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 February 28, 1997
----------------------------------
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 Identification No.)
incorporation or organization)
One Rotary Center, Suite 1111,
Evanston, Illinois 60201 (847) 570-7500
(Address of principal executive offices) (Registrant's telephone number)
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 5,923,963 shares of common stock outstanding as of April 14, 1997.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
February 28, May 31,
ASSETS 1997 1996
- ------ ----------- ----------
Current assets (Unaudited)
Cash and cash equivalents $ 975,354 $ 765,312
Short-term investments 4,985,814 7,705,380
Accounts receivable and unbilled
services, net of allowance for
doubtful accounts of $1,851,981 and
$1,222,463 13,841,487 9,664,422
Due from Managed Care Solutions, Inc. - 647,408
Inventories 248,978 235,398
Prepaid and deferred income taxes 1,826,255 2,423,746
Prepaid expenses and other 182,614 709,394
----------- ----------
22,060,502 22,151,060
----------- ----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF $3,382,007 AND $2,854,135 1,960,907 1,950,581
SOFTWARE, NET OF ACCUMULATED AMORTIZATION OF
$3,414,302 AND $2,900,540 4,069,363 3,051,387
INSTALLMENT ACCOUNTS RECEIVABLE DUE AFTER ONE
YEAR, NET OF UNEARNED INTEREST OF $134,426
AND $147,963 508,230 398,897
DEFERRED INCOME TAXES 2,175,600 227,635
----------- ----------
$ 30,774,602 $ 27,779,560
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,222,609 $ 188,777
Accrued compensation 186,454 828,857
Accrued restructuring charge 2,495,080 1,527,461
Other accrued liabilities 1,200,275 1,719,829
Stock repurchase 1,690,042 -
Deferred revenue 9,081,414 5,313,399
----------- -----------
15,875,874 9,578,323
STOCKHOLDERS' EQUITY
Common stock $.01 par:
Authorized - 10,000,000 shares
Issued - 6,480,257 and 6,456,447 shares 64,803 64,564
Capital in excess of par value 22,020,333 21,880,994
Treasury stock, at cost - 7,002 and
7,002 shares (62,418) (62,418)
Unrealized loss on short-term investments (34,001) (18,361)
Accumulated deficit (7,089,989) (3,663,542)
------------ ------------
14,898,728 18,201,237
------------ ------------
$ 30,774,602 $ 27,779,560
============ ============
The accompanying notes are an integral part of these statements.
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-----------------------------------------
February 28, February 29,
1997 1996
Revenues
Software products and services $ 1,688,369 $ 1,870,379
Maintenance and support services 2,364,967 2,392,662
Contract services 2,517,375 2,764,489
------------ -----------
6,570,711 7,027,530
Costs and expenses
Software products and services 800,958 840,536
Maintenance and support services 1,623,455 920,175
Contract services 2,409,277 2,571,391
------------ -----------
4,833,690 4,332,102
Marketing, general and administrative 3,137,812 2,286,954
Research and development 385,069 244,689
Restructuring charges 2,800,391 1,569,240
Stock repurchase 1,690,042 -
------------ -----------
12,847,004 8,432,985
------------ -----------
Operating loss (6,276,293) (1,405,455)
Interest and other income 79,423 134,089
------------ -----------
Loss before income taxes (6,196,870) (1,271,366)
Income tax benefit (2,266,633) (489,476)
------------
Net loss $ (3,930,237) $ (781,890)
============ ===========
Loss per share
$ (0.60) $ (0.12)
============ ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,503,346 6,445,826
============ ===========
The accompanying notes are an integral part of these statements.
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
--------------------------------------------
February 28, February 29,
1997 1996
Revenues
Software products and services $ 5,723,413 $ 7,931,847
Maintenance and support services 7,622,754 7,216,599
Contract services 7,620,067 8,521,576
------------ ------------
20,966,234 23,670,022
Costs and expenses
Software products and services 1,981,232 2,848,080
Maintenance and support services 3,863,542 4,098,843
Contract services 7,192,546 8,036,250
------------ ------------
13,037,320 14,983,173
Marketing, general and
administrative 7,401,705 6,847,882
Research and development 1,766,009 1,166,425
Restructuring charges 2,800,391 1,569,240
Stock repurchase 1,690,042 -
------------ ------------
26,695,467 24,566,720
------------ ------------
Operating loss (5,729,233) (896,698)
Interest and other income 354,820 455,659
------------ ------------
Loss before income taxes (5,374,413) (441,039)
Income tax benefit (1,947,966) (187,266)
------------ ------------
Net loss $ (3,426,447) $ (253,773)
============ ============
LOSS PER SHARE $ (0.53) $ (0.04)
============ ============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 6,491,196 6,463,491
============ ============
The accompanying notes are an integral part of these statements.
