UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended August 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
MEDICUS SYSTEMS CORPORATION
--------------------------------------------
(Exact name of registrant as specified in its
charter)
Delaware 36-4056769
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Rotary Center, Suite 1111
Evanston, Illinois 60201 (847) 570-7500
------------------------------ ------------------
(Address of principal (Registrant's
executive offices) telephone No.)
Commission File Number 0-27614
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.
[X] Yes [ ] No
There were 6,472,420 shares of common stock outstanding
as of October 10, 1996.
PART I - FINANCIAL INFORMATION
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
August 31, May 31,
ASSETS 1996 1996
====== ------------ -----------
Current assets (Unaudited)
Cash and cash equivalents $ 969,813 $ 765,312
Short-term investments 6,641,088 7,705,380
Accounts receivable and
unbilled services,
net of allowance for
doubtful accounts
of $1,245,360 and
$1,222,463 8,490,782 9,664,422
Due from Managed Care
Solutions, Inc. 457,619 647,408
Inventories 200,066 235,398
Prepaid and deferred
income taxes 2,315,200 2,423,746
Prepaid expenses and other 728,931 709,394
------------ ------------
19,803,499 22,151,060
------------ ------------
Property and equipment, net
of accumulated
depreciation of
$3,027,006 and
$2,854,135 1,805,916 1,950,581
Software, net of
accumulated
amortization of
$3,095,591
and $2,900,540 3,369,500 3,051,387
Installment accounts
receivable due after
one year, net of
unearned interest
of $157,470
and $147,963 470,457 398,897
Deferred income taxes 157,799 227,635
------------ ------------
$ 25,607,171 $ 27,779,560
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
====================================
Current liabilities
Accounts payable $ 186,429 $ 188,777
Accrued compensation 107,158 828,857
Accrued restructuring
charge 1,140,663 1,527,461
Other accrued
liabilities 1,398,645 1,719,829
Deferred revenue 4,234,771 5,313,399
------------ ------------
7,067,666 9,578,323
------------ ------------
Stockholders' equity
Common stock $.01 par:
Authorized - 10,000,000
shares
Issued - 6,466,460
and 6,456,447 shares 64,664 64,564
Capital in excess of
par value 21,938,340 21,880,994
Treasury stock, at
cost - 7,002 shares (62,418) (62,418)
Unrealized loss on
short-term
investments (29,755) (18,361)
Accumulated deficit (3,371,326) (3,663,542)
------------ ------------
18,539,505 18,201,237
------------ ------------
$ 25,607,171 $ 27,779,560
============ ============
The accompanying notes are an integral
part of these statements.
<PAGE>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
-----------------------
August 31, August 31,
1996 1995
---- ----
Revenues
Software products and
services $ 1,788,961 $ 3,126,567
Maintenance and support
services 2,381,043 2,357,000
Contract services 2,523,592 2,997,642
----------- -----------
6,693,596 8,481,209
Costs and expenses
Software products and
services 480,726 1,056,173
Maintenance and support
services 853,937 1,501,646
Contract services 2,358,350 2,873,256
----------- -----------
3,693,013 5,431,075
Marketing, general and
administrative 2,031,692 2,133,615
Research and development 605,300 525,184
----------- -----------
6,330,005 8,089,874
----------- -----------
Operating income 363,591 391,335
Interest and other
income 120,094 160,053
----------- -----------
Income before income taxes 483,685 551,388
Income tax expense 191,469 211,361
----------- -----------
Net income $ 292,216 $ 340,027
=========== ===========
Earnings per share $ 0.05 $ 0.05
=========== ===========
Weighted average
common and common
equivalent shares
outstanding 6,473,252 6,447,251
=========== ===========
The accompanying notes are an integral
part of these statements.
