection with the
acquisition of National Medical Systems, respectively. General and
administrative expenses remained constant as a percentage of net revenues at
5.4% for the nine months ended September 30, 1995 and September 30, 1996.
Amortization
Amortization of intangible assets decreased by 41.8% from $2,292,000 for the
nine months ended September 30, 1995 to $1,334,000 for the nine months ended
September 30, 1996, due primarily to a reduction in goodwill resulting from the
November 1995 expiration of a non-competition agreement with Medic's former
parent company.
13
<PAGE>
Income from Operations
Income from operations increased by 37.0% from $18,844,000 for the nine months
ended September 30, 1995 to $25,824,000 for the nine months ended September 30,
1996, due to the increase in gross margin of $11,277,000 partially offset by
increased operating expenses of $4,297,000. Income from operations increased as
a percentage of net revenues from 17.2% for the nine months ended September 30,
1995 to 18.7% for the nine months ended September 30, 1996, due primarily to
lower operating expenses as a percentage of net revenues as described above.
Other Income
Net interest income increased from $1,331,000 for the nine months ended
September 30, 1995 to $1,599,000 for the nine months ended September 30, 1996,
due primarily to increased invested cash primarily resulting from proceeds of
the secondary stock offering completed in April 1995.
Combined Actual and Pro Forma Provision for Income Taxes
The Company's combined actual and pro forma provision for income taxes increased
in absolute terms by 34.8% from $7,971,000, or 39.5% of pretax income, for the
nine months ended September 30, 1995 to $10,743,000, or 39.2% of pretax income,
for the nine months ended September 30, 1996, due primarily to increased pretax
income. The decrease in the combined actual and pro forma income taxes as a
percentage of pretax income was due primarily to the decrease in nondeductible
amortization expense and by the increase in tax-free interest income as
percentages of pretax income. The combined actual and pro forma tax provisions
differ from the U.S. statutory federal income tax rate due primarily to state
income taxes, nondeductible amortization of intangible assets and tax-free
interest income. See Note 5 to Consolidated Financial Statements.
Liquidity and Capital Resources
The Company has funded its operations over the nine months ended September 30,
1996 through cash flow from operations, borrowings and from the net proceeds
from the issuance of 1,700,000 shares of its Common Stock as part of a public
offering in April 1995. At September 30, 1996, the Company had cash and cash
equivalents equal to $38,375,000, short-term investments in the amount of
$15,667,000 and a working capital position in the amount of $94,872,000.
The Company currently has a $10,000,000 uncommitted line of credit with the
Wachovia Bank of North Carolina, N.A. ("Bank"). At September 30, 1996, there
were no borrowings outstanding under this line.
The Company's balance of cash and cash equivalents decreased by 1.4% from
$38,935,000 at December 31, 1995 to $38,375,000 at September 30, 1996, offset by
a net increase in short-term investments of $4,206,000. During the nine months
ended September 30, 1996, cash was provided from operating activities in the
amount of $9,021,000 and used for purchases of fixed assets in the amount of
$3,918,000.
The Company's accounts receivable balance increased by 26.7% from $41,189,000 at
December 31, 1995 to $52,187,000 at September 30, 1996, due primarily to the
growth experienced by the Company in the quarter and the expanding nature of the
customer base from predominantly small group medical practices to include
larger, consolidated physician practices, hospital organizations, affiliated
physician networks and managed services organizations. These larger customers
have been extended longer
14
<PAGE>
payment terms to more closely match the time required by their organizations
to integrate the Company's practice management and clinical products
throughout their organizations after installation.
Inventories decreased 6.5% from $12,294,000 at December 31, 1995 to $11,489,000
at September 30, 1996. Prepaid expenses decreased by 9.9% from $6,190,000 at
December 31, 1995 to $5,575,000 at September 30, 1996, due primarily to a usage
of prepaid Informix licenses.
Net property and equipment increased by 30.8% from $7,075,000 at December 31,
1995, to $9,257,000 at September 30, 1996, due primarily to the purchase of
computer equipment to enhance the Company's internal information management
systems and portable computers for sales demonstrations and customer field
support. Accordingly, the Company's capital expenditures increased from
$2,459,000 during the nine months ended September 30, 1995 to $3,918,000 during
the nine months ended September 30, 1996.
Current portion of long-term notes decreased due to the repayment of the
mortgage on the CompuSystems facility in June 1996.
Accounts payable increased by 36.2%, from $7,336,000 at December 31, 1995 to
$9,995,000 at September 30, 1996, due primarily to payment negotiations with
suppliers.
Customer deposits and deferred maintenance revenue decreased by 31.9% from
$13,396,000 at December 31, 1995 to $9,123,000 at September 30, 1996, due to
decreased deferred maintenance billings of $4,082,000 primarily as a result of
the timing of October 1996 maintenance billings and other deferred revenues of
$468,000, offset by net increases in customer deposits of $278,000.
Income taxes payable decreased by 42.1%, from $1,676,000 at December 31, 1995 to
$970,000 at September 30, 1996, due primarily to the timing of quarterly
estimated payments..