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
------------------------------------------
February 28, February 29,
1997 1996
Cash flows from operating activities
Net loss $ (3,426,447) $ (253,773)
Adjustments to reconcile to net cash
flows from operating activities:
Depreciation of property and
equipment 527,872 504,790
Amortization of software 513,762 937,167
Deferred income taxes (1,947,965) 30,322
Accrued restructuring charge 1,694,445 1,208,445
Stock repurchase 1,690,042 -
Provision for doubtful accounts 368,361 214,920
Changes in certain current assets and
current liabilities:
Accounts receivable and unbilled
services (4,982,368) (2,153,077)
Due from Managed Care
Solutions, Inc. 647,408 (1,370,562)
Prepaid income taxes 597,491 -
Accounts payable and other accrued
liabilities 514,278 (509,420)
Accrued compensation (642,403) (474,956)
Deferred revenue 3,768,015 1,452,561
Other, net 414,624 (118,215)
-------------- --------------
(262,885) (531,798)
-------------- --------------
Cash flows from investing activities
Additions to property and equipment (538,198) (506,624)
Additions to software (1,808,564) (1,722,785)
Proceeds from maturity of short-term
investments 4,784,361 4,033,377
Proceeds from sale of short-term
investments 79,688,023 38,800,000
Purchases of short-term investments (81,779,215) (41,386,664)
------------ ------------
346,407 (782,696)
------------ ------------
Cash flows from financing activities
Sale of common stock 126,520 -
Cash infusion to Managed Care
Solutions, Inc. - (250,000)
126,520 (250,000)
------------- ------------
Net increase (decrease) in cash and
cash equivalents 210,042 (1,564,494)
Cash and cash equivalents, beginning
of period 765,312 2,556,016
Cash allocated to Managed Care
Solutions, Inc. - (346,111)
------------ ------------
Cash and cash equivalents, end of
period $ 975,354 $ 645,411
============= ============
The accompanying notes are an integral part of these statements.
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 connection with a series of transactions which
occurred on March 1, 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 quarter and nine
months ended February 29, 1996 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) made 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) provided certain financial services to MCS, including analysis and
advice regarding potential financial transactions (including but not limited to
proposed issuance 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 continued for one year.
MCS paid the Company $700,000 for such services. In order to compensate the
Company for fixed costs incurred in making such services available, MCS paid
such fees whether or not it elected to utilize the services. MCS also reimbursed
the Company for its out-of-pocket expenses in connection therewith. The services
agreement also provided that the Company would 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 and $525,000 in the nine months ended February 28, 1997
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 quarter and
nine months ended February 28, 1997. 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.
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 Corporation declared quarterly dividends of $0.03 in the
first three quarters 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 - RESTRUCTURING CHARGES
During the third quarter of fiscal 1996, the Company commenced a process to
evaluate its strategic position, including the markets it will pursue and
product offerings in those chosen markets. As a result of decisions made in the
quarter ended February 29, 1996, the Company began a plan resulting in the
recording of approximately $1.6 million in charges to exit certain product lines
and abandon certain development efforts. Specifically, the Company decided to
exit the Executive Information Systems product line, recording charges to write
down related customer accounts and accrue future costs to provide maintenance
associated with existing contractual obligations. In addition, product
development efforts for the Optimizer project and portions of the MACH 1
project, which will no longer be utilized in the Medicus product line, were
abandoned and their associated development costs, which had been previously
capitalized, were expensed. During the fourth quarter of fiscal year 1996, the
Company continued the process resulting in additional charges of $3.1 million.
