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, 1997
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)
North Carolina 56-1306083
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
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 25,890,505 November 7, 1997
$.01 par value
1
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
INDEX TO FORM 10-Q
Pages
-----
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996 3
Statements of Operations for the three
months and nine months ended September 30,
1997 and 1996 (Unaudited) 4
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Part II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1997 1996
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 42,942 $ 25,557
Short-term investments 31,926 32,852
Accounts receivable, trade, net 56,227 54,737
Inventories and maintenance parts 12,710 13,778
Prepaid expenses 5,799 4,968
Other current assets 1,208 1,006
Deferred income tax benefit 2,935 2,886
- --------------------------------------------------------------------------------
Total current assets 153,747 135,784
Property and equipment, at cost, net 12,770 10,099
Intangible assets, at cost, net 17,469 18,798
Other assets 57 55
- --------------------------------------------------------------------------------
Total assets $184,043 $164,736
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term note $ 1,418 $ 1,575
Accounts payable, trade 9,517 10,013
Customer deposits and deferred maintenance revenue 11,561 11,340
Income taxes payable 2,746 1,131
Accrued expenses:
Commissions 1,788 2,213
Compensation and related items 5,145 4,915
Other 2,759 2,839
- --------------------------------------------------------------------------------
Total current liabilities 34,934 34,026
Long-term note, less current portion 258 1,418
Other long-term liabilities 81 82
- --------------------------------------------------------------------------------
Shareholders' equity:
Common Stock, $.01 par value; 40,000,000 shares
authorized; 25,785,717 and 24,441,470 shares
issued and outstanding in 1997 and 1996, respectively 258 244
Additional paid-in capital 72,825 70,797
Retained earnings 75,687 58,169
- --------------------------------------------------------------------------------
148,770 129,210
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $184,043 $164,736
================================================================================
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
--------------------------------------------------------------
Three Months Ended Nine Months Ended
--------------------------------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES:
Systems $ 28,802 $ 24,373 $ 76,435 $ 65,861
Maintenance, forms and other services 32,666 25,699 92,820 72,169
- ----------------------------------------------------------------------------------------------------------
Total net revenues 61,468 50,072 169,255 138,030
==========================================================================================================
COST OF REVENUES:
Systems 17,585 14,625 48,196 39,513
Maintenance, forms and other 19,293 15,768 55,497 43,609
services
- ----------------------------------------------------------------------------------------------------------
Total cost of revenues 36,878 30,393 103,693 83,122
- ----------------------------------------------------------------------------------------------------------
Gross margin 24,590 19,679 65,562 54,908
==========================================================================================================
OPERATING EXPENSES:
Sales and marketing 6,024 4,512 16,824 12,909
Research and development 3,625 2,602 11,079 7,395
General and administrative 3,546 2,584 11,032 7,446
Amortization of intangible assets 443 442 1,329 1,334
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 13,638 10,140 40,264 29,084
==========================================================================================================
Income from operations 10,952 9,539 25,298 25,824
==========================================================================================================
Other income:
Interest income, net 922 481 2,251 1,599
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 11,874 10,020 27,549 27,423
- ----------------------------------------------------------------------------------------------------------
Provision for income taxes 4,597 3,934 10,971 10,254
- ----------------------------------------------------------------------------------------------------------
Net income $ 7,277 $ 6,086 $ 16,578 $ 17,169
==========================================================================================================
Pro forma data:
Income before pro forma income
tax provision $ 7,277 $ 6,086 $ 16,578 $ 17,169
Pro forma income tax expense for
the periods prior to May 31, 1996 0 0 0 489
- ----------------------------------------------------------------------------------------------------------
Pro forma net income $ 7,277 $ 6,086 $ 16,578 $ 16,680
==========================================================================================================
Pro forma earnings per share:
Net income per share $ 0.28 $ 0.25 $ 0.64 $ 0.67
==========================================================================================================
Pro forma weighted average
common shares and equivalents used
in computing net income per share 26,275,946 24,815,880 25,878,710 24,786,994
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MEDIC COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
