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 June 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)
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<S> <C>
North Carolina 56-1306083
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
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8601 Six Forks Road, Suite 300, Raleigh, NC 27615
(Address of principal executive offices, 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.
Class Number Outstanding Date
----- ------------------ ----
Common Stock 24,348,545 August 8, 1996
$.01 par value
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MEDIC COMPUTER SYSTEMS, INC.
INDEX TO FORM 10-Q
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Pages
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1995 and 3
June 30, 1996
Statements of Operations for the three months and six months ended 4
June 30, 1995 and 1996
Statements of Cash Flows for the six months
ended June 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 - 15
Part II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
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2
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MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED) (UNAUDITED AND
RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $32,993 $38,935
Short-term investments 16,672 11,461
Accounts receivable, trade, net 44,898 41,189
Inventories and maintenance parts 11,994 12,294
Prepaid expenses 6,575 6,190
Other current assets 1,372 1,237
Deferred income tax benefit 2,255 2,515
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 116,759 113,821
Property and equipment, at cost, net 8,185 7,075
Intangible assets, at cost, net 19,622 20,445
Other assets 99 122
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $144,665 $141,463
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term note $1,475 $2,677
Accounts payable, trade 5,520 7,336
Customer deposits and deferred maintenance revenue 9,573 13,396
Income taxes payable 0 1,676
Accrued expenses:
Commissions 1,660 1,604
Compensation and related items 5,985 3,963
Other 2,746 3,075
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 26,959 33,727
Long-term note, less current portion 2,192 3,127
Other long-term liabilities 134 172
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock, $.01 par value; 40,000,000 shares authorized; 24,336,008
and 24,210,264 shares issued and outstanding in 1996 and 1995, respectively 243 242
Additional paid-in capital 69,960 68,628
Retained earnings 45,177 35,567
- ------------------------------------------------------------------------------------------------------------------------------
115,380 104,437
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $144,665 $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 SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET REVENUES:
Systems $20,325 $18,148 $41,488 $34,845
Maintenance, forms and other services 24,259 18,116 46,470 34,658
------------------------------------------------------------------
TOTAL NET REVENUES 44,584 36,264 87,958 69,503
- ---------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Systems 11,887 11,135 24,888 21,880
Maintenance, forms and other services 14,679 10,445 27,841 19,753
------------------------------------------------------------------
TOTAL COST OF REVENUES 26,566 21,580 52,729 41,633
- ---------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------
GROSS MARGIN 18,018 14,684 35,229 27,870
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 4,274 3,581 8,397 6,748
General and administrative 2,580 1,922 4,862 3,665
Amortization of intangible assets 447 757 892 1,512
Research and development 2,370 1,968 4,793 3,686
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 9,671 8,228 18,944 15,611
- ---------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------
INCOME FROM OPERATIONS 8,347 6,456 16,285 12,259
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Interest income (574) (478) (1,118) (706)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 8,921 6,934 17,403 12,965
- ---------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 3,229 2,354 6,320 4,591
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $5,692 $4,580 $11,083 $8,374
- ---------------------------------------------------------------------------------------------------------------------------
PRO FORMA DATA:
INCOME BEFORE PRO FORMA INCOME
TAX PROVISION $5,692 $4,580 $11,083 $8,374
PRO FORMA INCOME TAX EXPENSE FOR THE PERIODS
PRIOR TO MAY 31, 1996 FOR COMPUSYSTEMS 232 301 489 557
- ---------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $5,460 $4,279 $10,594 $7,817
- ---------------------------------------------------------------------------------------------------------------------------
PRO FORMA EARNINGS PER SHARE:
Net income per share $0.22 $0.18 $0.43 $0.33
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common
shares and equivalents used in
computing net income per share 24,814,430 24,084,248 24,786,156 23,387,158
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,083 $8,374
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization of property and equipment 1,072 652
Amortization of intangibles 892 1,512
Deferred income taxes 260 0
Accounts receivable, trade (net) (3,709) (9,311)
Inventories and maintenance parts 300 (2,026)
Prepaid expenses (385) (278)
Other (7) (95)
Accounts payable, trade (1,816) (934)
Customer deposits and deferred maintenance revenue (3,823) 980
Income taxes payable (1,777) (466)
Accrued expenses 1,749 1,621
Payments on long-term note payable to vendor (903) 0
Other long-term liabilities (38) (33)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,898 (4)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (14,929) (817)
Proceeds from the sale of short-term investments 9,718 1,500
Payments for purchases of property and equipment (2,182) (1,947)
Payments for acquisitions made, net of cash acquired (70) (5)