As part of an ongoing evaluation, the Company refined its strategic planning
process during fiscal 1997, and assessed continuing obligations associated with
the implementation of the plan. The Company continued the process of
implementing its plans during 1997 and, following the stock repurchase from its
founder in the quarter ended February 28, 1997, recorded $2.8 million in charges
to complete its plan, including accruing future costs to reorganize the
Company's business units, to abandon certain development efforts, and to
increase the allowance for doubtful accounts. Specifically, the Company decided
to relocate operations for its Clinical Data Systems ("CDS") division, based in
Alameda, CA, to the Company's Evanston, IL corporate offices. Costs associated
with the relocation, which is expected to be completed during the next twelve
months, included costs to cancel existing lease agreements, to terminate
employees and to write down abandoned assets. In addition, the Company increased
its reserves for product line exit costs and severance costs that relate to the
remaining customer of the previously discontinued Clinical Case Management
Systems ("CCM") product line. Also, certain product development efforts for the
Company's Patient Focused Systems ("PFS") products were abandoned, and the
associated development costs, which had been previously capitalized, along with
other related product line exit costs were expensed. The Company has increased
its allowance for doubtful accounts due to the potential for certain additional
billed and unbilled accounts to become uncollectible as a result of the
decisions discussed above.
The restructuring charges included in the Statements of Operations for the
quarter and nine months ended February 28, 1997 and February 29, 1996,
respectively, were comprised of the following items:
February 28, February 29,
1997 1996
------------ ------------
Product line exit costs $ 798,000 $ 360,793
Business unit reorganization costs 705,697 -
Employee termination and severance costs 569,868 -
Accounts receivable reserves 450,000 471,835
Capitalized software write-downs 276,826 736,612
------------ ------------
$ 2,800,391 $ 1,569,240
============ ============
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
NOTE 4 - RESTRUCTURING CHARGES, CONTINUED
At May 31, 1996, restructuring liabilities in the Balance Sheet aggregated
$1,527,461. During the quarter ended February 28, 1997, the Company increased
its reserve for future employee termination and severance costs and product line
exits costs by $569,868 and $798,000, respectively, primarily due to the
Company's decision to relocate its CDS division and increase its CCM product
line reserve, and paid $249,290 and $210,375 in severance benefits and product
line exit costs, respectively. The Company also recorded a $705,697 charge for
business unit reorganization costs associated with the relocation. The Company
did not accrue estimated incremental costs of approximately $1.1 million
associated with the relocation. Such costs relate to the orderly transition of
the division, will be incurred during the next twelve months and are not
accruable under Generally Accepted Accounting Principles.
During the nine months ended February 28, 1997, the Company increased its
reserve for future employee termination and severance costs and product line
exits costs by $569,868 and $798,000, respectively, primarily due to the
Company's decision to relocate its CDS division and increase its CCM product
line reserve. The Company also reduced its reserve for future severance
obligations and continuing obligations on product line exit costs by $124,716
and $200,000, respectively, as a result of favorable settlements with two of its
employees and negotiations with its customers, and paid $570,855 and $210,375 in
severance benefits and product line exit costs, respectively.
The components of the restructuring reserve at February 28, 1997, which the
Company expects will be paid during the next twelve months, and at May 31, 1996
are as follows:
February 28, May 31,
1997 1996
------------ -------------
Product line exit costs $ 798,000 $ 410,375
Business unit reorganization costs 705,697 -
Employee termination and severance costs 991,383 1,117,086
------------ -------------
$ 2,495,080 $ 1,527,461
============ =============
NOTE 5 - STOCK REPURCHASE
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek
one million shares of Common Stock and 500 shares of Voting Preferred Stock.
Also, Mr. Jelinek agreed to resign as Chairman and agreed not to attempt to seek
voting control of the Company for a period of five years. (Mr. Jelinek will
continue to serve as a Director.) In exchange, the Company agreed to pay Mr.
Jelinek $4.5 million in cash and $2.0 million in 8% two-year promissory notes,
and will issue to Mr. Jelinek 400,000 warrants to purchase Common Stock at $8.00
per share. The Company's Board of Directors approved the Agreement on January 2,
1997, and the Company's stockholders approved the Agreement at the Annual
Meeting of Stockholders on March 19, 1997.
The Company's results of operations for the quarter and nine months ended
February 28, 1997 include $1,690,042 in related costs and expenses, as a result
of the Agreement. Amounts in excess of the fair value of the Common Stock and
the exercise price of the Voting Preferred Stock, aggregating $1,319,000, have
been expensed as these amounts are attributable to the control represented by
the stock being acquired and are not expected to benefit the Company's future
operations. Also included are $371,042 in outside professional fees incurred to
consummate the Agreement. The Company recorded the charge in the quarter ended
February 28, 1997, even though consummation did not occur until March 19, 1997,
because, prior to February 28, 1997, it controlled enough votes through the
Board of Directors and the receipt of irrevocable proxies to ensure approval of
the Agreement at the Annual Meeting of Stockholders.