----------------- -----------------
Nine Months Ended Nine Months Ended
----------------- -----------------
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,578 $ 17,169
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property and equipment 2,576 1,740
Amortization of intangibles 1,329 1,334
Deferred income taxes (49) 260
Accounts receivable, trade (net) 55 (10,998)
Inventories and maintenance parts 1,133 805
Prepaid expenses and other current assets (351) 543
Other assets (198) 23
Accounts payable, trade (741) 2,659
Customer deposits and deferred maintenance revenue (695) (4,273)
Income taxes payable 1,429 (706)
Accrued expenses (1,418) 1,809
Tax benefits from stock options exercised 270 1,043
Payments on long-term note (1,317) (1,289)
Other long-term liabilities (1) (55)
- -------------------------------------------------------------------------------------
Net cash provided by operating activities 18,600 10,064
=====================================================================================
Cash flows from investing activities:
Purchases of short-term investments (36,038) (22,597)
Proceeds from the sale of short-term investments 36,963 18,391
Payments for purchases of property and equipment (3,846) (3,918)
Cash acquired, net of payments for acquisitions 1,001 (95)
- -------------------------------------------------------------------------------------
Net cash used in investing activities (1,920) (8,219)
=====================================================================================
Cash flows from financing activities:
Proceeds from issuance of common stock 705 334
Distributions to shareholders -- (1,475)
Cash acquired, net of payments for acquisitions -- (1,264)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 705 (2,405)
=====================================================================================
Net change in cash and cash equivalents 17,385 (560)
Cash and cash equivalents:
Beginning of period 25,557 38,935
- -------------------------------------------------------------------------------------
End of period $ 42,942 $ 38,375
=====================================================================================
Cash paid for interest and income taxes
was as follows:
Interest $ -- $ 13
=====================================================================================
Income taxes $ 8,979 $ 9,141
=====================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
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
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1997 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, 1996.
Results for interim periods are not necessarily indicative of the results for
any other interim period or for the full fiscal year.
2. MERGER AGREEMENT
Medic signed a merger agreement on September 4, 1997 with Misys plc, the UK's
largest independent applications software products group, whereby Misys would
acquire Medic for $35 per share in cash, or an aggregate of approximately $923
million. The merger proposal has already gained Misys shareholder approval, and
Misys has arranged sufficient financing to consummate the acquisition subject
only to customary loan conditions. The Federal Trade Commission has granted
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act with respect to the acquisition. The proposed merger will be
presented for approval to Medic shareholders on November 24, 1997. As previously
indicated, the transaction remains subject to a number of other customary
closing conditions, and there can be no assurance that the merger will occur by
such time, or at all.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires the disclosre of
an amount that represents total comprehensive income and the components of
comprehensive income in a financial statement. This pronouncement is effective
for fiscal years beginning after December 15, 1997, and is not expected to have
a material impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board also issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes standards for determining an entity's operating segments and the
type and level of financial information to be disclosed in both annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This pronouncement is effective for periods beginning after December 15, 1997,
and is not expected to have a material impact on the Company's financial
statements.
6
<PAGE>
4. 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 valued at
approximately $33,400,000. Medic issued 720,022 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.
On February 28, 1997, the Company acquired all of the outstanding stock of Home
Care Information Systems, Inc. ("HCIS"), a privately held company located in
Bloomfield, New Jersey, through an exchange of stock in a merger transaction
valued at approximately $18,800,000. The Company issued approximately 522,000
shares of its common stock in the transaction. The acquisition 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
HCIS are included from the date of acquisition.
On February 28, 1997, the Company also acquired all of the outstanding stock of
Computer Business Systems of Virginia, Inc. ("CBSI"), a privately held company
located in Rockville, Maryland, through an exchange of stock in a merger
transaction valued at approximately $26,460,000. The Company issued
approximately 735,000 shares of its common stock in the transaction. The
acquisition 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 CBSI are included from the date of acquisition.
