-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sb/x5ysEAMAU/R11c3h59McVswtu77olp09jlBUnucK5LCOue5Z9OuoNAp4Ql9K7 VPVTR+c38hy+wmJAMpv6Hg== 0000950168-96-002129.txt : 19961115 0000950168-96-002129.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950168-96-002129 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIC COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000885378 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 561306083 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20183 FILM NUMBER: 96661303 BUSINESS ADDRESS: STREET 1: 8601 SIX FORKS ROAD STE 300 CITY: RALEIGH STATE: NC ZIP: 27615 BUSINESS PHONE: 9198478102 10-Q 1 MEDIC COMPUTER SYSTEMS 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _______________ to __________________ Commission file number 0-20183 Medic Computer Systems, Inc. (Exact name of registrant as specified in its charter) North Carolina 56-1306083 (State or other jurisdiction of incorporation (I.R.S. Employer Identification Number) or organization)
8601 Six Forks Road, Suite 300, Raleigh, North Carolina 27615 (Address of principal executive offices, including zip code) (919) 847-8102 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Number Outstanding Date Common Stock 24,396,308 November 11, 1996 $.01 par value
MEDIC COMPUTER SYSTEMS, INC. Index to Form 10-Q
Pages Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of December 31, 1995 and 3 September 30, 1996 Statements of Operations for the three months and nine months 4 ended Septem4er 30, 1995 and 1996 Statements of Cash Flows for the nine months ended September 30, 1995 and 1996 5 Notes to Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 Part II. OTHER INFORMATION. Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 EXHIBIT INDEX 19
2 MEDIC COMPUTER SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
September 30, December 31, 1996 1995 (unaudited) (unaudited and restated) ASSETS Current assets: Cash and cash equivalents $38,375 $38,935 Short-term investments 15,667 11,461 Accounts receivable, trade, net 52,187 41,189 Inventories and maintenance parts 11,489 12,294 Prepaid expenses 5,575 6,190 Other current assets 1,309 1,237 Deferred income tax benefit 2,255 2,515 - ---------------------------------------------------------------------------------------- ------------------------------- Total current assets 126,857 113,821 Property and equipment, at cost, net 9,257 7,075 Intangible assets, at cost, net 19,206 20,445 Other assets 99 122 - ----------------------------------------------------------------------------------------------------------------------- Total assets $155,419 $141,463 ======================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term notes $1,446 $2,677 Accounts payable, trade 9,995 7,336 Customer deposits and deferred maintenance revenue 9,123 13,396 Income taxes payable 970 1,676 Accrued expenses: Commissions 2,118 1,604 Compensation and related items 5,403 3,963 Other 2,930 3,075 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 31,985 33,727 Long-term notes, less current portion 1,805 3,127 Other long-term liabilities 117 172 - ----------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common Stock, $.01 par value; 40,000,000 shares authorized; 24,355,695 and 24,210,264 shares issued and outstanding in 1996 and 1995, respectively 244 242 Additional paid-in capital 70,005 68,628 Retained earnings 51,263 35,567 - ----------------------------------------------------------------------------------------------------------------------- 121,512 104,437 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $155,419 $141,463 =======================================================================================================================
The accompanying notes are an integral part of the financial statements 3 MEDIC COMPUTER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (dollars in thousands, except share data)
Three Months Ended Nine Months Ended ------------------------------ ------------------------------ September 30 September 30 September 30 September 30 ------------ ------------ ------------ ------------ 1996 1995 1996 1995 ---- ---- ---- ---- (restated) (restated) NET REVENUES: Systems $24,373 $20,769 $65,861 $55,614 Maintenance, forms and other services 25,699 19,208 72,169 53,866 --------------------------------------------------------------------- Total Net Revenues 50,072 39,977 138,030 109,480 =============================================================================================================================== COST OF REVENUES: Systems 14,625 12,898 39,513 34,778 Maintenance, forms and other services 15,768 11,318 43,609 31,071 --------------------------------------------------------------------- Total Cost of Revenues 30,393 24,216 83,122 65,849 - ------------------------------------------------------------------------------------------------------------------------------- Gross Margin 19,679 15,761 54,908 43,631 =============================================================================================================================== OPERATING EXPENSES: Sales and marketing 4,512 3,921 12,909 10,669 General and administrative 2,584 2,233 7,446 5,898 Amortization of intangible assets 442 780 1,334 2,292 Research and development 2,602 2,242 7,395 5,928 - ------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 10,140 9,176 29,084 24,787 =============================================================================================================================== Income from Operations 9,539 6,585 25,824 18,844 =============================================================================================================================== Other Income: Interest income 481 625 1,599 1,331 - ------------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 10,020 7,210 27,423 20,175 - ------------------------------------------------------------------------------------------------------------------------------- Provision for Income Taxes 3,934 2,509 10,254 7,100 - ------------------------------------------------------------------------------------------------------------------------------- Net Income $6,086 $4,701 $17,169 $13,075 =============================================================================================================================== Pro forma data: Income before pro forma income tax provision $6,086 $4,701 $17,169 $13,075 Pro forma income tax expense for the period prior to May 31, 1996 for CompuSystems -- 314 489 871 - ------------------------------------------------------------------------------------------------------------------------------- Pro forma net income $6,086 $4,387 $16,680 $12,204 =============================================================================================================================== Pro Forma Earnings per Share: Net income per share $0.25 $0.18 $0.67 $0.51 =============================================================================================================================== Weighted average common shares and equivalents used in computing net income per share 24,815,880 24,513,230 24,786,994 23,736,416 ===============================================================================================================================
The accompanying notes are an integral part of the financial statements. 4 MEDIC COMPUTER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Nine Months Ended Nine Months Ended September 30, 1996 September 30, 1995 ------------------ ------------------ (restated) Cash flows from operating activities: Net income $17,169 $13,075 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 1,740 1,008 Amortization of intangibles 1,334 2,292 Deferred income taxes 260 0 Accounts receivable, trade (net) (10,998) (13,910) Inventories and maintenance parts 805 (463) Prepaid expenses 543 (487) Other 23 (43) Accounts payable, trade 2,659 (2,159) Customer deposits and deferred maintenance revenue (4,273) 767 Income taxes payable (706) (137) Accrued expenses 1,809 1,514 Payments on long-term note payable to vendor (1,289) 0 Other long-term liabilities (55) (49) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 9,021 1,408 ===================================================================================================================== Cash flows from investing activities: Purchases of short-term investments (22,597) (7,559) Proceeds from the sale of short-term investments 18,391 0 Payments for purchases of property and equipment (3,918) (2,459) Payments for acquisitions made, net of cash acquired (95) (4,909) - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (8,219) (14,927) ===================================================================================================================== Cash flows from financing activities: Proceeds from issuance of common stock 334 35,586 Distributions to CompuSystems' shareholders (1,475) (1,564) Payments on long-term notes (1,264) (57) Tax benefits from stock options exercised 1,043 1,638 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (1,362) 35,603 ===================================================================================================================== Net change in cash and cash equivalents (560) 22,084 Cash and cash equivalents: Beginning of period 38,935 16,644 - --------------------------------------------------------------------------------------------------------------------- End of period $38,375 $38,728 ===================================================================================================================== Cash paid for interest and income taxes was as follows: Interest $ 13 $14 ===================================================================================================================== Income taxes $9,141 $5,543 =====================================================================================================================
The accompanying notes are an integral part of the financial statements. 5 MEDIC COMPUTER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The financial statements included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 1996 and for all periods presented have been made. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, but the Company believes that the disclosures made are adequate to make the information presented not misleading. For more complete financial information, these financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Results for interim periods are not necessarily indicative of the results for any other interim period or for the full fiscal year. On June 10, 1996, the Company declared a two-for-one stock split of the Company's Common Stock effective June 24, 1996, pursuant to which each shareholder of record received one additional share of Common Stock for each share held as of that date. The financial statements have been restated to reflect the effect of the split. 