NOTE 6 - SUBSEQUENT EVENT
In April 1997, the Company entered into an agreement with a bank that
provides for a secured, revolving line of credit up to a maximum of $2.5
million. The credit facility, which has an initial maturity date of October
1998, bears interest at the bank's prime rate and provides the bank with a first
security interest in all assets of the Company. Certain financial covenants and
reporting requirements are also included in the agreement.
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
MEDICUS SYSTEMS CORPORATION
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.
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.
<TABLE>
<CAPTION>
Percent of Revenues Percentage Percent of Revenues Percentage
Three Months Ended Increase Nine Months Ended Increase
Feb. 28, Feb. 29, (Decrease) Feb. 28, Feb. 29, (Decrease)
1997 1996 1996 to 1997 1997 1996 1996 to 1997
<S> <C> <C> <C> <C> <C> <C>
Revenues
Software products and services 26% 27% (10)% 27% 34% (28)%
Maintenance and support services 36 34 (1) 37 30 6
Contract services 38 39 (9) 36 36 (11)
--- --- --- --- ---
100 100 (7) 100 100 (11)
--- --- --- --- ---
Costs and expenses
Software products and services<F1> 47 45 (5) 35 36 (30)
Maintenance and support services<F1> 69 38 76 51 57 (6)
Contract services<F1> 96 93 (6) 94 94 (11)
---- --- --- ---
73 62 12 62 63 (13)
Marketing, general and administrative
48 33 37 35 29 8
Research and development 6 3 57 9 5 51
Restructuring charges 42 22 78 13 7 78
Stock repurchase 26 - N/M 8 - N/M
--- --- --- ---
195 120 52 127 104 9
--- ---
Operating loss (95) (20) N/M (27) (4) N/M
Interest and other income 1 2 (41) 2 2 (22)
--- --- --- --- ---
Loss before income taxes (94) (18) N/M (25) (2) N/M
Income taxes (34) (7) N/M (9) (1) N/M
--- --- --- ---
Net loss (60)% (11)% N/M (16)% (1)% N/M
=== === === ===
<FN>
-------------
<F1> Shown as a percent of related revenues.
</TABLE>
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.
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS, Continued
SOFTWARE PRODUCTS AND SERVICES
Revenues decreased 10% to $1.7 million for the quarter and 28% to $5.7
million for the nine months, primarily due to the continued weakness in the
Company's primary markets and product lines as a result of delays in the release
of certain Windows-based products and continued competition in many markets.
Costs and expenses for the quarter and nine months decreased 5% and 30%,
respectively, compared to the corresponding prior year periods, and as a
percentage of related revenues, increased to 47 % from 45% for the quarter but
decreased to 35% from 36% for the nine months. The decrease resulted primarily
from 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 for the nine months 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 favorable negotiations with
its customers, and to reduce its reserve for future severance obligations by
$25,000, due to a favorable settlement with one of its employees.
MAINTENANCE AND SUPPORT SERVICES
Revenues decreased 1% to $2.4 million for the quarter but increased 6% to
$7.6 million for the nine months, 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 increased 76% for the quarter but decreased 6%
for the nine months, compared to the corresponding prior year periods, and as a
percentage of related revenues, increased to 69% from 38% for the quarter but
decreased to 51% from 57% for the nine months. Costs increased for the quarter
primarily due to additional labor costs incurred to support new product releases
from the Clinical Data Systems and Patient Focused Systems divisions and charges
to record cancellations identified during the annual maintenance and support
billing process. The decrease in total costs for the nine months resulted
primarily from 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 9% to $2.5 million for the quarter and 11% to $7.6 million
for the nine months, 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 for the quarter
and nine months decreased 6% and 11%, respectively, compared to the
corresponding prior year periods, and as a percentage of related revenues,
increased to 96% from 93% for the quarter but remained consistent at 94% for the
nine months, primarily reflecting a corresponding decrease in expenses
associated with the Bethesda, Inc. contract and the elimination of expenses
associated with the Drake Center contract.