<PAGE>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-------------------------
August 31, August 31,
1996 1995
---- ----
Cash flows from
operating activities
Net income $ 292,216 $ 340,027
Adjustments to reconcile
to net cash from
operating activities:
Depreciation of
property and
equipment 172,871 171,119
Amortization of
software 195,051 342,422
Deferred income
taxes 69,836 82,782
Accrued restructuring
charges (386,798) --
Changes in certain
current assets
and current liabilities:
Accounts receivable
and unbilled
services 1,181,846 (229,909)
Due from Managed
Care Solutions, Inc. 189,789 --
Inventories 35,332 13,937
Accounts payable (2,348) (307,148)
Accrued compensation (721,699) (255,016)
Deferred revenue (1,078,628) (848,469)
Other, net (295,903) 895,178
----------- -----------
(348,435) 204,923
----------- -----------
Cash flows from investing activities
Additions to property and
equipment (28,206) (90,908)
Additions to software (513,164) (530,013)
Proceeds from maturity of
short-term investments 1,597,157 1,125,000
Proceeds from sale of
short-term investments 10,888,023 4,600,000
Purchases of short-term
investments (11,440,114) (5,145,264)
----------- -----------
503,696 (41,185)
----------- -----------
Cash flows from financing activities
Sale of common stock 49,240 --
Purchase of treasury stock -- (532,500)
Reissuance of treasury stock -- 466,810
Dividends paid -- (191,626)
----------- -----------
49,240 (257,316)
----------- -----------
Net increase (decrease)
in cash and cash
equivalents 204,501 (93,578)
Cash and cash
equivalents, beginning
of period 765,312 2,556,016
Cash and cash ----------- -----------
equivalents, end
of period $ 969,813 $ 2,462,438
=========== ===========
The accompanying notes are an integral
part of these statements.
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation
Prior to March 1, 1996, the Company's
predecessor (the "Predecessor Corporation")
operated a software and related services
business and a small managed care business.
In February, 1996, the Predecessor
Corporation formed a new Delaware subsidiary,
Medicus Systems Software, Inc., to which it
transferred all of its assets and liabilities
excluding only the defined assets and
liabilities of its managed care business. In
turn, the stock of this newly-formed
subsidiary was distributed on a share-for-
share basis to the stockholders of the
Predecessor Corporation (the "Distribution"),
the name of the subsidiary was changed to
Medicus Systems Corporation ("the Company"),
and the name of the Predecessor Corporation
was changed to Managed Care Solutions, Inc.
("MCS"). The Company is liable for all
obligations of the Predecessor Corporation
except those specifically related to the
Predecessor Corporation's managed care
business.
Although the Company is, in substance,
the Predecessor Corporation's successor, the
financial statements of the Company for the
three months ended August 31, 1995 have been
prepared as if the Company had operated as a
free-standing entity for all the periods
presented (excluding certain incremental
corporate expenses that would have been
incurred had it operated on a stand-alone
basis). Accordingly, the financial
statements include those assets, liabilities,
revenues and expenses directly attributable
to the Company's operations and exclude those
specifically related to the managed care
business. The Company believes this
presentation most fairly represents its
financial condition, results of operations
and changes in stockholders' equity and cash
flows. The financial statements included
herein for periods prior to the Distribution
do not necessarily reflect what the financial
position and results of operations of the
Company would have been had it operated as a
stand-alone entity during the periods
covered, and may not be indicative of future
operations or financial position.
The Company and MCS signed a services
agreement, pursuant to which the Company (i)
will make available to MCS certain services,
including tax, accounting, data processing,
cash management, employee benefits,
monitoring, operational, supervisory,
insurance purchasing and claims
administration consulting services, and (ii)
provide certain financial services to MCS,
including analysis and advice regarding
potential financial transactions (including
but not limited to proposed issuances of debt
or equity securities, proposed merger or
asset acquisition or sale transactions and
dividend, stock split or similar
transactions), assistance in budget and
forecast preparation, relations with
financial analysts, financial press, and
investors, and crisis management and control.
Such services commenced on March 1, 1996, and
shall continue for one year. MCS will pay
the Company $700,000 for such services. In
order to compensate the Company for fixed
costs incurred in making such services
available, MCS will be obligated to pay such
fees whether or not it elects to utilize the
services. MCS will also reimburse the
Company for its out-of-pocket expenses in
connection therewith. The services agreement
also provides that the Company will not be
liable for any losses or damages suffered in
respect of services to be performed
thereunder, other than by reason of its
willful misconduct or gross negligence in
performing such services. Marketing, general
and administrative expenses were reduced by
$175,000 in the quarter ending August 31,
1996 as a result of this agreement.
In management's opinion, the financial
statements of the Company reflect all
adjustments (consisting only of normal
recurring adjustments) considered necessary
for a fair presentation of the operating results
for the quarters ended August 31, 1996 and 1995.
Certain reclassifications have been made in
the prior period financial statements to
conform to the current period presentation.
These reclassifications had no effect on
previously reported total assets, total
liabilities, equity or results of operations.
Operating results for the interim periods
are not necessarily indicative of the results
to be expected for the full year. The
financial information included herein should
be read in conjunction with the financial
statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for
the year ended May 31, 1996.