2. BUSINESS COMBINATIONS On May 31, 1996, the Company acquired all of the outstanding stock of CompuSystems, Inc. ("CompuSystems"), a privately held company based in Columbia, South Carolina, through an exchange of stock in a merger transaction. Medic issued 718,886 shares of its Common Stock to the shareholders of CompuSystems in the merger. The transaction was accounted for as a pooling of interests, and accordingly, the Company's financial statements for the periods prior to the merger have been restated to include the results of CompuSystems for all periods presented. Certain details of the results of operations of the previously separate companies before the acquisition are as follows:
January 1 - May 31, 1996 January 1 - September 30, 1995 ------------------------ ------------------------------ Medic CompuSystems Total Medic CompuSystems Total ----- ------------ ----- ----- ------------ ----- Revenue $63,181 $ 4,085 $67,266 $102,156 $ 7, 324 $109,480 Net income $ 5,660 $ 1,167 $ 6,827 $ 10,894 $ 2,181 $ 13,075 Pro forma income tax expense $ 489 $ 489 $ 871 $ 871 Pro forma Net income $ 5,660 $ 678 $ 6,338 $ 10,894 $ 1,310 $ 12,204
6 3. INVENTORIES AND MAINTENANCE PARTS Ending inventories consisted of the following (in thousands):
September 30, December 31, 1996 1995 ---- ---- (unaudited) (unaudited and restated) New and used computer hardware and parts $ 9,939 $ 10,865 Inventory shipped to customers for which revenue recognition criteria has not been met 1,031 1,007 Forms, FastBill and FastClaim 519 422 ------- ------- $11,489 $12,294 ======= =======
4. INTANGIBLE ASSETS Intangible assets consisted of the following (in thousands):
Amortization Method Estimated Life September 30, 1996 December 31, 1995 (unaudited) (unaudited and restated) Excess of purchase price over net assets acquired and other intangible assets Straight-line 15 years $ 25,873 $ 25,769 Noncompetition agreement Straight-line 5 years 374 374 ----------- --------- 26,247 26,143 Less accumulated amortization 7,041 5,698 ---------- --------- $ 19,206 $ 20,445 ========== =========
The Company continually monitors events and changes in circumstances that could indicate carrying amounts of intangible assets may not be recovered. When events or changes in circumstances are present that indicate the carrying amounts of intangible assets may not be recoverable, the Company assesses the recoverability of intangible assets by determining whether the carrying value of such intangible assets will be recoverable through the future cash flows expected from the use of the asset and its eventual disposition. No impairment losses on intangible assets were recorded by the Company during the nine month periods ended September 30, 1996 and 1995. 5. INCOME TAXES The tax provisions for the nine months ended September 30, 1996 and 1995 differ from the statutory U.S. federal income tax rate primarily due to state income taxes, nondeductible amortization of intangibles offset by tax-free interest income, and the tax status of CompuSystems. 7 Reconciliation between the "expected" income tax expense rate based on the statutory U.S. federal income tax rate and the actual effective rate of the expense is as follows: Nine months ended September 30, 1996 1995 ---- ---- Statutory U.S. federal rate 35.0% 35.0% State income taxes, net of federal income tax benefit 4.8 4.8 Taxes on CompuSystems, an S-Corporation prior to May 31, 1996, paid by former shareholders (1.8) (4.3) R & D tax credits (0.4) (0.9) Amortization of intangibles and other permanent differences (0.2) 0.6 ----- ---- 37.4% 35.2% ===== ==== Deferred income taxes result from temporary differences in the recognition of income and expense items for income tax and financial statement purposes. The components of the deferred tax asset as of September 30, 1996 were as follows: September 30, 1996 ---- Deferred revenue $ 1,519 Inventory reserves and/or writedowns 297 Allowance for bad debts and sales returns and credits 427 Accrued bonuses and vacation 413 Accrued pension and profit sharing plan (425) Other 24 --------- $ 2,255 6. RELATED PARTY TRANSACTIONS In June 1996, the Company entered into a software license agreement, valued at $2,026,000, with a customer that shares common members of the Board of Directors with the Company and in which certain senior members of management are minority shareholders. The Company believes that the terms of this agreement were based on prevailing market pricing and consistent with other transactions of equal magnitude with unrelated parties. As of September 30, 1996, the Company had collected all receivables outstanding related to this agreement. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations On June 10, 1996, the Company declared a two-for-one stock split of the Company's Common Stock effective June 24, 1996, pursuant to which each shareholder of record received one additional share of Common Stock for each share held as of that date. This is the Company's first stock split since it became publicly held in 1992 and increased the number of shares outstanding to approximately 24.3 million. The discussion of operations that follows is based on the restated balances of shares outstanding given the effect of the split. On May 31, 1996, the Company acquired all of the outstanding stock of CompuSystems, Inc. ("CompuSystems"), a privately held company based in Columbia, South Carolina, through an exchange of stock in a merger transaction. Medic issued 718,886 shares of its Common Stock to the shareholders of CompuSystems in the merger. The transaction was accounted for as a pooling of interests, and accordingly, the Company's financial statements for the periods prior to the merger have been restated to include the results of CompuSystems for all periods presented. The discussion of results of operations that follows is based on the combined operations of the Company and CompuSystems with respect to all periods presented. On September 29, 1995, the Company acquired Compudata Professional Systems, Ltd. ("Compudata"), located in Marietta, Georgia, for approximately $2 million in cash. The transaction was accounted for as a purchase and, accordingly, the results of operations of CompuData are included in the Company's financial statements from September 29, 1995. On August 31, 1995, the Company acquired National Medical Systems, Inc. ("National Medical"), located in Westboro, Massachusetts, through an exchange of stock in a merger transaction valued at approximately $5 million. The transaction was accounted for as a pooling of interests, but was not material to the Company's results of operations and financial position. Accordingly, the results of operations of National Medical are included in the Company's financial statements from August 31, 1995. On August 28, 1995, the Company acquired the assets of Script Systems, Inc. ("Script") from Infomed Holdings, Inc. with headquarters in Princeton, New Jersey, for approximately $3 million in cash and the assumption of certain liabilities. The transaction was accounted for as a purchase and, accordingly, the results of operations of Script are included in the Company's financial statements from August 31, 1995. This Item 2 contains certain forward-looking statements. The actual results of operations of the Company might differ materially from those projected in the forward-looking statements. The Company's revenues and operating results can vary significantly from quarter to quarter as a result of a number of factors, including the volume and timing of systems sales and installations, and product deliveries from the Company's vendors. The timing of such revenues from systems sales is difficult to forecast because the Company's sales cycle can vary depending upon factors such as the size of the transaction and the general economic conditions. Given that a significant percentage of the Company's 9 expenses are relatively fixed, a variation in the timing of systems sales can cause significant variations in operating results from quarter to quarter. The Company's future operating results may fluctuate as a result of these and/or other factors, such as customer purchasing patterns and the timing of new product and service introductions and product upgrade releases. Additional information regarding factors that could cause actual results to differ materially from those projected in the forward-looking statements contained herein is contained in certain of the Company's other SEC filings, copies of which are available from the Company upon request. Three Months Ended September 30, 1996 Compared to Three Months Ended September 30, 1995 Total Net Revenues Total net revenues increased by 25.3% from $39,977,000 during the three months ended September 30, 1995 to $50,072,000 during the three months ended September 30, 1996. Systems sales increased by 17.4% from $20,769,000 during the three months ended September 30, 1995 to $24,373,000 during the three months ended September 30, 1996. Systems sales to new customers increased by 30.4% from $12,004,000 during the three months ended September 30, 1995 to $15,659,000 during the three months ended September 30, 1996, and systems sales to existing customers for upgrades and add-ons decreased 0.1% from $8,765,000 in that period in 1995 to $8,714,000 in that period in 1996. The Company believes that because the general market for personal computers, networking hardware and peripheral equipment has been subject to increasingly competitive pricing, certain customers have elected to purchase these types of equipment from other sources. The Company believes that it still maintains and grows a strong add-on sales presence in the marketplace, and the Company focuses on providing strong after-sales support and higher value-added products to its customer base. The systems sales backlog increased by 64.1% from $23,933,000 at September 30, 1995 to $39,278,000 at September 30, 1996, reflecting an increase in orders secured during each of the first three quarters of 1996 compared to the first three quarters of 1995. The increase in backlog relative to the increase in systems sales revenues also reflects the longer installation process for large systems installations. Systems sales during a quarter as a percentage of systems sales backlog as of the end of the preceding quarter can fluctuate materially, and the Company believes that the backlog may not be indicative of future results for the following quarter or for any particular period. Net revenues from maintenance, forms and other services revenues increased by 33.8% from $19,208,000 for the three months ended September 30, 1995 to $25,699,000 for the three months