MARKETING, GENERAL AND ADMINISTRATIVE
Expenses increased 37% to $3.1 million for the quarter and 8% to $7.4 million
for the nine months. The increase reflected accruals and direct expenses
recorded in the third quarter of fiscal 1997 for additional taxes arising from
audits of prior year returns, increased recruiting fees associated with the
hiring of new sales and development personnel, higher marketing costs to support
new product introductions, increased professional fees incurred for tax and
legal services, and higher labor and employee benefit costs associated with the
filling of budgeted corporate and executive positions. Costs and expenses for
the quarter and nine months ended February 28, 1997 also include the effect of
$175,000 and $525,000, respectively, in administrative fees the Company received
as a result of the services agreement with MCS.
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS, Continued
RESEARCH AND DEVELOPMENT
Actual research and development expenses increased 22% to $1.2 million for
the quarter and 9% to $3.5 million for the nine months. Research and development
costs presented in the accompanying financial statements for the quarter and
nine months were $385,000 and $1,766,000, respectively, compared to $245,000 and
$1,166,000 in the corresponding prior year periods. The Company did not obtain
funding from clients under development service agreements during the quarter and
nine months ended February 28, 1997, compared to $158,000 and $470,000 obtained
in the corresponding prior year periods, for its research and development
efforts. These development service agreements provided 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 $829,000 and $1,776,000 during the quarter and
nine months, respectively, compared to $580,000 and $1,508,000 in the
corresponding prior year periods, reflecting increased investment in the
development of new products and significantly enhanced functionality of current
products. Actual research and development expenditures were 72% and 62% of
software products and services revenues for the quarter and nine months,
respectively, compared to 53% and 40% in the corresponding prior year periods.
During the first nine months of fiscal 1997, the Company's development
efforts were focused on the Resource Case Management System, and the Clinical
Data Systems and Decision Support Systems product lines. During the first nine
months of fiscal 1996, the Company was engaged in several development projects,
including the Resource Case Management System, Medicus Architecture (MACH 1) and
the Decision Support Systems product lines.
RESTRUCTURING CHARGES
As part of an ongoing evaluation, the Company refined its strategic planning
process during fiscal 1997, and assessed continuing obligations associated with
the implementation of the plan. As a result of decisions made in the quarter
ended February 28, 1997, and following the stock repurchase from its founder,
$2.8 million in charges were recorded for future costs to reorganize the
Company's business units, to provide for additional costs, to exit discontinued
product lines, to abandon certain development efforts, and to increase the
allowance for doubtful accounts. Specifically, the Company decided to relocate
operations for its Clinical Data Systems division, based in Alameda, CA, to the
Company's Evanston, IL corporate offices. Costs associated with the relocation,
which is expected to be completed during the next twelve months, included costs
to cancel existing lease agreements, to terminate employees and to write down
abandoned assets. In addition, the Company increased its reserves for product
line exit costs and severance costs that relate to the remaining customer of the
discontinued Clinical Case Management Systems product line. Also, certain
product development efforts for the Company's Patient Focused Systems products
were abandoned, and the associated development costs, which had been previously
capitalized, along with other related product line exit costs were expensed.
During the third quarter of fiscal 1996, the Company commenced a process to
evaluate its strategic position, including the markets it will pursue and
product offerings in those chosen markets. As a result of decisions made in the
quarter ended February 29, 1996, approximately $1.6 million in charges were
recorded to exit certain product lines and abandon certain development efforts.
Specifically, the Company decided to exit the Executive Information Systems
product line, recording charges to write down related customer accounts and
accrue future costs to provide maintenance associated with existing contractual
obligations. In addition, product development efforts for the Optimizer project
and portions of the MACH 1 project, which will no longer be utilized in the
Medicus product line, were abandoned and their associated development costs,
which had been previously capitalized, were expensed.
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS, Continued
STOCK REPURCHASE
On December 5, 1996, the Company reached an agreement in principle (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek
one million shares of Common Stock and 500 shares of Voting Preferred Stock.
Also, Mr. Jelinek agreed to resign as Chairman and agreed not to attempt to seek
voting control of the Company for a period of five years. In exchange, the
Company agreed to pay Mr. Jelinek $4.5 million in cash and $2.0 million in 8%
two-year promissory notes, and will issue to Mr. Jelinek 400,000 warrants to
purchase Common Stock at $8.00 per share.
