<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0 - 25078
PHAMIS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1141795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1001 FOURTH AVENUE PLAZA, SUITE 1500, SEATTLE, WASHINGTON 98154-1144
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 622-9558
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:
SHARES OUTSTANDING
CLASS SEPTEMBER 30, 1996
----- ------------------
Common Stock 6,073,051
===============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets-
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations-
Quarters ended September 30, 1996 and 1995
and Nine Months ended September 30, 1996 and September 30, 1995 4
Condensed Consolidated Statements of Cash Flows-
Nine Months ended September 30, 1996 and September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
</TABLE>
2
<PAGE>
PHAMIS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,040 $ 4,488
Investments available for sale, at fair value 18,897 19,890
Accounts receivable, net 7,624 6,153
Accrued revenue receivable 2,186 1,143
Refundable income taxes 775 777
Deferred income taxes 1,010 950
Prepaid expenses and other assets 910 651
------- -------
Total current assets 32,442 34,052
------- -------
Furniture, equipment and leasehold improvements, at cost 8,526 6,396
Less accumulated depreciation and amortization 3,628 3,458
------- -------
4,898 2,938
------- -------
Other investments and advances, at cost 2,173 1,082
Capitalized software costs, net 4,610 3,060
Other assets 381 367
------- -------
Total assets $44,504 $41,499
======= =======
Liabilities and Shareholders' Equity
----------------------------------------
Current liabilities:
Note payable to bank $ - $ 209
Current installments of long-term obligations 107 265
Accounts payable and accrued liabilities 4,870 4,498
Deferred revenue 7,184 7,236
------- -------
Total current liabilities 12,161 12,208
------- -------
Long-term obligations, excluding current installments 74 152
Deferred income taxes 1,780 1,059
Shareholders' equity:
Preferred stock - -
Common stock 15 15
Additional paid-in capital 26,868 25,921
Unrealized gains on investments 1 32
Retained earnings 3,605 2,112
------- -------
Total shareholders' equity 30,489 28,080
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $44,504 $41,499
====================================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PHAMIS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Year
Third Third to to
Quarter Quarter Date Date
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $12,814 $11,173 $37,089 $34,862
Cost of revenues 7,812 6,414 21,677 20,674
------- ------- ------- -------
Gross margin 5,002 4,759 15,412 14,188
------- ------- ------- -------
Operating expenses:
Sales and marketing 1,744 1,416 5,422 4,134
Research and development 1,318 1,109 4,446 2,670
General and administrative 868 1,280 2,883 3,875
Merger and acquisition costs - - 292 -
Corporate headquarters relocation - - 304 -
International market entry costs 310 - 310 -
------- ------- ------- -------
Total operating expenses 4,240 3,805 13,657 10,679
------- ------- ------- -------
Operating income 762 954 1,755 3,509
------- ------- ------- -------
Other income (expense):
Interest income 192 271 594 830
Interest expense (5) (14) (26) (49)
Other, net 26 3 (14) 38
------- ------- ------- -------
Other income, net 213 260 554 819
------- ------- ------- -------
Income before income taxes 975 1,214 2,309 4,328
Provision for income taxes 304 141 816 991
------- ------- ------- -------
Net income $ 671 $ 1,073 $ 1,493 $ 3,337
======= ======= ======= =======
Net income per common share - primary $ .11 $ .17 $ .23 $ .53
Net income per common share - fully diluted $ .11 $ .17 $ .23 $ .53
Weighted average number of common 6,351 6,369 6,367 6,299
shares outstanding - primary
Weighted average number of common 6,354 6,369 6,366 6,327
shares outstanding - fully diluted
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PHAMIS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________________
1996 1995
___________________________________________________________________________________________________________________________________
<S> <C> <C>
Cash flows from operating activities:
Net income $1,493 $ 3,337
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,894 1,305
Deferred income taxes 678 164
Other 106 -
Change in certain assets and liabilities:
Accounts receivable and accrued revenue receivable (2,515) (1,698)
Prepaid expenses and other current assets (259) 17
Refundable income taxes 2 (868)
Accounts payable and accrued liabilities 371 2,423
Income taxes payable 110 306
Deferred revenue (54) (1,118)
------ -------
Net cash provided by operating activities 1,826 3,868
------ -------
Cash flows from investing activities:
Purchases of investments (17,540) (59,805)
Maturities and sales of investments 18,486 54,030
Purchases of furniture, equipment and leasehold improvements (2,938) (1,381)
Other investments and advances (1,091) -
