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, 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 (I.R.S Employer Identification No.)
of incorporation or organization)
One Rotary Center, Suite 1111, Evanston, Illinois 60201 (847) 570-7500
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Comission 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 5,485,032 shares of common stock outstanding as of October 10, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MEDICUS SYSTEMS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
ASSETS 1997 1997
- ------ ----------- -----------
<S> <C> <C>
Current assets (Unaudited)
Cash and cash equivalents $ 371,761 $ 1,205,135
Accounts receivable and unbilled services, net of allowance for
doubtful accounts of $1,742,195 and 1,713,008 8,615,200 10,500,676
Inventories 303,424 214,264
Prepaid expenses and other 251,971 258,725
Prepaid and deferred income taxes 2,025,238 2,147,416
Net assets of discontinued operation 52,178 111,381
--------------------- -----------------
11,619,772 14,437,597
--------------------- -----------------
Property and equipment, net of accumulated
depreciation of $5,331,012 and $5,080,110 2,142,357 2,335,175
Internally developed software, net of accumulated
amortization of $2,329,887 and $2,110,378 2,937,905 3,087,849
Installment accounts receivable due after one year,
net of unearned interest of $145,583 and $154,647 536,261 533,488
Deferred income taxes 2,763,950 2,454,563
--------------------- -----------------
$ 20,000,245 $ 22,848,672
===================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 486,037 $ 597,787
Accrued compensation 272,464 453,035
Accrued restructuring charge 1,875,909 2,247,416
Other accrued liabilities 1,482,016 1,138,226
Deferred revenue 4,857,186 6,910,599
Notes payable 1,000,000 1,000,000
-------------------- -----------------
9,973,612 12,347,063
-------------------- -----------------
Notes payable 1,000,000 1,000,000
-------------------- -----------------
Stockholders' Equity
Preferred stock $1,000 par, 500 shares authorized and issued 500,000 500,000
Common stock $.01 par:
Authorized - 10,000,000 shares
Issued - 6,492,926 and 6,487,159 shares, respectively 64,929 64,872
Capital in excess of par value 22,095,491 22,063,715
Capital in excess of par value - warrant 944,000 944,000
Less treasury stock:
Preferred stock, at cost - 500 shares (500,000) (500,000)
Common stock, at cost - 1,007,002 shares (5,687,418) (5,687,418)
Accumulated deficit (8,390,369) (7,883,560)
-------------------- ------------------
9,026,633 9,501,609
-------------------- ------------------
$ 20,000,245 $ 22,848,672
==================== ==================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
--------------------------------------------------
August 31, August 31,
1997 1996
--------------------- ----------------------
<S> <C> <C>
Revenues
Software products and services $ 2,243,860 $ 1,815,736
Maintenance and support services 2,376,050 2,381,043
---------------------- ----------------------
4,619,910 4,196,779
Costs and expenses
Software products and services 718,268 454,102
Maintenance and support services 1,127,150 816,611
---------------------- ----------------------
1,845,418 1,270,713
Marketing, general and administrative 2,723,663 2,139,479
Research and development 981,059 505,920
---------------------- ----------------------
5,550,140 3,916,112
--------------------- ----------------------
Operating income (loss) (930,230) 280,667
Interest and other income 42,514 120,094
Interest expense (39,665) -
---------------------- ----------------------
Income (Loss) from continuing operations before income
taxes (927,381) 400,761
Provision for (benefit from) income taxes (357,041) 159,543
---------------------- ----------------------
Income (Loss) from continuing operations (570,340) 241,218
Discontinued operation, net of taxes 63,531 50,998
---------------------- ----------------------
Net income (loss) $ (506,809) $ 292,216
====================== ======================
Earnings (loss) per common and common equivalent share
Continuing operations $ (0.10) $ 0.04
Discontinued operation 0.01 0.01
---------------------- ----------------------
$ (0.09) $ 0.05
====================== ======================
Weighted average common and common equivalent shares outstanding 5,489,329 6,473,252
====================== ======================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICUS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
----------------------------------------------------
August 31, August 31,
1997 1996
---------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities
Income (Loss) from continuing operations $ (570,340) $ 241,218
Adjustments to reconcile to net cash from operating activities:
Depreciation of property and equipment 250,902 284,609
Amortization of internally developed software 219,511 78,914
Deferred income taxes (43,938) 69,836
Accrued restructuring charge (291,860) (386,798)
Allowance for doubtful accounts 150,000 -
Changes in certain current assets and current liabilities:
Accounts receivable and unbilled services 1,660,193 307,267
Due from Managed Care Solutions, Inc. - 189,789
Inventories (89,160) 35,332
Prepaid expenses and other current assets (136,517) 59,479
Accounts payable (111,750) (2,348)
Accrued compensation (180,571) (721,699)