The Company's results of operations for the quarter and nine months ended
February 28, 1997 include $1,690,042 in related costs and expenses, as a result
of the Agreement. Amounts in excess of the fair value of the Common Stock and
the exercise price of the Voting Preferred Stock, aggregating $1,319,000, have
been expensed as these amounts are attributable to the control represented by
the stock being acquired and are not expected to benefit the Company's future
operations. Also included are $371,042 in outside professional fees incurred to
consummate the Agreement. The Company recorded the charge in the quarter ended
February 28, 1997, even though consummation did not occur until March 19, 1997,
because, prior to February 28, 1997, it controlled enough votes through the
Board of Directors and the receipt of irrevocable proxies to ensure approval of
the Agreement at the Annual Meeting of Stockholders.
INTEREST AND OTHER INCOME
Interest and other income decreased 41% to $79,000 for the quarter and 22% to
$355,000 for the nine months, primarily due to lower average cash and investment
balances.
INCOME TAXES
The Company's effective tax rate was 36.6% for the quarter and 36.2% for the
nine months, compared to 38.5% and 42.5% for the corresponding prior year
periods. The effective tax rates and resulting benefits decreased in the current
year primarily due to the nondeductibility of certain expenses related to the
stock repurchase.
FINANCIAL CONDITION
As of February 28, 1997, the Company had no long-term debt and held
approximately $975,000 in cash and cash equivalents and $5.0 million in
short-term investments. In addition, the Company has a $2.5 million standby
credit facility available.
The Company's current commitments consist primarily of lease obligations for
office space. During the fourth quarter of fiscal year 1997, the Company will
pay to its founder, Richard C. Jelinek, $4.5 million in cash and $2.0 million in
8% two-year promissory notes, and will issue 400,000 warrants to purchase Common
Stock at $8.00 per share, resulting from an agreement (the "Agreement") to
purchase from Mr. Jelinek one million shares of Common Stock and 500 shares of
Voting Preferred Stock. The Company will also pay $371,000 in outside
professional fees incurred to consummate the Agreement.
In addition, the Company anticipates cash outlays of approximately $3.2
million during the next twelve months, resulting primarily from its decision to
reorganize its business units and to exit certain product lines. Of this total,
approximately $2.1 million was expensed as part of the restructuring charge. The
remainder will be expensed as incurred during the next twelve months.
The Company believes that it has sufficient financial resources to meet these
obligations and its ordinary capital needs for the foreseeable future.
PART II - OTHER INFORMATION
Item 5. Other Information.
On March 19, 1997, the Company announced that its stockholders approved the
repurchase of one million shares of Common Stock and 500 shares of Voting
Preferred Stock from its founder, Richard C. Jelinek. In addition, the Company
announced that Patrick C. Sommers, Chief Executive Officer, was elected as
Chairman of the Board of Directors. A copy of the announcement is filed as an
exhibit and listed in the Exhibit Index below.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Press Release Announcing New Chairman and Completion of Stock
Repurchase
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter.
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)
April 14, 1997 /s/ Patrick C. Sommers
- --------------------------- --------------------------------------
Patrick C. Sommers
President
(Chief Executive Officer)
April 14, 1997 /s/ Daniel P. DiCaro
- --------------------------- -------------------------------------
Daniel P. DiCaro
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 February 28, 1997, 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> Dec-01-1996
<PERIOD-END> Feb-28-1997
<EXCHANGE-RATE> 1
<CASH> 975,354
<SECURITIES> 4,985,814
<RECEIVABLES> 15,693,468
<ALLOWANCES> 1,851,981
<INVENTORY> 248,978
<CURRENT-ASSETS> 22,060,502
<PP&E> 5,342,914
<DEPRECIATION> 3,382,007
<TOTAL-ASSETS> 30,774,602
<CURRENT-LIABILITIES> 15,875,874
<BONDS> 0
0
0
<COMMON> 64,803
<OTHER-SE> 14,898,728
<TOTAL-LIABILITY-AND-EQUITY> 30,774,602
<SALES> 6,570,711
<TOTAL-REVENUES> 6,570,711
<CGS> 0
<TOTAL-COSTS> 4,833,690
<OTHER-EXPENSES> 385,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,196,870)
<INCOME-TAX> (2,266,633)
<INCOME-CONTINUING> (3,930,237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,930,237)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
MEDICUS SYSTEMS CORPORATION
EXHIBIT 99 - ADDITIONAL EXHIBITS
For Immediate Release
Press Release - Medicus Systems Corporation
Contact: Lon Gruen
Medicus Systems Corporation
(847) 570-7500
MEDICUS SYSTEMS CORPORATION ANNOUNCES NEW CHAIRMAN AND
COMPLETION OF STOCK REPURCHASE
EVANSTON, Ill., March 19, 1997 -- Medicus Systems Corporation (NASDAQ:MECS), a
leading provider of healthcare decision support systems and related services,
held its annual shareholder meeting today and announced the following:
Patrick C. Sommers has been elected as Chairman of its Board of Directors. Mr.