Capitalized software development costs (2,573) (1,227)
Decrease (increase) in other assets and other (13) 19
------ -------
Net cash used in investing activities (5,669) (8,364)
------ -------
Cash flows from financing activities:
Net change in note payable to bank (209) 31
Principal repayments of long-term obligations (235) (399)
Net proceeds from initial public offering - 4,192
Proceeds from issuance of common stock under stock option and employee 839 1,474
benefit plans ------ -------
Net cash provided by financing activities 395 5,298
------ -------
Net increase (decrease) in cash and cash equivalents (3,448) 802
Cash and cash equivalents at beginning of period 4,488 3,306
------ -------
Cash and cash equivalents at end of period $1,040 $ 4,108
====== =======
___________________________________________________________________________________________________________________________________
Supplemental Disclosures of Cash Flow Information:
Non-cash financing activities:
Tax benefit from stock options exercised $ 108 $ 561
====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PHAMIS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated balance sheets, statements of
operations and statements of cash flows reflect all adjustments which are, in
the opinion of management, necessary to present a fair statement of the
condensed consolidated financial position at September 30, 1996, and the
condensed consolidated statements of operations and cash flows for the interim
periods ended September 30, 1996 and 1995.
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
all information and footnotes necessary for a complete presentation of the
financial position, results of operations, and cash flows, in conformity with
generally accepted accounting principles. The Company filed audited financial
statements which included all information and footnotes necessary for such a
presentation of the financial position, results of operations, and cash flows
for the years ended December 31, 1995, 1994 and 1993, in the Company's 1995 Form
10-K. Prior period balances have been reclassified to conform to the 1996
presentation, and restated for the acquisition of DataBreeze, Inc. discussed in
Note 2 of Notes to Condensed Consolidated Financial Statements.
The results of operations for the interim period ended September 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2. ACQUISITION
In March 1996, the Company acquired DataBreeze, Inc. ("DataBreeze"), a Florida-
based provider of information systems for physician practices. DataBreeze became
a wholly-owned subsidiary of the Company and continues to operate from its
Florida headquarters. The transaction was accounted for as a pooling-of-
interests, and was effected through the exchange of 153,609 shares of common
stock of the Company for all the issued and outstanding shares of DataBreeze. In
connection with the merger, the Company incurred approximately $292,000 of one-
time merger costs consisting principally of transaction fees for investment
bankers, attorneys, and other related charges necessary to consummate the
transaction. The consolidated financial statements for periods prior to the
transaction have been restated to include the accounts and results of operations
of DataBreeze.
The results of operations previously reported by the separate enterprises and
the consolidated amounts for the years ended December 31, 1995 and 1994 are
summarized below.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Net revenues:
PHAMIS Inc. $44,003 34,442
DataBreeze 3,162 4,659
------- ------
Consolidated $47,165 39,101
======= ======
Extraordinary item:
PHAMIS Inc. $ - -
DataBreeze - 298
------- ------
Consolidated $ - 298
======= ======
Net income (loss):
PHAMIS Inc. $ 4,546 2,401
DataBreeze (238) 136
------- ------
Consolidated $ 4,308 2,537
======= ======
</TABLE>
6
<PAGE>
PHAMIS INC.
Notes to Condensed Consolidated Financial Statements
NOTE 3. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale at September 30, 1996 and December 31, 1995
consist principally of tax-exempt, investment-grade, interest-bearing securities
diversified among security types and users.
Investments available-for-sale consisted of the following at September 30,
1996:
<TABLE>
<CAPTION>
Unrealized Estimated
Cost gains (losses) fair value
-------------------------------------------
(in thousands)
<S> <C> <C> <C>
Money market funds $ 595 - 595
State and municipal bonds and notes 9,151 1 9,152
Tax-exempt municipal preferreds 9,150 - 9,150
-----------------------------------------
$18,896 1 18,897
=========================================
</TABLE>
At September 30, 1996, approximately $1,000, net of income taxes, of unrealized
holding gains were recorded in shareholders' equity. At December 31, 1995,
approximately $32,000, net of income taxes, of unrealized holding gains were
recorded in shareholders' equity. The weighted average contractual maturity date
for the Company's available-for-sale portfolio was approximately six months at
September 30, 1996.