Deferred revenue (2,053,413) (1,078,628)
Other, net 341,017 (402,062)
--------------------- -----------------------
(855,926) (1,325,091)
--------------------- -----------------------
Cash flows from investing activities
Additions to property and equipment (58,085) (40,480)
Additions to internally developed software (69,567) (500,887)
Proceeds from maturity of short-term investments - 1,597,157
Proceeds from sale of short-term investments - 10,888,023
Purchases of short-term investments - (11,440,114)
--------------------- -----------------------
(127,652) 503,699
--------------------- -----------------------
Cash flows from financing activities
Sale of common stock 27,470 49,240
--------------------- -----------------------
27,470 49,240
--------------------- -----------------------
Net decrease in cash and cash equivalents (956,108) (772,152)
Cash and cash equivalents, beginning of period 1,205,135 765,312
Net cash activity from discontinued operation 122,734 976,653
--------------------- -----------------------
Cash and cash equivalents, end of period $ 371,761 $ 969,813
===================== =======================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In management's opinion, the financial statements of Medicus Systems
Corporation (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, 1997 and 1996. 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, 1997.
During the quarter ended August 31, 1996, the Company performed certain
administrative services for Managed Care Solutions, Inc. ("MCS") under a
services agreement resulting from the spin off of the Company from MCS on March
1, 1996. During the quarter ended August 31, 1996, the Company received $175,000
in consideration for these services, and reduced marketing, general and
administrative expenses by this amount.
NOTE 2 - DISCONTINUED OPERATION
Effective May 31, 1997 the Company adopted a plan to discontinue its contract
services line of business. This separate line of business consisted of
information systems management contracts with one customer. As a result of this
decision, the net assets of the contract services line of business, principally
accounts receivable and unbilled services, property and equipment, and accounts
payable and other accrued liabilities have been reclassified in the Balance
Sheets at August 31, 1997 and May 31, 1997. In addition, the results of
operations of the contract services business have been reclassified in the
Statements of Operations and Statements of Cash Flows for the quarters ended
August 31, 1997 and 1996.
The following table summarizes unaudited selected financial data of the
contract services business for the quarters ended August 31, 1997 and 1996:
Three Months Ended
-------------------------------------------
August 31, August 31,
1997 1996
------------------- -------------------
Revenues $2,501,000 $2,497,000
Operating income 103,000 83,000
NOTE 3 - EARNINGS PER SHARE
Earnings (Loss) per common share have been computed by dividing net income
(loss) 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.
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
NOTE 4 - ACCRUED RESTRUCTURING CHARGE
During February, 1996, the Company commenced a process to evaluate its
current strategic position, including the markets it expects to pursue and its
product offerings in those chosen markets. As a result of decisions made as part
of this evaluation process, the Company recorded $4.7 million in restructuring
charges, representing costs and expenses to exit certain product lines, to
abandon certain product development efforts and to provide for liabilities
resulting from the strategic redirection of the Company, including severance
costs. Specifically, the Company decided to exit the Clinical Case Management
Systems ("CCM") and the Executive Information Systems product lines.
Additionally, product development efforts for the Clinical Data Systems Wincoder
V2 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. Severance costs
associated with an officer and several employees, in addition to the write-off
of a portion of the Contract Management System, were also included in the
restructuring charge.
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 certain 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 accrued
associated with the relocation 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 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 also 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 components of the restructuring reserve, which the Company expects will
be utilized during the next nine months, are as follows:
August 31, May 31,
1997 1997
------------------- --------------------
Product line exit costs $ 671,978 $ 774,425
Business unit reorganization costs 579,986 674,597
Employee termination and severance costs 623,945 798,394
------------------- --------------------
$ 1,875,909 $ 2,247,416
=================== ====================
During the quarter ended August 31, 1997, the Company incurred $79,647 in
write-downs of accounts receivable and $22,800 in product line exit costs
related to the remaining customer of the previously discontinued CCM product
line. The Company also paid $94,611 in business unit reorganization costs
related to the relocation of the CDS division and $174,449 in severance benefits
and employee termination costs.