Sommers, who will remain as CEO of the company, replaces the founder, Richard C.
Jelinek, Ph.D.
The Company has completed the shareholder approved repurchase of one million
shares of Common Stock and 500 shares of Voting Preferred Stock from Dr. Jelinek
who has stepped down as Chairman of the Company, but will remain a director. The
repurchased stock, including approximately 15.6% of the outstanding common
shares and 100% of the authorized Voting Preferred, will be retired. The Company
paid Dr. Jelinek an aggregate purchase price of $4,500,000 in cash, $2,000,000
in two year notes, and 400,000 warrants to purchase common stock exercisable at
$8.00 per share. The Company expects the action to have a positive impact on
future earnings per share. This transaction allows the Company to continue with
its newly-revised strategic plans and eliminates Dr. Jelinek's "super vote."
The Company also elected its Board of Directors, which in addition to Mr.
Sommers and Dr. Jelinek includes :
Mr. William G. Brown, a partner of Bell, Boyd and Lloyd, Chicago, Illinois. Mr.
Brown is counsel to he Company and has been Secretary and a Director since 1984.
Mr. Brown is also a director of MYR Group, Inc., Dovenmuehle Mortgage, Inc. ,
and CFC International.
John E. M. Jacoby, Executive Vice President, Chief Financial Officer and member
of the Board of Directors of Stephens Group, Inc., an affiliate of Stephens,
Inc. Mr. Jacoby has been a director of the company since 1991 and is also a
director of American Classic Voyages, Co., St. Vincent infirmary Medical Center,
Delta and Pine Land Company, and Beverly Enterprises, Inc.
Risa Lavizzo-Mourey, the Sylvan Eisman Professor of Medicine and Health Care
systems at the University of Pennsylvania. Dr. Lavizzo-Mourey earned her medical
degree and completed her residency at Harvard medical school and holds a Masters
of Business Administration degree from the university of Pennsylvania Wharton
School. She is a consultant to the White house on health care policy and is a
director of Nellcor Puritan Bennett, the Kapson group, the American Board of
Internal Medicine, and a Regent of the American College of Physicians. Dr.
Lavizzo-Mourey has been a director of the Company since 1994.
Gail L. Warden is President and CEO of Henry Ford Health System, Detroit,
Michigan. Mr. Ward is the past Chairman and a Member of the American Hospital
Association Board of Trustees and a member of the Governing Council of the
Institute of Medicine of the National Academy of Sciences. He has been a
director since 1988. Mr. Warden is also a director of the Robert Wood Johnson
Foundation, Comerica Bank Midwest of Detroit, Mental Health Management and
American Healthcare Systems.
Mr. John P. Kunz, founder and President of J.P.K. Associates and former
President of Dun and Bradstreet Business Information Services. Mr. Kunz is the
former Chairman of R. H. Donnelley - Europe and has served as a director of
Advance-Peterholm Group, Ltd., American Credit Indemnity Company, Dun &
Bradstreet international, and Intervest.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Statements contained in this release that are not based on historical
facts are forward-looking statements subject to uncertainties and risks
including, but not limited to: product and service demand and acceptance;
economic conditions; the impact of competition and pricing; capacity and supply
constraints or difficulties; results of financing efforts; and other risks
detailed in the Company's Securities and Exchange Commission filings.
Medicus Systems Corporation provides its customers with software and services to
capture, structure and analyze information, enabling them to measure and manage
organizational performance to optimize outcomes. For further information about
Medicus Systems Corporation, contact Lon Gruen at (847) 570-7500.