NOTE 4. UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings to date on uncompleted contracts were as
follows:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
---------------------
(In thousands)
<S> <C> <C>
Costs incurred on uncompleted contracts $55,776 $55,641
Estimated earnings 36,519 33,321
-------------------
92,295 88,962
Less billings to date 97,293 95,055
-------------------
$(4,998) $(6,093)
===================
Included in accompanying balance sheets
under the following captions:
Accrued revenue receivable $ 2,186 $ 1,143
Deferred revenue (7,184) (7,236)
-------------------
$(4,998) $(6,093)
===================
</TABLE>
NOTE 5. OTHER INVESTMENTS AND ADVANCES
In December 1995, the Company purchased an equity interest in a critical care
information systems developer based in Europe, for approximately $1,082,000 in
cash. The equity interest is accounted for under the cost method of accounting.
In addition to the equity interest, the Company entered into an OEM
Distribution Agreement to distribute the critical care system throughout the
Company's customer base. To consummate the Agreement the Company paid certain
costs for advance license fees, which are recorded as prepaid expenses.
In February 1996, the Company signed a Distribution Agreement with a California-
based software developer of mobile computing solutions for the home healthcare
marketplace. The Agreement allows the Company to distribute the home healthcare
solutions throughout its direct sales network. In addition to the Agreement, the
Company purchased a minority equity interest in the developer for approximately
$950,000 in cash. The equity interest is accounted for under the cost method of
accounting. Subsequent to the initial investment, the Company has advanced
additional funds to the developer.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
Overview
The Company develops, markets, installs and services enterprise-wide, patient-
centered healthcare information systems for use by large- and medium-sized
healthcare providers. The Company's DataBreeze(TM) practice management and
managed care information system is designed for medium- to large-sized
management service organizations (MSOs), and multi-specialty, multi-site
physician group practices. The Company's revenues are derived from system,
license and service sales, support and maintenance fees, and sales of third-
party hardware relating to its products. Systems revenues are generated from
long-term contracts to deliver and install an integrated system solution. The
revenues and related costs on these contracts, including the revenues from the
resale of third-party hardware, are recognized using the percentage-of-
completion method based on the estimated labor hours required to complete an
installation. Support and maintenance revenues are recognized over the contract
period, while additional hardware revenues, generated from hardware sales not
included in a systems contract, are recognized when the hardware is shipped. The
Company's total backlog consists of signed contracts for systems installation,
support and maintenance, and additional software and services that are not yet
recognized as revenue.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
including those discussed below that could cause actual results to differ
materially from historical results or those anticipated. The Company has
identified by italics, or all capital letters, various sentences within this
Form 10-Q which contain such forward-looking statements, and words such as
"believes", "anticipates", "expects", "intends", and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. In addition, the disclosures on page 12 under
the caption "Other Factors That May Affect Operating Results", which is not
italicized or capitalized for improved readability, consists principally of a
discussion of risks which may affect future results and, are thus, in their
entirety forward-looking in nature. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect
the Company's business.
Results of Operations
Revenue for the third quarter ended September 30, 1996, increased to $12.8
million from $11.2 million in the third quarter of 1995. The increase in third
quarter revenues was principally due to increased additional hardware sales. Net
income decreased 37 percent to $671,000 or $0.11 per share compared with $1.1
million or $0.17 per share, in the third quarter of 1995. The decrease in third
quarter income before income taxes was primarily due to one-time international
market entry costs of $310,000. In addition, a favorable IRS ruling in the third
quarter of 1995 accelerated the recognition of previously unrecognized deferred
tax benefits, and reduced the Company's effective tax rate to 12% compared to
31% in the third quarter of 1996.
On a year-to-date basis, revenues increased from $34.9 million to $37.1 million,
primarily due to a combined 5% increase in systems, licenses and services, and
support and maintenance revenues, the Company's core revenue categories. In
addition, additional hardware revenues increased $662,000, or 18 percent, over
year-to-date 1995 levels. Net income, prior to special charges, decreased 34
percent to $2.2 million or $0.35 per share compared with $3.3 million or $0.53
per share for 1995. Net income, after $906,000 of special charges, decreased 55
percent to $1.5 million or $0.23 per share compared with $3.3 million or $0.53
per share for 1995. The $1.8 million decline in year-to-date net income was
primarily due to a $2.1 million increase in operating expenses, and the addition
of $906,000 of special charges, which were partially offset by a $1.2 million
increase in overall gross margins. THE COMPANY EXPECTS FOURTH QUARTER INCOME
BEFORE INCOME TAXES, EXCLUDING U.K. MARKET ENTRY COSTS, WILL BE COMPARABLE TO
THE RESULTS ACHIEVED IN THE THIRD QUARTER OF 1996.