ended September 30, 1996. This increase was primarily the result of increases in hardware and software maintenance revenues of $2,226,000 and other increases in FastBill(SM) revenue of $2,596,000 and in FastClaim(R) revenue of $1,174,000. Cost of Revenues Cost of systems sales increased by 13.4% from $12,898,000 for the three months ended September 30, 1995 to $14,625,000 for the three months ended September 30, 1996, due primarily to increased systems sales. Cost of systems sales decreased as a percentage of related revenues from 62.1% for the three months ended September 30, 1995 to 60.0% for the three months ended September 30, 1996, due primarily to more favorable margins on systems sales to new customers resulting from a higher percentage of software products and professional services delivered with the new system contracts, primarily sales of the +Medic Vision system. 10 Cost of maintenance, forms and other services revenues increased by 39.3% from $11,318,000 for the three months ended September 30, 1995 to $15,768,000 for the three months ended September 30, 1996, due primarily to increased related revenues. Cost of maintenance, forms and other services revenues increased as a percentage of related revenues from 58.9% for the three months ended September 30, 1995 to 61.4% for the three months ended September 30, 1996, due primarily to the increase in FastBill sales as a percentage of maintenance, forms and other services revenues. FastBill has a relatively lower margin as compared to the gross margins on maintenance and FastClaim revenues. Primarily as a result of the factors described above, the total cost of net revenues remained relatively constant as a percentage of total net revenues at 60.6% for the three months ended September 30, 1995, compared to 60.7% for the three months ended September 30, 1996. Sales and Marketing Expenses Sales and marketing expenses increased by 15.1% from $3,921,000 for the three months ended September 30, 1995 to $4,512,000 for the three months ended September 30, 1996, primarily due to increased systems sales. Sales and marketing expenses decreased as a percentage of net revenues from 9.8% for the three months ended September 30, 1995 to 9.0% for the three months ended September 30, 1996, due primarily to increased systems sales per salesperson and lower systems sales as a percentage of total net revenues in 1996. Sales and marketing expenses for maintenance, forms and other services revenue, which are increasing as a percentage of total net revenues, are lower as a percentage of revenue than sales and marketing expenses for systems sales. Research and Development Research and development expenses increased by 16.1% from $2,242,000 for the three months ended September 30, 1995 to $2,602,000 for the three months ended September 30, 1996, due primarily to staff additions. Research and development expenses decreased as a percentage of net revenues from 5.6% for the three months ended September 30, 1995, compared to 5.2% for the three months ended September 30, 1996. The Company maintains a high level of investment into research and development activities primarily directed to developing new clinical products and enhancements to its practice management systems. The Company has not capitalized any research and development costs under Statement of Financial Accounting Standards No. 86 because the amounts that would be subject to capitalization have not been material. General and Administrative Expenses General and administrative expenses increased by 15.7% from $2,233,000 for the three months ended September 30, 1995, including $295,000 incurred in connection with the acquisition of National Medical Systems, to $2,584,000 for the three months ended September 30, 1996, due primarily to the overall Company growth. General and administrative expenses decreased as a percentage of net revenues from 5.6% for the three months ended September 30, 1995 to 5.2% for the three months ended September 30, 1996. Amortization Amortization of intangible assets decreased by 43.3% from $780,000 for the three months ended September 30, 1995 to $442,000 for the three months ended September 30, 1996, due primarily to a reduction in goodwill resulting from the November 1995 expiration of a non-competition agreement with Medic's former parent company. 11 Income from Operations Income from operations increased by 44.9% from $6,585,000 for the three months ended September 30, 1995 to $9,539,000 for the three months ended September 30, 1996, due to the increase in gross margin of $3,918,000 partially offset by increased operating expenses of $964,000. Income from operations increased as a percentage of net revenues from 16.5% for the three months ended September 30, 1995 to 19.1% for the three months ended September 30, 1996, due primarily to lower operating expenses as a percentage of net revenues as described above. Other Income Net interest income decreased from $625,000 for the three months ended September 30, 1995 to $481,000 for the three months ended September 30, 1996 primarily due to lower available yields on short-term investments and the higher percentage of such investments held in non-taxable securities. Provision for Income Taxes The Company's provision for income taxes in absolute terms increased by 39.4% from $2,823,000, or 39.2% of pretax income, for the three months ended September 30, 1995 to $3,934,000, or 39.3% of pretax income, for the three months ended September 30, 1996, due primarily to increased pretax income. The tax provision differs from the U.S. statutory federal income tax rate due primarily to state income taxes, tax credits for research and development, nondeductible amortization of intangible assets and tax-free interest income. See Note 5 of Notes to Consolidated Financial Statements. Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 Total Net Revenues Total net revenues increased by 26.1% from $109,480,000 during the nine months ended September 30, 1995 to $138,030,000 during the nine months ended September 30, 1996. Systems sales increased by 18.4% from $55,614,000 during the nine months ended September 30, 1995 to $65,861,000 during the nine months ended September 30, 1996. Systems sales to new customers increased by 30.9% from $31,183,000 during the nine months ended September 30, 1995 to $40,834,000 during the nine months ended September 30, 1996, and systems sales to existing customers for upgrades and add-ons increased by 2.4% from $24,431,000 in 1995 to $25,027,000 in 1996. The Company believes that because the general market for personal computers, networking hardware and peripheral equipment has been subject to increasingly competitive pricing, certain customers have elected to purchase these types of equipment from other sources. The Company believes that it still maintains and grows a strong add-on sales presence in the marketplace, and the Company focuses on providing strong after-sales support and higher value-added products to its customer base. Net revenues from maintenance, forms and other services revenues increased by 34.0% from $53,866,000 for the nine months ended September 30, 1995 to $72,169,000 for the nine months ended September 30, 1996. This increase was primarily the result of increases in hardware and software maintenance revenues of $7,007,000 and other increases in FastBill revenue of $7,975,000 and FastClaim revenue of $2,725,000. Cost of Revenues Cost of systems sales increased by 13.6% from $34,778,000 for the nine months ended September 30, 1995 to $39,513,000 for the nine months ended September 30, 1996, due primarily to increased systems sales. Cost of systems sales decreased as a percentage of related revenues from 62.5% for the nine months ended September 30, 1995 to 60.0% for the nine 12 months ended September 30, 1996, due primarily to more favorable margins on systems sales to new customers resulting from a higher percentage of software products and professional services delivered with the new system contracts. Cost of maintenance, forms and other services revenues increased by 40.4% from $31,071,000 for the nine months ended September 30, 1995 to $43,609,000 for the nine months ended September 30, 1996, due to increased related revenues. Cost of maintenance, forms and other services revenues increased as a percentage of related revenues from 57.7% for the nine months ended September 30, 1995, to 60.4% for the nine months ended September 30, 1996, due primarily to the increase in FastBill sales as a percentage of maintenance, forms and other services revenues. FastBill has a relatively lower margin as compared to margins on maintenance and FastClaim revenues. Primarily as a result of the factors described above, the total cost of net revenues remained relatively constant as a percentage of total net revenues at 60.1% for the nine months ended September 30, 1995 and 60.2% for the nine months ended September 30, 1996. Sales and Marketing Expenses Sales and marketing expenses increased by 21.0% from $10,669,000 for the nine months ended September 30, 1995 to $12,909,000 for the nine months ended September 30, 1996, primarily due to increased systems sales. Sales and marketing expenses decreased as a percentage of net revenues from 9.7% for the nine months ended September 30, 1995 to 9.4% for the nine months ended September 30, 1996, due primarily to increased systems sales per sales person and lower systems sales as a percentage of total net revenues in 1996. Sales and marketing expenses for maintenance, forms and other services revenue, which are increasing as a percentage of total net revenues, are lower as a percentage of revenue than sales and marketing expenses for systems sales. Research and Development Research and development costs increased by 24.7% from $5,928,000 for the nine months ended September 30, 1995 to $7,395,000 for the nine months ended September 30, 1996, due primarily to staff additions. Research and development expenses remained constant as a percentage of net revenues at 5.4% for the nine months ended September 30, 1995 and September 30, 1996. The Company remains committed to maintaining a high level of investment in research and development activities primarily directed to developing new clinical products and enhancements to its practice management systems. General and Administrative Expenses General and administrative expenses increased by 26.2% from $5,898,000 for the nine months ended September 30, 1995 to $7,446,000 for the nine months ended September 30, 1996, due primarily to the overall Company growth. Acquisition related expenses of $243,000 and $295,000 were expensed in 1996 in connection with the acquisition of CompuSystems and in 1995 in connection with the acquisition of National Medical Systems, respectively. General and administrative expenses remained constant as a percentage of net revenues at 5.4% for the nine months ended September 30, 1995 and September 30, 1996. Amortization Amortization of intangible assets decreased by 41.8% from $2,292,000 for the nine months ended September 30, 1995 to $1,334,000 for the nine months ended September 30, 1996, due primarily to a reduction in goodwill resulting from the November 1995 expiration of a non-competition agreement with Medic's former parent company. 