5. INVENTORIES AND MAINTENANCE PARTS
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
New and used computer hardware and parts $ 11,336 $ 12,952
Inventory shipped to customers for which revenue
recognition criteria had not been met 779 560
Forms 595 266
-------- --------
$ 12,710 $ 13,778
======== ========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
Amortization Estimated September 30, December 31,
Method Lives 1997 1996
------ ----- ---- ----
(unaudited)
Excess of purchase
price over net assets
acquired and other
intangible assets Straight-line 15 years $ 25,905 $ 25,904
Noncompetition agreement Straight-line 5 years 374 374
-------- --------
26,279 26,278
Less accumulated amortization 8,810 7,480
-------- --------
$ 17,469 $ 18,798
======== ========
7
<PAGE>
7. INCOME TAXES
The tax provisions for the nine-month periods ended September 30, 1997 and 1996
differ from the statutory U.S. federal income tax rate primarily due to state
income taxes, nondeductible amortization of intangible assets,
acquisition-related costs and tax-free interest income.
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,
1997 1996
---- ----
Statutory U.S. federal rate 35.0% 35.0%
State income taxes, net of federal income tax benefits 4.8 4.8
Research and experimentation tax credits -- (0.4)
Pro forma taxes on CompuSystems, an S-Corporation
prior to May 31, 1996, paid by former shareholders -- (1.8)
Amortization of intangibles and other permanent
differences, including acquisition-related expenses -- (0.2)
---- ----
39.8% 37.4%
==== ====
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, 1997 were as follows
(in thousands):
September 30,
1997
----
Deferred revenue $ 1,265
Accelerated depreciation (348)
Inventory reserves and/or writedowns 390
Inventory spare parts capitalization 284
Allowance for bad debts and sales returns and 1,198
credits
Accrued bonuses and vacation 531
Accrued pension and profit sharing plan (473)
Other 88
-------
$ 2,935
=======
8. REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of AICPA
Statement of Position No. 91-1 "Software Revenue Recognition". Revenue from
systems sales is recognized upon the installation and testing of the system and
completion of the initial customer training for all contracts. Costs of
remaining insignificant Company obligations, if any, are accrued as cost of
revenues at the time of revenue recognition. Revenue from services is recognized
as the services are performed. Revenues related to hardware and software
maintenance contracts are recognized ratably over the terms of the contracts.
Revenues related to forms and other ancillary products are recognized upon
shipment.
8
<PAGE>
9. COMMON STOCK OPTIONS
The Company will adopt SFAS No. 128, "Earnings Per Share", on December 31, 1997,
requiring change in its method of computing, presenting and disclosing earnings
per share information. Upon adoption, all prior period data presented will be
restated to conform to the provisions of SFAS No. 128.
Had SFAS No. 128 been adopted for the period ended September 30, 1997, basic
income per common share and diluted income per common share would have been
presented as follows (dollars in thousands, except share data):
Nine Months Nine Months
Ended Sept Ended Sept
30, 1997 30, 1996
-------- --------
Basic income per common share:
Income available to common stockholders $ 16,578 $ 16,680
=========== ===========
Weighted average common shares outstanding 25,475,210 24,300,113
=========== ===========
Basic income per common share $ 0.65 $ 0.69
=========== ===========
Diluted income per common share:
Income available to common stockholders $ 16,578 $ 16,680
=========== ===========
Weighted average common shares outstanding 25,475,210 24,300,113
Dilutive effect of stock options 403,500 488,017
----------- -----------
Total shares 25,878,710 24,788,130
=========== ===========
Diluted income per common share $ 0.64 $ 0.67
=========== ===========
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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 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 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 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.
Medic signed a merger agreement on September 4, 1997 with Misys plc, the UK's
largest independent applications software products group, whereby Misys would
acquire Medic for $35 per share in cash, or an aggregate of approximately $923
million. The merger proposal has already gained Misys shareholder approval, and
Misys has arranged sufficient financing to consummate the acquisition subject
only to customary loan conditions. The Federal Trade Commission has granted
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act with respect to the acquisition. The proposed merger will be
presented for approval to Medic shareholders on November 24, 1997. As previously
indicated, the transaction remains subject to a number of other customary
closing conditions, and there can be no assurance that the merger will occur by
such time, or at all.