8
<PAGE>
Net Revenues, Cost of Revenues and Gross Margins
The following table sets forth the dollar amount of each revenue category, the
percentage that each revenue category represents of total revenue, the dollar
amount of each category of cost of revenues and gross margins, and the
percentage that each category of cost of revenues and gross margins bears to net
revenues for that category:
<TABLE>
<CAPTION>
Quarters ended Sept. 30, Nine months ended Sept. 30,
------------------------ ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
$ % $ % $ % $ %
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Systems, licenses and service........ 8,654 67.5 9,229 82.6 27,008 72.8 26,897 77.2
Support and maintenance.............. 2,031 15.9 1,469 13.1 5,829 15.7 4,375 12.5
Additional hardware.................. 2,129 16.6 475 4.3 4,252 11.5 3,590 10.3
------ ----- ------ ----- ------- ----- ------- -----
Total........................... 12,814 100.0 11,173 100.0 37,089 100.0 34,862 100.0
COST OF REVENUES:
Systems, licenses and service........ 5,120 59.2 5,139 55.7 15,147 56.1 15,247 56.7
Support and maintenance.............. 1,372 67.6 952 64.8 3,748 64.3 2,948 67.4
Additional hardware.................. 1,320 62.0 323 68.0 2,782 65.4 2,479 69.1
------ ------ ------- -------
Total........................... 7,812 61.0 6,414 57.4 21,677 58.4 20,674 59.3
GROSS MARGINS:
Systems, licenses and service........ 3,534 40.8 4,090 44.3 11,861 43.9 11,650 43.3
Support and maintenance.............. 659 32.4 517 35.2 2,081 35.7 1,427 32.6
Additional hardware.................. 809 38.0 152 32.0 1,470 34.6 1,111 30.9
------ ------ ------- -------
Total........................... $5,002 39.0 $4,759 42.6 $15,412 41.6 $14,188 40.7
====== ====== ======= =======
</TABLE>
Systems, licenses and service revenues were $8.7 million in the third quarter of
1996, a 6 percent decrease over the same period a year ago. The decrease in the
third quarter was primarily due to customer-driven implementation delays, and a
shift in the Company's revenue mix. For the nine month period, systems, licenses
and service sales increased from $26.9 million to $27.0 million. The year-to-
date increase was primarily due to an increase in the rates realized per revenue
hour, and the addition of revenues from third-party solution partner agreements.
The Company's backlog of systems, licenses and services was $49.4 million (out
of a total backlog of $76.6 million) at September 30, 1996.
Gross margin percentages on systems, licenses and service sales declined to
40.8% for the three month period ended September 30, 1996, compared to 44.3% for
the same period in 1995. The current quarter's decline in margins was due to a
shift in the Company's revenue mix to lower margin services revenues from higher
margin software revenues. For the year-to-date, the Company experienced an
increase in systems, licenses and services gross margin percentages to 43.9%
from 43.3% in 1995.
Support and maintenance revenues increased 38% to $2.0 million in the third
quarter of 1996 from $1.5 million in the third quarter of 1995. Third quarter
1996 margins declined to 32.4%, compared to 35.2% in 1995, as support and
maintenance costs increased to accommodate the recent transition of several
customers from their installation phase to their customer support phase, and due
to additional costs of periodic updates for current regulatory requirements.
Historically, increases in support costs occur following system activations, as
customers require additional support to become acclimated with the Company's
system.
Year-to-date support and maintenance revenues increased 33% to $5.8 million at
September 30, 1996 from $4.4 million at September 30, 1995. In 1996, gross
margins on support and maintenance have increased as the Company has been able
to spread the fixed portion of its maintenance costs over a larger installed
customer base.
Third quarter additional hardware revenues increased to $2.1 million, a 348%
increase over the same period in 1995. Third quarter gross margins were
positively affected by sales of additional hardware for
9
<PAGE>
which the Company acted as an agent rather than a reseller. Year-to-date
additional hardware revenues increased 18% to $4.3 million at September 30, 1996
from $3.6 million at September 30, 1995.