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
Note 2 - Earnings per share
Earnings per common share have been
computed by dividing net income by the
weighted average of common stock and common
stock equivalents outstanding during the
period. Common stock equivalents include
shares issuable on the exercise of stock
options and the warrant (when dilutive),
using the treasury method from the date of
grant.
Note 3 - Dividends
The Predecessor Company declared
quarterly dividends of $0.03 in the first
quarter of fiscal year 1996. The Board of
Directors of the Company has determined not
to pay dividends on the common stock in the
foreseeable future.
Note 4 - Accrued restructuring charge
During fiscal 1996, the Company recorded
a charge as a result of efforts to
restructure its businesses to focus on its
core products and services. The components
of the remaining restructuring reserve are as
follows:
August 31, May 31,
1996 1996
----------- -----------
Product line exit costs $ 210,375 $ 410,375
Severance (1 officer and
3 employees) 930,288 1,117,086
----------- -----------
$ 1,140,663 $ 1,527,461
=========== ===========
During the quarter ending August 31,
1996, the Company paid severance benefits of
$186,798. Also, the Company reduced its
reserve for continuing obligations on product
line exit costs by $200,000 as a result of
negotiations with its customers.
<PAGE>
MEDICUS SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's quarterly operating results
historically have varied depending upon such
factors as the timing of significant sales
and the timing of new product introductions.
Consequently, the results for any one quarter
may not be indicative of future operating
results.
RESULTS OF OPERATIONS
The following table sets forth for the
periods indicated (i) the percent of revenues
represented by certain line items in the
Company's Statements of Income and (ii) the
percentage change in each line item from the
prior year period.
Percent of Revenues
-------------------
Three Months Ended Percentage
------------------- Increase
Aug. 31, Aug. 31, (Decrease)
1996 1995 1995 to 1996
---- ---- ------------
Revenues
Software products and
services 27% 37% (43%)
Maintenance and support
services 35 28 1
Contract services 38 35 (16)
---- ----
100 100 (21)
---- ----
Costs and expenses
Software products and
services (1) 27 34 (54)
Maintenance and support
services (1) 36 64 (43)
Contract services (1) 93 96 (18)
---- ----
55 64 (32)
Marketing, general and
administrative 31 25 (5)
Research and
development 9 6 15
---- ----
95 95 (22)
---- ----
Operating income 5 5 (7)
Interest and other
income 2 2 (25)
---- ----
Income before income taxes 7 7 (12)
Income taxes 3 3 (9)
---- ----
Net income 4% 4% (14)
==== ====
_____________
(1) Shown as a percent of related revenues.
The Company's revenues are derived from
three sources: (1) license fees and the
related services for licensing the Company's
proprietary software products; (2)
maintenance and support services related to
such software products; and (3) contract
services.
<PAGE>
MEDICUS SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
(Continued)
Software products and services
Revenues decreased 43% to $1.8 million,
primarily due to the continued weakness in
the Company's primary markets and product
lines. Also contributing to the decline were
delays in the release of certain Windows-
based products and continued competition in
many markets. Costs and expenses decreased
54% compared to the corresponding prior year
period, and as a percentage of related
revenues, decreased to 27% from 34%. The
decrease resulted primarily due to lower
personnel and service-related expenses
associated with product lines discontinued
during the latter part of fiscal 1996 and
lower labor costs resulting from a reduction
in service-related personnel for continuing
product lines. Additionally, costs and
expenses include the effect of the Company's
decision to reduce its reserve for continuing
obligations on product line exit costs by
$200,000, as a result of negotiations with
its customers.
Maintenance and support services
Revenues increased 1% to $2.4 million,
primarily due to the larger base of licensed
products and modest price increases,
partially offset by the loss of maintenance
revenue from product lines which were
discontinued during the latter part of fiscal
1996. Costs and expenses decreased 43%
compared to the corresponding prior year
period, and as a percentage of related
revenues, decreased to 36% from 64%,
primarily due to lower labor and operating
costs associated with product lines that were
discontinued in the third and fourth quarters
of fiscal 1996. Also, the decrease reflected
lower labor costs resulting from personnel
shifts to development activities from
maintenance and support services.
Contract services
Revenues decreased 16% to $2.5 million,
primarily due to lower revenues from the
contract to manage the information systems
functions at Bethesda, Inc. in Cincinnati,
Ohio. Additionally, the prior year period
includes revenues from the Drake Center
contract, which expired in February, 1996.