On February 28, 1997, the Company acquired all of the outstanding stock of Home
Care Information Systems, Inc. ("HCIS"), a privately held company located in
Bloomfield, New Jersey, through an exchange of stock in a merger transaction
valued at approximately $18,800,000. The Company issued approximately 522,000
shares of its common stock in the transaction. The acquisition was accounted for
as a pooling of interests, but was not material to the Company's results of
operations and financial position. Accordingly, the operating results of HCIS
are included in the Company's financial statements from the date of acquisition.
On February 28, 1997, the Company also acquired all of the outstanding stock of
Computer Business Systems of Virginia, Inc. ("CBSI"), a privately held company
located in Rockville, Maryland, through an exchange of stock in a merger
transaction valued at approximately $26,460,000. The Company issued
approximately 735,000 shares of its common stock in the transaction. The
acquisition was accounted for as a pooling of interests, but was not material to
the Company's results of operation and financial position. Accordingly, the
operating results of CBSI are included in the Company's financial statements
from the date of acquisition.
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
10
<PAGE>
stock in a merger transaction valued at approximately $33,400,000. Medic issued
720,022 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.
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Total Net Revenues
Total net revenues increased by 22.8% from $50,072,000 during the three months
ended September 30, 1996, to $61,468,000 during the three months ended September
30, 1997. Systems sales increased by 18.2% from $24,373,000 during the three
months ended September 30, 1996, to $28,802,000 for the three months ended
September 30, 1997. Systems sales to new customers increased by 14.8% from
$15,659,000 during the three months ended September 30, 1996 to $17,983,000
during the three months ended September 30, 1997, and systems sales to existing
customers for upgrades and add-ons increased 24.2% from $8,714,000 in 1996 to
$10,819,000 in 1997.
The systems sales backlog increased by 7.5% from $39,278,000 at September 30,
1996, to $42,242,000 at September 30, 1997. The backlog reflects an increase in
orders secured primarily during the nine months ended September 30, 1997.
Net revenues from maintenance, forms and other services increased by 27.1% from
$25,699,000 for the three months ended September 30, 1996, to $32,666,000 for
the three months ended September 30, 1997. This increase was primarily the
result of increases in hardware and software maintenance revenues of $2,862,000,
in FastBill(SM) revenue of $2,877,000, and in FastClaim(R) revenue of
$1,206,000.
Cost of Revenues
Cost of systems sales increased by 20.2% from $14,625,000 for the three months
ended September 30, 1996, to $17,585,000 for the three months ended September
30, 1997, due primarily to increased hardware and software costs of $1,194,000
related to increased system sales to existing and new customers, increased
+Medic Vision system implementation costs of $1,269,000, and systems costs of
$600,000 for companies acquired in 1997. Cost of systems sales increased as a
percentage of related revenues from 60.0% for the three months ended September
30, 1996, to 61.1% for the three months ended September 30, 1997, due primarily
to higher implementation costs relative to +Medic Vision system sales as
compared to the same period in 1996.
Cost of maintenance, forms and other services revenues increased by 22.4% from
$15,768,000 for the three months ended September 30, 1996, to $19,293,000 for
the three months ended September 30, 1997, due primarily to increased related
revenues. Cost of maintenance, forms and other services revenues decreased as a
percentage of related revenues from 61.4% for the three months ended September
30, 1996, to 59.1% for the three months ended September 30, 1997, primarily due
to increased margins on EDI services and software maintenance and decreased
hardware maintenance-related and forms costs as a percentage of the total
maintenance, forms and services revenue resulting from lower hardware
maintenance and forms revenues as percentages of total maintenance, forms and
other services revenues.
The total cost of net revenues decreased as a percentage of total net revenues
from 60.7% for the three months ended September 30, 1996, to 60.0% for the three
months ended September 30, 1997, due primarily to a higher margins on EDI
services and software maintenance revenues as described above.