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (7,463) (1,269)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 289 35,578
Distributions to CompuSystems' shareholders (1,475) (1,211)
Payment on long-term note (1,234) (38)
Tax benefits from stock options exercised 1,043 1,237
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,377) 35,566
- -------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (5,942) 34,293
CASH AND CASH EQUIVALENTS:
Beginning of period 38,935 16,644
- -------------------------------------------------------------------------------------------------------------------
End of period $32,993 $50,937
- -------------------------------------------------------------------------------------------------------------------
CASH PAID FOR INTEREST AND INCOME TAXES WAS AS FOLLOWS:
Interest $43 $52
- -------------------------------------------------------------------------------------------------------------------
Income taxes $6,351 $3,899
- -------------------------------------------------------------------------------------------------------------------
</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 June 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. Details of the results of operations of the previously separate
companies before the acquisition are as follows:
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<CAPTION>
Jan 1 - May 31, 1996 Jan 1 - June 30, 1995
Medic CompuSystems Total Medic CompuSystems Total
<S> <C> <C> <C> <C> <C> <C>
Revenue $63,181 $ 4,085 $67,266 $64,985 $ 4,518 $69,503
Net Income $ 5,660 $ 1,167 $ 6,827 $ 6,980 $ 1,394 $ 8,374
Pro Forma Income
Tax Expense $ 489 $ 489 $ 557 $ 557
Pro Forma
Net Income $ 5,660 $ 678 $ 6,338 $ 6,980 $ 837 $ 7,817
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6
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3. INVENTORIES AND MAINTENANCE PARTS
Ending inventories consist of the following (in thousands):
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<CAPTION>
June 30, December 31,
1996 1995
(unaudited) (unaudited and
restated)
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New and used computer hardware and parts $ 10,481 $ 10,865
Inventory shipped to customers for which
revenue recognition criteria has not been met 1,147 1,007
Forms, FastBill and FastClaim 366 422
------- -------
$11,994 $12,294
======= =======
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4. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
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<CAPTION>
Amortization June 30, December 31,
Method Estimated Lives 1996 1995
(unaudited) (unaudited and
restated)
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Excess of purchase price over net
assets acquired and
other intangible assets Straight-line 15 years $ 25,844 $ 25,769
Noncompetition agreement Straight-line 5 years 374 374
-------- --------
26,218 26,143
Less accumulated amortization 6,596 5,698
------ --------
$ 19,622 $ 20,445
========== =========
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5. INCOME TAXES
The tax provisions for the six months ended June 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. Reconciliation between the "expected" income
tax expense (benefit) rate based on the statutory U.S. federal income tax rate
and the actual effective rate of the expense:
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Six months ended June 30,
1996 1995
<S> <C> <C>
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 (2.8) (4.3)
R & D tax credits ( .5) ( .7)
Amortization of intangibles and
other permanent differences (.2) .6
---- ------
36.3% 35.4%
==== ====
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7
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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 June 30, 1996 are as follows:
June 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 several senior members of management are minority
shareholders. The terms of this agreement were based on prevailing market
pricing and consistent with other transactions of equal magnitude with unrelated
parties. As of June 30, 1996, the Company had receivables outstanding in the
amount of $2,026,000 related to this agreement.
8
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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.
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 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
9
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a result of these and other factors, such as customer purchasing patterns, and
the timing of new product and service introductions and product upgrade
releases.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
TOTAL NET REVENUES
Total net revenues increased by 22.9% from $36,264,000 during the three months
ended June 30, 1995, to $44,584,000 during the three months ended June 30, 1996.
Systems sales increased by 12.0% from $18,148,000 during the three months ended
June 30, 1995, to $20,325,000 during the three months ended June 30, 1996.
Systems sales to new customers increased by 26.8% from $9,714,000 during the
three months ended June 30, 1995 to $12,319,000 during the three months ended
June 30, 1996, and systems sales to existing customers for upgrades and add-ons
decreased 5.1% from $8,434,000 in 1995 to $8,006,000 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 focuses on providing strong
after-sales support and higher value-added products to its customer base.
The systems sales backlog increased by 33.5% from $24,856,000 at June 30, 1995,
to $33,182,000 at June 30, 1996, reflecting an increase in orders secured during
both of the first two quarters of 1996 compared to the first two 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
33.9% from $18,116,000 for the three months ended June 30, 1995, to $24,259,000
for the three months ended June 30, 1996. This increase was primarily the result
of increases in hardware and software maintenance revenues of $2,689,000 and
other increases in FastBillSM revenue of $2,598,000 and in FastClaim(R) revenue
of $771,000.