Costs and expenses decreased 18% compared to
the corresponding prior year period, and as a
percentage of related revenues, decreased to
93% from 96%, primarily reflecting the
decreased expenses associated with the
Bethesda, Inc. contract and the elimination
of expenses associated with the Drake Center
contract.
Marketing, general and administrative
Expenses decreased 5% to $2.0 million.
Costs and expenses in the quarter ending
August 31, 1996 include the effect of
$175,000 in administrative fees the Company
received as a result of the services
agreement with MCS.
<PAGE>
MEDICUS SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
(Continued)
Research and development
Actual research and development expenses
decreased 5% to $1.1 million for the quarter.
Research and development costs presented in
the accompanying financial statements were
$605,000 compared to $525,000 in the
corresponding prior year period. The Company
did not obtain funding from clients under
development service agreements during the
quarter ending August 31, 1996, compared to
$172,000 obtained in the corresponding prior
year period, for its research and development
efforts. These development service
agreements provide for retention of ownership of
the products developed by the Company and for
payment of royalties of up to 5% of future
license fees to the clients. The Company also
capitalized software development costs of
$471,000 compared to $441,000 in the
corresponding prior year period, reflecting
increased investment in the development of
new products and significantly enhanced
functionality of current products. Actual
research and development expenditures were
60% of software products and services
revenues compared to 37% in the corresponding
prior year period.
During the first quarter of fiscal 1997, the
Company's development efforts were focused on
the Resource Case Management System, and the
Decision Support Systems product line.
During the first three months of fiscal 1996,
the Company was engaged in several
development projects, including the Resource
Case Management System, and the Medicus
Architecture (MACH 1).
Interest and other income
Interest and other income decreased 25%
to $120,000, primarily due to lower average
cash balances during the quarter ending
August 31, 1996.
Income taxes
The Company's effective tax rate was
39.6% compared to 38.3% in the corresponding
prior period. The Company plans to utilize
net tax operating losses carried forward from
the prior year to the extent it has taxable
income in the current year.
FINANCIAL CONDITION
Working capital generated by operations
increased $163,000 during the quarter. The
Company currently has no long-term debt, and,
as of August 31, 1996, the Company held
approximately $1.0 million in cash and cash
equivalents and $6.6 million in short-term
investments.
As a result of management's commitment to
expand products and services, the Company
continually evaluates for acquisition various
businesses and products complementary to its
current operations. The Company expects to
finance any such investments through cash on
hand, cash generated from operations and the
issuance of additional shares of common
stock.
The Company's current commitments consist
primarily of lease obligations for office
space. The Company believes that its capital
resources are sufficient to meet its
obligations incurred in the normal course of
business for at least the next twelve months.
<PAGE>
PART II - OTHER INFORMATION
MEDICUS SYSTEMS CORPORATION
Item 4. Submission of Matters to a Vote of Security
Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company did not file any reports
on Form 8-K during the quarter.
<PAGE>
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.
MEDICUS SYSTEMS CORPORATION
---------------------------
(Registrant)
October 14, 1996 /s/ Patrick C. Sommers
- ---------------- -----------------------
Patrick C. Sommers
President
(Chief Executive Officer)
October 14, 1996 /s/ William W. Cowan
- ---------------- ---------------------
William W. Cowan
Vice President
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the Company's Form 10-Q for the quarterly
period ended August 31, 1996, and is qualified in its
entirety by reference to such document.
</LEGEND>
<S> <C>
<CURRENCY> U.S. DOLLARS
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 969,813
<SECURITIES> 6,641,088
<RECEIVABLES> 10,193,761
<ALLOWANCES> 1,245,360
<INVENTORY> 200,066
<CURRENT-ASSETS> 19,803,499
<PP&E> 4,832,922
<DEPRECIATION> 3,027,006
<TOTAL-ASSETS> 25,607,171
<CURRENT-LIABILITIES> 7,067,666
<BONDS> 0
0
0
<COMMON> 64,664
<OTHER-SE> 18,474,841
<TOTAL-LIABILITY-AND-EQUITY> 25,607,171
<SALES> 6,693,596
<TOTAL-REVENUES> 6,693,596
<CGS> 0
<TOTAL-COSTS> 3,693,013
<OTHER-EXPENSES> 605,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 483,685
<INCOME-TAX> 191,469
<INCOME-CONTINUING> 292,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292,216
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