11
<PAGE>
Sales and Marketing Expenses
Sales and marketing expenses increased by 33.5% from $4,512,000 for the three
months ended September 30, 1996, to $6,024,000 for the three months ended
September 30, 1997, including increased commissions of $570,000 on sales to new
customers and sales and marketing expenses of $526,000 for companies acquired in
1997. Sales and marketing expenses increased as a percentage of net revenues
from 9.0% for the three months ended September 30, 1996, to 9.8% for the three
months ended September 30, 1997, primarily due to higher sales commission costs
on the increased systems sales to new customers, which yields a higher
commission expense, and to sales and marketing expenses associated with
companies acquired in 1997.
Research and Development
Research and development costs increased by 39.4% from $2,602,000 for the three
months ended September 30, 1996, to $3,625,000 for the three months ended
September 30, 1997, due primarily to research and development expenses of
$513,000 related to companies acquired in 1997, and an increase of $510,000
incurred in the development of new products. Research and development expenses
increased as a percentage of net revenues from 5.2% for the three months ended
September 30, 1996, to 5.9% for the three months ended September 30, 1997, due
primarily to the increased investment in development discussed above. The
Company has not capitalized any research and development costs under SFAS 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 37.2% from $2,584,000 for the
three months ended September 30, 1996, to $3,546,000 for the three months ended
September 30, 1997, due primarily to general administrative expenses of $508,000
related to companies acquired in 1997 and the overall company growth. General
and administrative expenses increased as a percentage of net revenues from 5.2%
for the three months ended September 30, 1996, to 5.8% for the three months
ended September 30, 1997, due primarily to the relatively higher general and
administrative expenses of the acquired companies.
Amortization
Amortization of intangibles remained virtually constant in absolute terms at
$442,000 and $443,000 for the three months ended September 30, 1996 and 1997,
respectively.
Income from Operations
Income from operations increased by 14.8% from $9,539,000 for the three months
ended September 30, 1996, to $10,952,000 for the three months ended September
30, 1997, due to an increase in gross margin of $4,911,000, partially offset by
an increase in operating expenses of $3,498,000. Income from operations
decreased as a percentage of net revenues from 19.1% for the three months ended
September 30, 1996, to 17.8% for the three months ended September 30, 1997, due
primarily to higher operating costs as a percentage of revenue as described
above.
Other Income
Net interest income increased from $481,000 for the three months ended September
30, 1996, to $922,000 for the three months ended September 30, 1997, due
primarily to increased cash invested and short-term investments on-hand.
Provision for Income Taxes
The Company's provision for income taxes increased by 16.9% from $3,934,000, or
39.3% of pretax income for the three months ended September 30, 1996, to
$4,597,000, or 38.7% of pretax income for the three months ended September 30,
1997, due primarily to increased pretax income. The decrease in combined income
taxes as a percentage of pretax income was due primarily to an increase in
favorable permanent
12
<PAGE>
differences such as tax-free interest. The tax provision differs from the U.S.
statutory federal income tax rate due primarily to state income taxes,
nondeductible amortization of intangible assets, acquisition-related expenses
and tax-free interest income.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Total Net Revenues
Total net revenues increased by 22.6% from $138,030,000 during the nine months
ended September 30, 1996, to $169,255,000 during the nine months ended September
30, 1997. Systems sales increased by 16.1% from $65,861,000 during the nine
months ended September 30, 1996, to $76,435,000 for the nine months ended
September 30, 1997. Systems sales to new customers increased by 10.6% from
$40,834,000 during the nine months ended September 30, 1996 to $45,173,000
during the nine months ended September 30, 1997, and systems sales to existing
customers for upgrades and add-ons increased 24.9% from $25,027,000 in 1996 to
$31,262,000 in 1997.
Net revenues from maintenance, forms and other services increased by 28.6% from
$72,169,000 for the nine months ended September 30, 1996, to $92,820,000 for the
nine months ended September 30, 1997. This increase was primarily the result of
increases in hardware and software maintenance revenues of $7,322,000, in
FastBill(SM) revenue of $8,714,000, and in FastClaim(R) revenue of $4,245,000.