13 Income from Operations Income from operations increased by 37.0% from $18,844,000 for the nine months ended September 30, 1995 to $25,824,000 for the nine months ended September 30, 1996, due to the increase in gross margin of $11,277,000 partially offset by increased operating expenses of $4,297,000. Income from operations increased as a percentage of net revenues from 17.2% for the nine months ended September 30, 1995 to 18.7% for the nine months ended September 30, 1996, due primarily to lower operating expenses as a percentage of net revenues as described above. Other Income Net interest income increased from $1,331,000 for the nine months ended September 30, 1995 to $1,599,000 for the nine months ended September 30, 1996, due primarily to increased invested cash primarily resulting from proceeds of the secondary stock offering completed in April 1995. Combined Actual and Pro Forma Provision for Income Taxes The Company's combined actual and pro forma provision for income taxes increased in absolute terms by 34.8% from $7,971,000, or 39.5% of pretax income, for the nine months ended September 30, 1995 to $10,743,000, or 39.2% of pretax income, for the nine months ended September 30, 1996, due primarily to increased pretax income. The decrease in the combined actual and pro forma income taxes as a percentage of pretax income was due primarily to the decrease in nondeductible amortization expense and by the increase in tax-free interest income as percentages of pretax income. The combined actual and pro forma tax provisions differ from the U.S. statutory federal income tax rate due primarily to state income taxes, nondeductible amortization of intangible assets and tax-free interest income. See Note 5 to Consolidated Financial Statements. Liquidity and Capital Resources The Company has funded its operations over the nine months ended September 30, 1996 through cash flow from operations, borrowings and from the net proceeds from the issuance of 1,700,000 shares of its Common Stock as part of a public offering in April 1995. At September 30, 1996, the Company had cash and cash equivalents equal to $38,375,000, short-term investments in the amount of $15,667,000 and a working capital position in the amount of $94,872,000. The Company currently has a $10,000,000 uncommitted line of credit with the Wachovia Bank of North Carolina, N.A. ("Bank"). At September 30, 1996, there were no borrowings outstanding under this line. The Company's balance of cash and cash equivalents decreased by 1.4% from $38,935,000 at December 31, 1995 to $38,375,000 at September 30, 1996, offset by a net increase in short-term investments of $4,206,000. During the nine months ended September 30, 1996, cash was provided from operating activities in the amount of $9,021,000 and used for purchases of fixed assets in the amount of $3,918,000. The Company's accounts receivable balance increased by 26.7% from $41,189,000 at December 31, 1995 to $52,187,000 at September 30, 1996, due primarily to the growth experienced by the Company in the quarter and the expanding nature of the customer base from predominantly small group medical practices to include larger, consolidated physician practices, hospital organizations, affiliated physician networks and managed services organizations. These larger customers have been extended longer 14 payment terms to more closely match the time required by their organizations to integrate the Company's practice management and clinical products throughout their organizations after installation. Inventories decreased 6.5% from $12,294,000 at December 31, 1995 to $11,489,000 at September 30, 1996. Prepaid expenses decreased by 9.9% from $6,190,000 at December 31, 1995 to $5,575,000 at September 30, 1996, due primarily to a usage of prepaid Informix licenses. Net property and equipment increased by 30.8% from $7,075,000 at December 31, 1995, to $9,257,000 at September 30, 1996, due primarily to the purchase of computer equipment to enhance the Company's internal information management systems and portable computers for sales demonstrations and customer field support. Accordingly, the Company's capital expenditures increased from $2,459,000 during the nine months ended September 30, 1995 to $3,918,000 during the nine months ended September 30, 1996. Current portion of long-term notes decreased due to the repayment of the mortgage on the CompuSystems facility in June 1996. Accounts payable increased by 36.2%, from $7,336,000 at December 31, 1995 to $9,995,000 at September 30, 1996, due primarily to payment negotiations with suppliers. Customer deposits and deferred maintenance revenue decreased by 31.9% from $13,396,000 at December 31, 1995 to $9,123,000 at September 30, 1996, due to decreased deferred maintenance billings of $4,082,000 primarily as a result of the timing of October 1996 maintenance billings and other deferred revenues of $468,000, offset by net increases in customer deposits of $278,000. Income taxes payable decreased by 42.1%, from $1,676,000 at December 31, 1995 to $970,000 at September 30, 1996, due primarily to the timing of quarterly estimated payments.. Accrued commissions increased by 32.0% from $1,604,000 at December 31, 1995 to $2,118,000 at September 30, 1996, due primarily to increased systems sales and to higher commissions accrued than paid out in the nine months ended September 30, 1996. Accrued compensation and related items increased by 36.3% from $3,963,000 at December 31, 1995 to $5,403,000 at September 30, 1996, due primarily to increases in accrued vacation, federal and state tax withholdings and voluntary employee stock purchase plan withholdings. These increases were partially offset by decreases resulting from payment of bonuses accrued at December 31, 1995 and a decrease in the accrued profit sharing balance due to the annual contribution made in September 1996. Other accrued expenses decreased by 4.7% from $3,075,000 at December 31, 1995 to $2,930,000 at September 30, 1996, due primarily to decreases in accrued legal and corporate expenses and the timing of payments related to local and state sales taxes. Long-term notes, less current portion, decreased because of the scheduled payments made on the note financing the prepaid Informix licenses. The Company believes that cash generated from operations, current cash and cash equivalents, and cash available under the revolving credit facility will be sufficient to meet its cash and capital requirements for the immediately foreseeable future. 15 From time to time, the Company has been contacted by or has made contact with third parties who represent potential strategic partners or acquisition candidates. Depending upon the cash requirements of a potential transaction, the Company may finance the transaction through its cash flow from operations or may raise additional funds by pursuing various financing vehicles such as additional bank financing or one or more additional public offerings or private placements of the Company's securities. However, there can be no assurance that any such transactions will occur, that the funds to finance any such acquisition will be available on reasonable terms or at all, or that the consummation of such transactions will not adversely affect the Company's cash balances and capital requirements. The Company believes that inflation has not had a significant impact on the Company's results of operations to date. 16 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: 11.1 Computations of Net Income per share of Common Stock 27.1 Financial Data Schedule (b) Reports on Form 8-K: On August 13, 1996, the registrant filed an amendment to its Current Report on Form 8-K in connection with the merger with CompuSystems, Inc. This amendment included the financial statements required by Item 7 thereof. 17 MEDIC COMPUTER SYSTEMS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDIC COMPUTER SYSTEMS, INC. DATED: November 12, 1996 /s/ LUANNE L. ROTH ---------------------------------- Luanne L. Roth Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 18 MEDIC COMPUTER SYSTEMS, INC. EXHIBIT INDEX
Exhibit No. Page No. 11.1 Computations of Net Income per share of Common Stock 21 27.1 Financial Data Schedule 22
19 EX-11 2 EXHIBIT 11.1 Exhibit 11.1 MEDIC COMPUTER SYSTEMS, INC. COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
Three Months Ended Nine Months Ended --------------------------------- ----------------------------------- September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Primary: Weighted average number of Common Shares outstanding 24,346,882 23,943,974 24,298,977 23,148,650 Common Stock equivalents assuming exercise of dilutive options, determined by the treasury stock method 468,998 569,256 488,017 587,766 ------------- ------------- ------------ ------------ Common Stock and equivalents 24,815,880 24,513,230 24,786,994 23,736,416 =========== =========== ============ ============ Pro forma net income $ 6,086,000 $ 4,387,000 $ 16,680,000 $ 12,204,000 ============ =========== ============ ============ Pro forma net income per Common Share $0.25 $0.18 $0.67 $0.51 ===== ===== ===== ===== Fully diluted: Weighted average number of Common Shares outstanding 24,346,882 23,943,974 24,298,977 23,148,650 Common Stock equivalents assuming exercise of dilutive options, determined by the treasury stock method 468,998 598,816 488,017 631,946 ----------- ----------- ------------ ------------ Common Stock and equivalents 24,815,880 24,542,790 24,786,994 23,780,596 =========== =========== ============ ============ Pro forma net income $ 6,086,000 $ 4,387,000 $ 16,680,000 $ 12,204,000 =========== =========== ============ ============ Pro forma net income per Common Share $ 0.25 $ 0.18 $ 0.67 $ 0.51 ====== ====== ====== ======
Notes: The calculation for pro forma fully diluted earnings per share has not been included with the Consolidated Statements of Operations as fully diluted earnings per share does not differ from primary earnings per share. 20 EX-27 3 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1995 SEP-30-1996 38,375 15,667 54,558 (2,371) 11,489 126,857 15,747 (6,490) 155,419 31,985 0 244 0 0 121,268 155,419 65,861 138,030 39,513 83,122 0 0 49 27,423 10,743 16,680 0 0 0 16,680 .67 .67
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