<PAGE>
MEDICUS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
NOTE 5 - NOTE PAYABLE AND LINE OF CREDIT
On December 5, 1996, the Company reached an agreement in principle with its
founder, Richard C. Jelinek, to purchase from Mr. Jelinek, and a trust of which
he is a beneficiary (the "Trust"), one million shares of Common Stock and 500
shares of Voting Preferred Stock. In exchange, the Company agreed to pay Mr.
Jelinek and the Trust $4.5 million in cash and $2.0 million in 8% two-year
promissory notes, and issued to Mr. Jelinek and the Trust 400,000 five-year
warrants to purchase Common Stock at $8.00 per share. The scheduled maturities
of the notes are $1 million on March 19, 1998 and $1 million on March 19, 1999.
Interest costs incurred and paid on the promissory notes totaled $39,665 for the
quarter ending August 31, 1997.
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. As of August 31,
1997, the Company had not utilized the line of credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS
This report contains statements that may be considered forward-looking, such
as the discussion of the Company's strategic goals, new products and cash flows.
These statements speak of the Company's plans, goals or expectations, refer to
estimates, or use similar terms. Actual results could differ materially from the
results indicated by these statements because the realization of those results
is subject to many uncertainties.
Some of these uncertainties that may affect future results are discussed in
more detail below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All forward-looking statements included in
this document are based upon information presently available, and the Company
assumes no obligation to update any forward-looking statement.
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
Operations and (ii) the percentage change in each line item from the prior year
period.
Percent of Revenues Percentage
Three Months Ended Increase
---------------------
Aug. 31, Aug. 31, (Decrease)
1997 1996 1996 to 1997
-------- -------- ------------
Revenues
Software products and services 49% 43% 24%
Maintenance and support services 51 57 -
---- ----
100 100 10
---- ----
Costs and expenses
Software products and services (1) 32 25 58
Maintenance and support services (1) 47 34 38
---- ----
40 30 45
Marketing, general and administrative 59 51 27
Research and development 21 12 94
---- ----
120 93 42
---- ----
Operating income (loss) (20) 7 N/M
Interest and other income 1 3 (65)
Interest expense (1) - N/M
---- ----
Income (Loss) from continuing
operations before income taxes (20) 10 N/M
Provision for(benefit from)income taxes (8) 4 N/M
---- ----
Income (Loss) from continuing
operations (12) 6 N/M
Discontinued operation, net of taxes 1 1 25
---- ----
Net income (loss) (11)% 7% N/M
==== ====
(1) Shown as a percent of related revenues.
Operating revenues are derived from two sources: (1) license fees and the
related services for licensing the Company's proprietary software products; and
(2) maintenance and support services related to such software products.
<PAGE>
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS, Continued
SOFTWARE PRODUCTS AND SERVICES
Revenues increased 24% to $2.2 million primarily due to the shipment of the
new Windows based products from the Clinical Data Systems and Decision Support
Systems divisions during the quarter. Costs and expenses increased 58% compared
to the corresponding prior year period, and as a percentage of related revenues,
increased to 32% from 25%. The increase was primarily due to amortization of
capitalized software for the newly released products. Additionally, costs and
expenses for the quarter ended August 31, 1996 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 remained relatively flat at $2.4 million. Costs and expenses
increased 38% compared to the corresponding prior year period, and as a
percentage of related revenues, increased to 47% from 34%, primarily due to
additional labor costs incurred to support new product releases from the
Clinical Data Systems and Decision Support Systems divisions and higher labor
costs resulting from personnel shifts to maintenance and support services from
development activities.
MARKETING, GENERAL AND ADMINISTRATIVE
Expenses increased 27% to 2.7 million. The increase was primarily due to
$139,000 of expenses related to the move of the Alameda office that could not be
accrued for in fiscal 1997. Additionally, costs and expenses for the quarter
ended August 31, 1996 included the effect of $175,000 in administrative fees the
Company received as a result of the services agreement with MCS and a reduction
of reserves and of various items totaling approximately $250,000.
RESEARCH AND DEVELOPMENT
Actual research and development expenses decreased 2% to $1,051,000 for the
quarter. Research and development costs presented in the accompanying financial
statements were $981,000 compared to $506,000 in the corresponding prior year
period. The Company also capitalized software development costs of $70,000
compared to $471,000 in the corresponding prior year period, reflecting the
release of new products in the current quarter and the resulting cessation of
software cost capitalization. Actual research and development expenditures were
47% of software products and services revenues compared to 60% in the
corresponding prior year period.