Cost of Revenues
Cost of systems sales increased by 22.0% from $39,513,000 for the nine months
ended September 30, 1996, to $48,196,000 for the nine months ended September 30,
1997, due to increased hardware and software costs of $2,092,000 related to
increased system sales to existing and new customers, increased +Medic Vision
implementation costs of $4,112,000, systems costs $1,541,000 for companies
acquired in 1997 and other increased systems-related costs of $938,000. Cost of
systems sales increased as a percentage of related revenues from 60.0% for the
nine months ended September 30, 1996, to 63.1% for the nine months ended
September 30, 1997, due primarily to higher implementation costs relative to
+Medic Vision systems sales as compared to 1996.
Cost of maintenance, forms and other services revenues increased by 27.3% from
$43,609,000 for the nine months ended September 30, 1996, to $55,497,000 for the
nine months ended September 30, 1997, due primarily to increased related
revenues. Cost of maintenance, forms and other services revenues decreased as a
percentage of related revenues from 60.4% for the nine months ended September
30, 1996, to 59.8% for the nine months ended September 30, 1997, due primarily
to higher margins on EDI services and forms sales partially offset by lower
margins on maintenance revenues.
The total cost of net revenues increased as a percentage of total net revenues
from 60.2% for the nine months ended September 30, 1996, to 61.3% for the nine
months ended September 30, 1997 due primarily to lower margins on systems sales
as described above.
Sales and Marketing Expenses
Sales and marketing expenses increased by 30.3% from $12,909,000 for the nine
months ended September 30, 1996, to $16,824,000 for the nine months ended
September 30, 1997 due primarily to the growth in systems revenues and to the
relatively higher sales and marketing expenses in the amount of $1,272,000 for
the companies acquired in 1997. Sales and marketing expenses increased as a
percentage of net revenues from 9.4% for the nine months ended September 30,
1996, to 9.9% for the nine months ended September 30, 1997, primarily due to the
shortfall of systems revenue in the first quarter of 1997 not absorbing fixed
sales and marketing costs.
13
<PAGE>
Research and Development
Research and development costs increased by 49.8% from $7,395,000 for the nine
months ended September 30, 1996, to $11,079,000 for the nine months ended
September 30, 1997, due primarily to research and development expenses of
$1,233,000 related to companies acquired in 1997, and an increase of $2,451,000
incurred in the development of new products. Research and development expenses
increased as a percentage of net revenues from 5.4% for the nine months ended
September 30, 1996, to 6.5% for the nine months ended September 30, 1997, due
primarily to the increased development investment discussed above. The Company
has not capitalized any research and development costs under SFAS 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 48.2% from $7,446,000 for the
nine months ended September 30, 1996, to $11,032,000 for the nine months ended
September 30, 1997, including non-recurring expenses of $1,079,000 incurred in
connection with the acquisitions of HCIS and CBSI in 1997, and including
non-recurring expenses of $243,000 incurred in connection with the acquisition
of CompuSystems in 1996. Excluding these non-recurring expenses, general and
administrative expenses increased by 38.2%, due primarily to the overall company
growth, including $1,667,000 related to the acquired companies. General and
administrative expenses including non-recurring expenses increased as a
percentage of net revenues from 5.4% for the nine months ended September 30,
1996, to 6.5% for the nine months ended September 30, 1997. Excluding these
non-recurring expenses, general and administrative expenses increased as a
percentage of net revenues from 5.2% for the nine months ended September 30,
1996, to 5.9% for the nine months ended September 30, 1997, due primarily to
higher fixed costs relative to lower systems revenues and to the relatively
higher general and administrative expenses of the acquired companies.
Amortization
Amortization of intangibles remained relatively constant in absolute terms at
$1,334,000 for the nine months ended September 30, 1996, and $1,329,000 for the
nine months ended September 30, 1997.
Income from Operations
Income from operations decreased by 2.0% from $25,824,000 for the nine months
ended September 30, 1996, to $25,298,000 for the nine months ended September 30,
1997, due primarily to the shortfall of systems revenue in the first quarter of
1997 and an increase in operating expenses of $11,180,000, including the
non-recurring expenses of $1,079,000 and $243,000 in 1997 and 1996,
respectively. Excluding the non-recurring expenses, income from operations
increased by 1.2%. Income from operations decreased as a percentage of net
revenues from 18.7% for the nine months ended September 30, 1996, to 14.9% for
the nine months ended September 30, 1997. Excluding the non-recurring expenses,
income from operations decreased as a percentage of net revenues from 18.9% for
the nine months ended September 30, 1996, to 15.6% for the nine months ended
September 30, 1997.