COST OF REVENUES
Cost of systems sales increased by 6.8% from $11,135,000 for the three months
ended June 30, 1995, to $11,887,000 for the three months ended June 30, 1996,
due primarily to increased systems sales. Cost of systems sales decreased as a
percentage of related revenues from 61.4% for the three months ended June 30,
1995, to 58.5% for the three months ended June 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.
Cost of maintenance, forms and other services revenues increased by 40.5% from
$10,445,000 for the three months ended June 30, 1995, to $14,679,000 for the
three months ended June 30, 1996, due primarily to increased related revenues.
Cost of maintenance, forms and other services revenues increased as a percentage
of related revenues from 57.7% for the three months ended June 30, 1995, to
60.5% for the three months ended June 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.
10
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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
59.5% for the three months ended June 30, 1995, compared to 59.6% for the three
months ended June 30, 1996.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by 19.4% from $3,581,000 for the three
months ended June 30, 1995, to $4,274,000 for the three months ended June 30,
1996, due to increased systems sales. Sales and marketing expenses decreased as
a percentage of net revenues from 9.9% for the three months ended June 30, 1995,
to 9.6% for the three months ended June 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 relatively lower than sales and marketing expenses for systems
sales.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by 34.2% from $1,922,000 for the
three months ended June 30, 1995, to $2,580,000 for the three months ended June
30, 1996, due primarily to the overall company growth and to non-recurring
merger related expenses of $243,000 expensed in the quarter in connection with
the acquisition of CompuSystems. General and administrative expenses increased
as a percentage of net revenues from 5.3% for the three months ended June 30,
1995, to 5.8% for the three months ended June 30, 1996, due primarily to the
merger expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by 20.4% from $1,968,000 for the
three months ended June 30, 1995, to $2,370,000 for the three months ended June
30, 1996, due primarily to staff additions. Research and development expenses
remained relatively constant as a percentage of net revenues at 5.4% for the
three months ended June 30, 1995, compared to 5.3% for the three months ended
June 30, 1996. The Company maintains a high level of investment into research
and development activities primarily directed to increased investments in
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.
AMORTIZATION
Amortization of intangible assets decreased by 41.0% from $757,000 for the three
months ended June 30, 1995, to $447,000 for the three months ended June 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.
INCOME FROM OPERATIONS
Income from operations increased by 29.3% from $6,456,000 for the three months
ended June 30, 1995, to $8,347,000 for the three months ended June 30, 1996, due
to the increase in gross margin of $3,334,000 partially offset by increased
operating expenses of $1,443,000. Income from operations increased as a
percentage of net revenues from 17.8% for the three months ended June 30, 1995,
to 18.7 % for the three months ended June 30, 1996, due primarily to lower
operating expenses as a percentage of net revenues as described above.
11
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OTHER INCOME
Net interest income increased from $478,000 for the three months ended June 30,
1995, to $574,000 for the three months ended June 30, 1996, due primarily to
increased invested cash resulting from net proceeds from 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 in
absolute terms increased by 30.4% from $2,655,000, or 38.3% of pretax income,
for the three months ended June 30, 1995, to $3,461,000, or 38.8% of pretax
income, for the three months ended June 30, 1996, due primarily to increased
pretax income. The increase in the combined actual and pro forma income taxes as
a percentage of pretax income was due primarily to the reduction in benefit from
the research and experimentation tax credits previously available. 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.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
TOTAL NET REVENUES
Total net revenues increased by 26.6% from $69,503,000 during the six months
ended June 30, 1995, to $87,958,000 during the six months ended June 30, 1996.
Systems sales increased by 19.1% from $34,845,000 during the six months ended
June 30, 1995, to $41,488,000 during the six months ended June 30, 1996. Systems
sales to new customers increased by 31.3% from $19,179,000 during the six months
ended June 30, 1995 to $25,175,000 during the six months ended June 30, 1996,
and systems sales to existing customers for upgrades and add-ons increased by
4.1% from $15,666,000 in 1995 to $16,313,000 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 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
34.1% from $34,658,000 for the six months ended June 30, 1995, to $46,470,000
for the six months ended June 30, 1996. This increase was primarily the result
of increases in hardware and software maintenance revenues of $4,781,000 and
other increases in FastBill revenue of $5,379,000 and FastClaim revenue of
$1,565,000.