During the first quarter of fiscal 1998, the Company's development efforts
were focused on the Decision Support Systems product line and the Clinical Data
Systems product line. During the first quarter of fiscal 1997, the Company was
engaged in several development projects, including the Resource Case Management
System, and the Decision Support Systems product line.
INTEREST AND OTHER INCOME
Interest and other income decreased 65% to $42,000, primarily due to lower
average cash balances during the quarter ending August 31, 1997.
INCOME TAXES
The Company's effective tax rate was 38.5% compared to 39.8% 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.
<PAGE>
MEDICUS SYSTEMS CORPORATION
RESULTS OF OPERATIONS, Continued
FINANCIAL CONDITION
As a result of the Company's commitment to expand its software products and
services, funds are required to support its ongoing product research and
development activities and the infrastructure required to serve its customer
base. Historically, cash generated from its operations has been an important
contributor to these needs. As a result of the market factors adversely
affecting fiscal 1997 results, as well as the stock repurchase transaction, the
Company was required to use a significant portion of its cash reserves. It is
expected that, following the restructuring efforts begun in prior periods, the
Company will return to a situation where cash from operations will provide an
important source of liquidity to support its normal capital needs, although
numerous factors, including any reductions in revenues from currently
anticipated amounts, could affect the amount of such cash available.
At August 31, 1997, the Company had available cash reserves of $372,000. In
addition, the Company had a $2.5 million standby credit facility available. $1.0
million of the principal amount of the Company's 8% promissory notes, issued in
connection with the Company's stock repurchase agreement, is due in March 1998.
In addition, the Company anticipates cash outlays of approximately $1.9 million
in the next nine months, resulting primarily from its decision to reorganize its
business units and to exit certain product lines.
While the Company has experienced negative cash flows from operating
activities during the past two fiscal years, management believes that, as a
result of significant reductions in expenses, its cash flows will improve. While
there can be no assurance that this will occur, the Company currently believes
that it will have adequate financial resources available from operations and the
available credit facility to provide sufficient liquidity to meet its ordinary
capital requirements for the foreseeable future, including the March 1998
payment on the promissory notes and cash outlays related to the Company's
restructuring plan.
During its second fiscal quarter, the Company bills its clients in advance
for the next calendar year's maintenance and support services provided on its
software products. This generates an increase in the Company's accounts
receivable and deferred revenue balances during those periods, and increases
cash balances in subsequent months as the related accounts receivable are
collected.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," issued in February 1997, changes the method of calculating earnings per
share and will be effective for the Company's financial statements for the year
ending May 31, 1998. Earlier application is not permitted. However, the Company
is permitted to disclose pro forma earnings per share amounts computed using
SFAS 128 in periods prior to adoption. Upon adoption, all prior period earnings
per share data presented shall be restated to conform to SFAS 128. The
calculation of earnings per share under SFAS 128 is simpler than prior methods
and more consistent with international accounting standards. Because a majority
of the Company's common stock equivalents have exercise prices in excess of the
Company's Common Stock price, the Company does not believe that the adoption of
SFAS 128 will have a significant impact on amounts reported as net income (loss)
per common share.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(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 10, 1997 /s/ Patrick C. Sommers
- ----------------------------------------- -------------------------------
Patrick C. Sommers
President
(Chief Executive Officer)
October 10, 1997 /s/ Daniel P. DiCaro
- ----------------------------------------- -------------------------------
Daniel P. DiCaro
Vice President
(Chief Financial Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Company's Form 10-Q for the quarterly period ended August 31, 1997, and is
qualified in its entirety by reference to such document.
ITEM DESCRIPTION
<CURRENCY> U.S. DOLLARS
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 371,761
<SECURITIES> 0
<RECEIVABLES> 10,357,395
<ALLOWANCES> 1,742,195
<INVENTORY> 303,424
<CURRENT-ASSETS> 11,619,772
<PP&E> 7,473,369
<DEPRECIATION> 5,331,012
<TOTAL-ASSETS> 20,000,245
<CURRENT-LIABILITIES> 9,973,612
<BONDS> 1,000,000
0
500,000
<COMMON> 64,929
<OTHER-SE> 8,461,704
<TOTAL-LIABILITY-AND-EQUITY> 20,000,245
<SALES> 4,619,910
<TOTAL-REVENUES> 4,619,910
<CGS> 1,845,418
<TOTAL-COSTS> 1,845,418
<OTHER-EXPENSES> 981,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,665
<INCOME-PRETAX> (927,381)
<INCOME-TAX> (357,041)
<INCOME-CONTINUING> (570,340)
<DISCONTINUED> 63,531
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,809)
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