Other Income
Net interest income increased from $1,599,000 for the nine months ended
September 30, 1996, to $2,251,000 for the nine months ended September 30, 1997,
due primarily to increased cash invested and short-term investments on-hand.
Provision for Income Taxes
The Company's combined actual and pro forma provision for income taxes increased
in absolute terms by 2.1% from $10,743,000, or 39.2% of pretax income, for the
nine months ended September 30, 1996, to $10,971,000, or 39.8% of pretax income,
for the nine months ended September 30, 1997, due primarily to
14
<PAGE>
increased pretax income. The increase in income taxes as a percentage of pretax
income was due primarily to the increase in nondeductible expenses, including
acquisition-related expenses, partially offset by the increase in tax-free
interest income as a percentage 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, acquisition-related expenses and tax-free interest income.
Liquidity and Capital Resources
The Company has funded its operations over the nine months ended September 30,
1997 primarily through cash on-hand and cash flow from operations. At
September 30, 1997, the Company had cash and cash equivalents equal to
$42,942,000 and a working capital position in the amount of $118,813,000.
The Company currently has a $10,000,000 uncommitted line of credit with Wachovia
Bank of North Carolina, N.A. At September 30, 1997, there were no borrowings
outstanding under this line.
The Company's balance of cash and cash equivalents increased by 68.0% from
$25,557,000 at December 31, 1996 to $42,942,000 at September 30, 1997, due to
cash flow from operations of $18,600,000, sales of short term investments of
$36,963,000, proceeds from issuance of Common Stock of $705,000 and net cash
acquired of $1,001,000. Cash was used primarily for purchases of fixed assets in
the amount of $3,846,000 and purchases of short term investments of $36,038,000.
The Company's accounts receivable balance increased by 2.7% from $54,737,000 at
December 31, 1996, to $56,227,000 at September 30, 1997, primarily as a result
of the increase in revenues partially offset by increased cash collections in
1997. The Company's customer base continues to expand from predominately small
group medical practices to larger, consolidated physician practices, hospital
organizations, affiliated physician networks and management services
organizations. Selected larger customers have been extended longer payment terms
to more closely match the time required by the customers to integrate the larger
practice management systems throughout their organizations after the
installation of the system. The Company has increased the reserve for doubtful
accounts 42.2% from $3,198,000 at December 31, 1996 to $4,547,000 at September
30, 1997, including reserves in the amount of $452,000 for recent acquisitions.
The allowance for doubtful accounts is an estimate and may increase or decrease
in the future according to varying conditions in the general economy or the
Company's customer base. Days Sales Outstanding decreased from 93 days at
December 31, 1996 to 83 days at September 30, 1997. Management continues to
invest in systems and personnel to better manage working capital, including
accounts receivable.
Prepaid expenses increased by 16.7% from $4,968,000 at December 31, 1996, to
$5,799,000 at September 30, 1997, due primarily to payments for supplies and
materials associated with FastBill(SM) revenues. Property and equipment
increased by 26.4% from $10,099,000 at December 31, 1996, to $12,770,000 at
September 30, 1997, due primarily to the purchase of computer equipment for use
in various departments and the acquisition of real property at a cost of
$1,892,000 in the CBSI transaction.
Accounts payable decreased by 5.0%, from $10,013,000 at December 31, 1996, to
$9,517,000 at September 30, 1997, due primarily to the timing of payments for
purchases.
Customer deposits and deferred revenue increased by 1.9% from $11,340,000 at
December 31, 1996, to $11,561,000 at September 30, 1997, due to decreases in
customer deposits of $211,000, offset by an increase in deferred maintenance
billings of $432,000.