COST OF REVENUES
Cost of systems sales increased by 13.7% from $21,880,000 for the six months
ended June 30, 1995, to $24,888,000 for the six months ended June 30, 1996, due
primarily to increased systems sales. Cost of systems sales decreased as a
percentage of related revenues from 62.8% for the six months ended June 30,
1995, to 60.0% for the six months ended June 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 40.9% from
$19,753,000 for the six months ended June 30, 1995, to $27,841,000 for the six
months ended June 30, 1996, due to increased related revenues. Cost of
maintenance, forms and other services revenues increased as a percentage of
related revenues from 57.0% for the six months ended June 30, 1995, to 59.9% for
the six months ended
12
<PAGE>
June 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 a percentage of total net revenues at 59.9% for both the six
months ended June 30, 1995 and for the six months ended June 30, 1996.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by 24.4% from $6,748,000 for the six
months ended June 30, 1995, to $8,397,000 for the six months ended June 30,
1996, due to increased systems sales. Sales and marketing expenses decreased as
a percentage of net revenues from 9.7% for the six months ended June 30, 1995,
to 9.5% for the six months ended June 30, 1996, due primarily to increased
systems sales per sales person and lower systems sales as a percentage of total
net revenues in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by 32.7% from $3,665,000 for the
six months ended June 30, 1995, to $4,862,000 for the six months ended June 30,
1996, due primarily to the overall company growth and to non-recurring merger
related expenses of $243,000 expensed in 1996 in connection with the acquisition
of CompuSystems. General and administrative expenses increased as a percentage
of net revenues from 5.3% for the six months ended June 30, 1995, to 5.5% for
the six months ended June 30, 1996, due primarily to non-recurring merger
related costs.
RESEARCH AND DEVELOPMENT
Research and development costs increased by 30.0% from $3,686,000 for the six
months ended June 30, 1995, to $4,793,000 for the six months ended June 30,
1996, due primarily to staff additions. Research and development expenses
remained relatively constant as a percentage of net revenues at 5.3% for the six
months ended June 30, 1995, compared to 5.4% for the six months ended June 30,
1996. The Company remains committed to maintaining a high level of investment in
research and development activities primarily directed to increased investments
in developing new clinical products and enhancements to its practice management
systems.
AMORTIZATION
Amortization of intangible assets decreased by 41.0% from $1,512,000 for the six
months ended June 30, 1995, to $892,000 for the six months ended June 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.
INCOME FROM OPERATIONS
Income from operations increased by 32.8% from $12,259,000 for the six months
ended June 30, 1995, to $16,285,000 for the six months ended June 30, 1996, due
to the increase in gross margin of $7,359,000 partially offset by increased
operating expenses of $3,333,000. Income from operations increased as a
percentage of net revenues from 17.6% for the six months ended June 30, 1995, to
18.5% for the six months ended June 30, 1996, due primarily to lower operating
expenses as a percentage of net revenues as described above.
OTHER INCOME
13
<PAGE>
Net interest income increased from $706,000 for the six months ended June 30,
1995, to $1,118,000 for the six months ended June 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 32.3% from $5,148,000, or 39.7% of pretax income, for the
six months ended June 30, 1995, to $6,809,000, or 39.1% of pretax income, for
the six months ended June 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 offset 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations 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 June 30, 1996,
the Company had cash and cash equivalents equal to $32,993,000, short-term
investments in the amount of $16,672,000 and a working capital position in the
amount of $89,800,000.
The Company currently has a $4,000,000 unsecured line of credit with the
Wachovia Bank of North Carolina, N.A. ("Bank") . This commitment expires on
September 17, 1996, and is subject to the Company maintaining a condition
satisfactory to the Bank. At June 30, 1996, there were no borrowings outstanding
under this line. The line of credit presently accrues interest on borrowings at
the lesser of U.S. prime minus 0.5%, LIBOR plus 1.7% or a rate that approximates
the published CD Base Rate plus 1.7%. Interest is due and payable in arrears
monthly and/or at the maturity of the individual borrowings.
The Company's balance of cash and cash equivalents decreased by 15.3% from
$38,935,000 at December 31, 1995 to $32,993,000 at June 30, 1996, offset by a
net increase in short-term investments of $5,211,000. Cash was provided from
operating activities in the amount of $2,898,000 and used for purchases of fixed
assets in the amount of $2,182,000.
The Company's accounts receivable balance increased by 9.0% from $41,189,000 at
December 31, 1995, to $44,898,000 at June 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 payment terms to more closely match the time required
by their organizations to integrate the Company's practice management products
throughout their organizations after the installation of the system.