Sales of additional hardware have historically experienced significant quarterly
fluctuations, and may vary significantly from period to period as they are
limited in number and individual sales can have a high dollar value. THE LEVEL
OF FUTURE HARDWARE SALES MAY BE IMPACTED BY BOTH PRICE DECREASES AND BY THE
INCREASING OPPORTUNITIES TO SELL SUCH HARDWARE AS THE COMPANY'S INSTALLED
CUSTOMER BASE INCREASES AND CONSOLIDATION TAKES PLACE.
THE COMPANY EXPECTS REVENUES IN THE FOURTH QUARTER OF 1996 WILL BE COMPARABLE TO
THOSE IN THE THIRD QUARTER OF 1996. RISKS THAT COULD CAUSE ACTUAL REVENUES TO
DIFFER FROM EXPECTED REVENUES INCLUDE CHANGING VOLUMES OF LABOR HOURS, CHANGES
IN REALIZED RATES PER REVENUE HOUR, AND CHANGES IN THE COMPANY'S REVENUE MIX.
OVERALL GROSS MARGIN PERCENTAGES IN THE FOURTH QUARTER OF 1996 ARE EXPECTED TO
APPROXIMATE THE LEVEL EXPERIENCED IN THE THIRD QUARTER OF 1996. HOWEVER,
ACHIEVEMENT OF THE COMPANY'S EXPECTATIONS IS SUBJECT TO A NUMBER OF RISKS,
INCLUDING IMPLEMENTATION DELAYS AND CHANGES IN THE COMPANY'S REVENUE MIX.
<TABLE>
<CAPTION>
Operating Expenses
Sales and Marketing
- -------------------------------------------------------------------------------------------------------
Percentage Percentage
Sept. 30, of Sept. 30, of
1996 Net Revenues Change 1995 Net Revenues
------- ------------ ------ -------- --------------
<S> <C> <C> <C> <C> <C>
Three months ended $1,744 13.6% 23% $1,416 12.7%
Nine months ended $5,422 14.6% 31% $4,134 11.9%
</TABLE>
The increase in third quarter and year-to-date sales and marketing expense was
primarily the result of increased personnel costs, corporate marketing, and
corporate communication program expenditures necessary to promote the Company's
competitive position and expand its customer base. Sales and marketing expense
increased as a percentage of net revenues in 1996 as the rate of increase in
sales and marketing expense exceeded the rate of increase in net revenues. THE
COMPANY BELIEVES THAT THIS LEVEL OF EXPENDITURE IS APPROPRIATE TO TAKE ADVANTAGE
OF SIGNIFICANT OPPORTUNITIES TO SELL NEW SYSTEMS CONTRACTS IN THE CURRENT MARKET
ENVIRONMENT. THE COMPANY'S EFFORTS TO EXPAND ITS CUSTOMER BASE, PROMOTE ITS
COMPETITIVE POSITION, AND SUPPORT THE SALES AND MARKETING OF NEW AND EXISTING
APPLICATIONS WILL CONTINUE THROUGHOUT THE REMAINDER OF 1996.
During the third quarter the Company incurred approximately $310,000 of "start-
up" costs associated with its planned entry into the United Kingdom. The costs
include pre-contract signing costs, and initial product conversion costs to make
the Company's product applicable to the U.K. marketplace. THE COMPANY
ANTICIPATES THAT ADDITIONAL NON-RECURRING EXPENSES WILL BE INCURRED IN THE
FOURTH QUARTER, BUT WILL CONCLUDE AT THE TIME OF AN INITIAL CONTRACT SIGNING,
WHICH IS ANTICIPATED TO OCCUR IN THE FOURTH QUARTER OF 1996.