Accrued commissions increased by 32.0% from $1,604,000 at December 31, 1995 to
$2,118,000 at September 30, 1996, due primarily to increased systems sales and
to higher commissions accrued than paid out in the nine months ended September
30, 1996.
Accrued compensation and related items increased by 36.3% from $3,963,000 at
December 31, 1995 to $5,403,000 at September 30, 1996, due primarily to
increases in accrued vacation, federal and state tax withholdings and voluntary
employee stock purchase plan withholdings. These increases were partially offset
by decreases resulting from payment of bonuses accrued at December 31, 1995 and
a decrease in the accrued profit sharing balance due to the annual contribution
made in September 1996.
Other accrued expenses decreased by 4.7% from $3,075,000 at December 31, 1995 to
$2,930,000 at September 30, 1996, due primarily to decreases in accrued legal
and corporate expenses and the timing of payments related to local and state
sales taxes.
Long-term notes, less current portion, decreased because of the scheduled
payments made on the note financing the prepaid Informix licenses.
The Company believes that cash generated from operations, current cash and cash
equivalents, and cash available under the revolving credit facility will be
sufficient to meet its cash and capital requirements for the immediately
foreseeable future.
15
<PAGE>
From time to time, the Company has been contacted by or has made contact with
third parties who represent potential strategic partners or acquisition
candidates. Depending upon the cash requirements of a potential transaction, the
Company may finance the transaction through its cash flow from operations or may
raise additional funds by pursuing various financing vehicles such as additional
bank financing or one or more additional public offerings or private placements
of the Company's securities. However, there can be no assurance that any such
transactions will occur, that the funds to finance any such acquisition will be
available on reasonable terms or at all, or that the consummation of such
transactions will not adversely affect the Company's cash balances and capital
requirements.
The Company believes that inflation has not had a significant impact on the
Company's results of operations to date.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11.1 Computations of Net Income per share of Common Stock
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On August 13, 1996, the registrant filed an amendment to its Current
Report on Form 8-K in connection with the merger with CompuSystems,
Inc. This amendment included the financial statements required by
Item 7 thereof.
17
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIC COMPUTER SYSTEMS, INC.
DATED: November 12, 1996 /s/ LUANNE L. ROTH
----------------------------------
Luanne L. Roth
Vice President and Chief Financial
Officer (Duly Authorized Officer and
Principal Financial and Accounting
Officer)
18
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page No.
<S> <C>
11.1 Computations of Net Income per share of Common Stock 21
27.1 Financial Data Schedule 22
</TABLE>
19
Exhibit 11.1
MEDIC COMPUTER SYSTEMS, INC.
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- -----------------------------------
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Primary:
Weighted average number of Common Shares
outstanding 24,346,882 23,943,974 24,298,977 23,148,650
Common Stock equivalents assuming exercise of
dilutive options, determined by the treasury stock method 468,998 569,256 488,017 587,766
------------- ------------- ------------ ------------
Common Stock and equivalents 24,815,880 24,513,230 24,786,994 23,736,416
=========== =========== ============ ============
Pro forma net income $ 6,086,000 $ 4,387,000 $ 16,680,000 $ 12,204,000
============ =========== ============ ============
Pro forma net income per Common Share $0.25 $0.18 $0.67 $0.51
===== ===== ===== =====
Fully diluted:
Weighted average number of Common Shares
outstanding 24,346,882 23,943,974 24,298,977 23,148,650
Common Stock equivalents assuming exercise of
dilutive options, determined by the treasury stock method 468,998 598,816 488,017 631,946
----------- ----------- ------------ ------------
Common Stock and equivalents 24,815,880 24,542,790 24,786,994 23,780,596
=========== =========== ============ ============
Pro forma net income $ 6,086,000 $ 4,387,000 $ 16,680,000 $ 12,204,000
=========== =========== ============ ============
Pro forma net income per Common Share $ 0.25 $ 0.18 $ 0.67 $ 0.51
====== ====== ====== ======
</TABLE>
Notes:
The calculation for pro forma fully diluted earnings per share has not been
included with the Consolidated Statements of Operations as fully diluted
earnings per share does not differ from primary earnings per share.
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 38,375
<SECURITIES> 15,667
<RECEIVABLES> 54,558
<ALLOWANCES> (2,371)
<INVENTORY> 11,489
<CURRENT-ASSETS> 126,857
<PP&E> 15,747
<DEPRECIATION> (6,490)
<TOTAL-ASSETS> 155,419
<CURRENT-LIABILITIES> 31,985
<BONDS> 0
<COMMON> 244
0
0
<OTHER-SE> 121,268
<TOTAL-LIABILITY-AND-EQUITY> 155,419
<SALES> 65,861
<TOTAL-REVENUES> 138,030
<CGS> 39,513
<TOTAL-COSTS> 83,122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 27,423
<INCOME-TAX> 10,743
<INCOME-CONTINUING> 16,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,680
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