Inventories decreased minimally from $12,294,000 at December 31, 1995, to
$11,994,000 at June 30, 1996. Prepaid expenses increased by 6.2% from $6,190,000
at December 31, 1995, to $6,575,000 at June 30, 1996, due primarily to prepaid
insurance for corporate insurance renewals, prepaid expenses paid in connection
with increased customer maintenance contracts and prepaid postage for FastBill
services.
Property and equipment increased by 15.7% from $7,075,000 at December 31, 1995,
to $8,185,000 at June 30, 1996, due primarily to the purchase of computer
equipment to enhance the Company's internal
14
<PAGE>
information management systems and portable computers for sales demonstrations
and customer field support. Accordingly, the Company's capital expenditures
increased from $1,947,000 during the six months ended June 30, 1995, to
$2,182,000 during the six months ended June 30, 1996.
Accounts payable decreased by 24.8%, from $7,336,000 at December 31, 1995, to
$5,520,000 at June 30, 1996, due primarily to the timing of payments for
purchases.
Customer deposits and deferred revenue decreased by 28.5% from $13,396,000 at
December 31, 1995, to $9,573,000 at June 30, 1996, due to decreased deferred
maintenance billings of $3,995,000 as a result of the timing of July 1996
maintenance billings and other deferred revenues of $114,000 offset by net
increases in customer deposits of $286,000.
There were no income taxes payable at June 30, 1996 as compared to $1,676,000
payable at December 31, 1995, given the timing of quarterly estimated payments.
Accrued commissions increased by 3.5% from $1,604,000 at December 31, 1995, to
$1,660,000 at June 30, 1996, due primarily to increased systems sales and to
higher commissions accrued than paid out in the six months ended June 30, 1996.
Accrued compensation and related items increased by 51.0% from $3,963,000 at
December 31, 1995, to $5,985,000 at June 30, 1996, due primarily to increases in
the profit-sharing plan accrual, 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.
Other accrued expenses decreased by 10.7% from $3,075,000 at December 31, 1995,
to $2,746,000 at June 30, 1996, due primarily to the timing of payments relating
to local and state sales taxes.
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.
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.
15
<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
(b) Reports on Form 8-K:
During the registrant's fiscal quarter ended June 30, 1996 the
registrant filed a report on Form 8-K on June 13, 1996 in
connection with the merger with CompuSystems, Inc.
16
<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: August 12, 1996 /s/ LUANNE L. ROTH
Luanne L. Roth
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
17
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page No.
<S> <C> <C>
11.1 Computations of Net Income per share of Common Stock 19
</TABLE>
18
<PAGE>
Exhibit 11.1
MEDIC COMPUTER SYSTEMS, INC.
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ----------------------------------
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Weighted average number of Common Shares outstanding 24,315,656 23,483,170 24,274,760 22,744,398
Common Stock equivalents assuming exercise of dilutive
options, determined by the treasury stock method 498,774 601,078 511,396 642,760
------- ------- ------- -------
Common Stock and equivalents 24,814,430 24,084,248 24,786,156 23,387,158
========== ========== ========== ==========
Pro Forma Net income $ 5,460,000 $ 4,279,000 $10,594,000 $ 7,817,000
============ =========== =========== ===========
Pro Forma Net income per Common Share $ .22 $ .18 $ .43 $ .33
===== ===== ===== =====
Fully diluted:
Weighted average number of Common Shares outstanding 24,315,656 23,483,170 24,274,760 22,744,398
Common Stock equivalents assuming exercise of dilutive
options, determined by the treasury stock method 488,048 601,078 523,584 642,760
------- ------- ------- -------
Common Stock and equivalents 24,803,704 24,084,248 24,798,344 23,387,158
========== ========== ========== ==========
Pro Forma Net income $ 5,460,000 $ 4,279,000 $10,594,000 $ 7,817,000
=========== =========== ============ ===========
Pro Forma Net income per Common Share $ .22 $ .18 $ .43 $ .33
===== ===== ===== =====
</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.
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 32,993
<SECURITIES> 16,672
<RECEIVABLES> 46,594
<ALLOWANCES> (1,696)
<INVENTORY> 11,994
<CURRENT-ASSETS> 116,759
<PP&E> 14,136
<DEPRECIATION> (5,951)
<TOTAL-ASSETS> 144,665
<CURRENT-LIABILITIES> 26,959
<BONDS> 0
0
0
<COMMON> 243
<OTHER-SE> 115,137
<TOTAL-LIABILITY-AND-EQUITY> 144,665
<SALES> 41,488
<TOTAL-REVENUES> 87,958
<CGS> 24,888
<TOTAL-COSTS> 52,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 17,403
<INCOME-TAX> 6,809
<INCOME-CONTINUING> 10,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,594
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