10
<PAGE>
<TABLE>
Research and Development
___________________________________________________________________________________________________________________________________
<CAPTION>
Percentage Percentage
Sept. 30, of Sept. 30, of
1996 Net Revenues Change 1995 Net Revenues
-------- ------------ ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended $1,318 10.3% 19% $1,109 9.9%
Nine months ended $4,446 12.0% 67% $2,670 7.7%
</TABLE>
The Company's research and development efforts focus on enhancing existing
applications and developing new applications for the LASTWORD(R), Enterprise
View(TM), and DataBreeze(TM) systems, and integrating applications from its
third party solution providers. The following table sets forth certain
information regarding research and development expense and amounts of
capitalized software development costs for the quarters ended September 30, 1996
and 1995, and the nine months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Research and development expenditures:
Research and development expense................................... $1,318 $1,109 $4,446 $2,670
Capitalized software development costs............................. 973 375 2,573 1,227
Funded research and development under development contracts........ 82 79 291 272
------ ------ ------ ------
Total research and development expenditures........................ $2,373 $1,563 $7,310 $4,169
====== ====== ====== ======
As a percentage of net revenues:
Research and development expense................................... 10.3% 9.9% 12.0% 7.7%
Total research and development expenditures........................ 18.5 14.0 19.7 12.0
Capitalized costs as a percentage of total
research and development expenditures............................. 41.0 24.0 35.2 29.4
</TABLE>
THE COMPANY BELIEVES IT MUST MAINTAIN A SUBSTANTIAL COMMITMENT TO RESEARCH AND
DEVELOPMENT TO REMAIN COMPETITIVE. SINCE 1993, THE COMPANY HAS SPENT INCREASING
AMOUNTS ON RESEARCH AND DEVELOPMENT AND EXPECTS THIS TREND TO CONTINUE. The
Company capitalizes software development costs when technological feasibility on
a particular project has been established and thereafter until the related
product is available for general release to customers. Research and development
expense increased $209,000 and $1.8 million in the third quarter and first nine
months of 1996, respectively, as the Company added development personnel and
devoted increased hours and resources to development projects. In addition, the
Company incurred significant expenditures developing release 4.0 of the
LASTWORD(R) system, which contributed to the increase in capitalized software
development costs of approximately $598,000 and $1.3 million, respectively,
during the same periods.
THE COMPANY ANTICIPATES ITS LEVEL OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS AS A
PERCENTAGE OF TOTAL RESEARCH AND DEVELOPMENT EXPENDITURES WILL FLUCTUATE BASED
UPON THE NATURE AND TIMING OF SPECIFIC DEVELOPMENT PROJECTS UNDERTAKEN.
<TABLE>
General and Administrative
___________________________________________________________________________________________________________________________________
<CAPTION>
Percentage Percentage
Sept. 30, of Sept. 30, of
1996 Net Revenues Change 1995 Net Revenues
------- ------------ ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended $ 868 6.8% (32)% $1,280 11.5%
Nine months ended $2,883 7.8% (26)% $3,875 11.1%
</TABLE>
General and administrative expense decreased in the third quarter, and for the
nine months ended September 30, 1996, primarily due to a decrease in legal fees
related to the successful defense of the civil action complaint filed by TDS
Healthcare Systems Corporation (TDS), and a reduction in management bonuses. All
claims against the Company in the TDS matter were dismissed in October 1995, and
the Company and TDS have agreed that the judgment entered in the case is final
and no appeals will be filed.
11
<PAGE>
THE COMPANY EXPECTS TO MAINTAIN GENERAL AND ADMINISTRATIVE SPENDING AT
APPROXIMATELY THE SAME PERCENTAGE OF REVENUE DURING THE REMAINDER OF 1996 AS WAS
ACHIEVED IN THE FIRST NINE MONTHS OF 1996.
<TABLE>
<CAPTION>
Other Income, Net
- --------------------------------------------------------------------------------------------------------------
Percentage Percentage
Sept. 30, of Sept. 30, of
1996 Net Revenues Change 1995 Net Revenues
-------- ------------- ------- -------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended $213 1.7% (18)% $260 2.3%
Nine months ended $554 1.5% (32)% $819 2.4%
</TABLE>
The decrease in other income, net in 1996 was directly attributable to lower
cash, cash equivalents, and investment balances during 1996, and lower interest
yields due to a shift in investment portfolio holdings from taxable securities
to tax-exempt securities.
<TABLE>
<CAPTION>
Provision for Income Taxes
- --------------------------------------------------------------------------------------------------------------
Percentage Percentage
Sept. 30, of Effective Sept. 30, of Effective
1996 Net Revenues Tax Rate 1995 Net Revenues Tax Rate
-------- ------------ -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Three months ended $304 2.4% 31.2% $141 1.3% 11.6%
Nine months ended $816 2.2% 35.3% $991 2.8% 22.9%
</TABLE>
The Company's effective tax rate for the third quarter of 1996 was less than the
enacted statutory federal tax rate due to tax-exempt interest. The Company's
effective tax rate for the first nine months of 1996 exceeds the enacted
statutory federal tax rate due to the $292,000 of one-time, nondeductible merger
costs related to the DataBreeze acquisition in March 1996 (Note 2 of Notes to
Condensed Consolidated Financial Statements). THE COMPANY ANTICIPATES THAT THE
EFFECTIVE TAX RATE FOR 1996 WILL APPROXIMATE THE STATUTORY TAX RATE.