Income taxes payable increased by 142.8% from $1,131,000 at December 31, 1996,
to $2,746,000 at September 30, 1997, due primarily to the timing of estimated
payments.
15
<PAGE>
Accrued commissions decreased by 19.2% from $2,213,000 at December 31, 1996, to
$1,788,000 at September 30, 1997, due primarily to commissions being paid out
consistent with the collection activity in accounts receivable.
Accrued compensation and related items increased 4.7% from $4,915,000 at
December 31, 1996, to $5,145,000 at September 30, 1997, due primarily to
increases in accrued vacation of $667,000 and employee stock plan withholdings
of $209,000, partially offset by the net decreases in accrued bonuses of
$389,000 and profit-sharing of $292,000 at December 31, 1996.
The Company's capital expenditures decreased from $3,918,000 during the nine
months ended September 30, 1996, to $3,846,000 during the nine months ended
September 30, 1997 due primarily to the purchase of computer equipment and
software to enhance management information systems in 1996. The Company believes
that cash generated from operations, proceeds from the issuance of common stock,
and cash available under the revolving credit facility will be sufficient to
meet its cash and capital requirements for the immediate foreseeable future.
From time to time, the Company has been contacted by or has made contact with
third parties who represent potential acquisition candidates that would help
facilitate the Company's growth strategy. 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:
During the registrant's fiscal quarter ended September 30,
1997, registrant filed the following current Reports on Form
8-K:
September 8, 1997 - Pursuant to Item 5 of Form 8-K reporting
the execution of a definitive merger agreement to be acquired
by Misys.
September 17 and 22, 1997 - Pursuant to Item 5 of Form 8-K
filing the text of press releases relating to timing of the
proposed acquisition by Misys.
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 13, 1997
-----------------------------------------------------
Luanne L. Roth
Vice-President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and
Accounting Officer)
18
Exhibit 11.1
MEDIC COMPUTER SYSTEMS, INC.
COMPUTATIONS OF NET INCOME PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
--------------------------------- -----------------------------------
Three Months Ended Nine Months Ended
--------------------------------- -----------------------------------
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common shares outstanding 25,773,116 24,348,018 25,475,210 24,300,113
Common Stock equivalents assuming exercise of
dilutive options, determined by the treasury stock
method 502,830 468,998 403,500 488,017
--------------------------------- -----------------------------------
Common shares and equivalents 26,275,946 24,817,016 25,878,710 24,788,130
================================= ===================================
Net income $7,277,000 $6,086,000 $16,578,000 $16,680,000
================================= ===================================
Net income per Common Share $0.28 $0.25 $0.64 $0.67
================================= ===================================
Fully Diluted:
Weighted average number of common shares outstanding
25,773,117 24,348,018 25,475,210 24,300,113
Common Stock equivalents assuming exercise of
dilutive options, determined by the treasury stock
method 551,616 458,148 479,621 476,992
--------------------------------- -----------------------------------
Common shares and equivalents 26,324,733 24,806,166 25,954,831 24,777,105
================================= ===================================
Net income $7,277,000 $6,086,000 $16,578,000 $16,680,000
================================= ===================================
Net income per Common Share $0.28 $0.25 $0.64 $0.67
================================= ===================================
</TABLE>
Note: The calculation for fully diluted earnings per share has not been included
with the Consolidated Statements of Operations because fully diluted
earnings per share does not differ from primary earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 42,942
<SECURITIES> 31,926
<RECEIVABLES> 60,774
<ALLOWANCES> (4,547)
<INVENTORY> 12,710
<CURRENT-ASSETS> 153,747
<PP&E> 23,613
<DEPRECIATION> (10,843)
<TOTAL-ASSETS> 184,043
<CURRENT-LIABILITIES> 34,934
<BONDS> 0
0
0
<COMMON> 258
<OTHER-SE> 148,512
<TOTAL-LIABILITY-AND-EQUITY> 148,770
<SALES> 28,802
<TOTAL-REVENUES> 61,468
<CGS> 17,585
<TOTAL-COSTS> 36,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,874
<INCOME-TAX> 4,597
<INCOME-CONTINUING> 7,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,277
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