Liquidity and Capital Resources
At September 30, 1996, the Company's principal sources of liquidity consisted of
$1.0 million in cash and cash equivalents, $18.9 million in investments
available for sale, $7.6 million of accounts receivable and up to $5.0 million
available under a bank line of credit. As of September 30, 1996, no amounts were
outstanding under this line of credit and the Company was in compliance with all
applicable debt covenants. The Company had working capital of $20.3 million at
September 30, 1996. The Company requires significant down payments on its system
and license sales contracts and attempts to negotiate its subsequent milestone
payments so that it is in a cash positive position throughout most of the
contract period. Amounts billed in excess of costs and earnings on contracts are
reflected as deferred revenue on the Company's balance sheet.
THE COMPANY BELIEVES EXISTING CASH, CASH EQUIVALENTS, INVESTMENTS AVAILABLE FOR
SALE, ACCOUNTS RECEIVABLE AND AVAILABLE BANK CREDIT, TOGETHER WITH THE
ANTICIPATED CASH GENERATED FROM OPERATIONS AND THE EXERCISE OF STOCK OPTIONS,
WILL PROVIDE SUFFICIENT FUNDS FOR POSSIBLE ACQUISITIONS, CAPITAL EXPENDITURE
REQUIREMENTS, AND INTERNAL WORKING CAPITAL NEEDS FOR AT LEAST THE NEXT TWELVE
MONTHS.
Other Factors That May Affect Operating Results
The Company's operating results may fluctuate due to factors such as the volume
and timing of systems and additional hardware sales, the length of sales cycles
and the installation process, possible contract and implementation
postponements, changes in product mix of revenues, changes in the level of
operating expenses, delays in revenue contributions from additional product
offerings, uncertainty of international business development, and general
economic conditions in the healthcare industry. All of the above factors are
difficult for the Company to forecast, and can materially adversely affect the
Company's business and operating results for one quarter or a series of
quarters.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to exhibits
Exhibit
Number Exhibit Description
------- -------------------
4.1 Rights Agreement dated as of July 24, 1996 by and between
PHAMIS, Inc. and First Interstate Bank of Washington, N.A., as
Rights Agent (incorporated by reference to the Company's
Registration Statement on Form 8-A dated August 1, 1996).
(b) Reports on Form 8-K--A Form 8-K dated July 24, 1996 was filed by the
Company reporting the adoption of the Company's Shareholder's Rights Plan
("Rights Plan"). The Company disclosed Board of Directors approval of the
Rights Plan on July 24, 1996, and a distribution of one Right for each
outstanding share of common stock to shareholders of record on July 31,
1996.
13
<PAGE>
SIGNATURE
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.
PHAMIS, Inc.
By /s/ Gregg W. Blodgett Date: November 13, 1996
------------------------------
Gregg W. Blodgett
Vice President of Finance
and Administration
Chief Financial Officer and
Treasurer
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 0 1,040
<SECURITIES> 0 18,897
<RECEIVABLES> 0 7,725
<ALLOWANCES> 0 101
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 32,442
<PP&E> 0 8,526
<DEPRECIATION> 0 3,628
<TOTAL-ASSETS> 0 44,504
<CURRENT-LIABILITIES> 0 12,161
<BONDS> 0 0
0 0
0 0
<COMMON> 0 15
<OTHER-SE> 0 30,474
<TOTAL-LIABILITY-AND-EQUITY> 0 44,504
<SALES> 12,814 37,089
<TOTAL-REVENUES> 12,814 37,089
<CGS> 7,812 21,677
<TOTAL-COSTS> 7,812 21,677
<OTHER-EXPENSES> 4,240 13,657
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5 26
<INCOME-PRETAX> 975 2,309
<INCOME-TAX> 304 816
<INCOME-CONTINUING> 671 1,493
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 671 1,493
<EPS-PRIMARY> .11 .23
<EPS-DILUTED> .11 .23
</TABLE>
