FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: JUNE 30, 1996
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from _______________ to _______________
Commission file number 1-9815
CYCARE SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 91-0842322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1000, 7001 North Scottsdale Road, Scottsdale, Arizona 85253
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code...........................................(602) 596-4300
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. At August 12, 1996, 5,067,670
shares of common stock were outstanding, net of 1,030,287 shares of treasury
stock.
<PAGE>
INDEX
CYCARE SYSTEMS, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995. 3
Condensed Consolidated Income Statements Three months ended June
30, 1996 and 1995; Six months ended June 30, 1996 and 1995. 4
Condensed Consolidated Statements of
Cash Flows - Six months ended June 30,
1996 and 1995. 5
Notes to Condensed Consolidated Financial
Statements - June 30, 1996. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 7 - 8
PART II. OTHER INFORMATION
- ----------------------------
Item 4. Submission of Matters to a Vote of
Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits 10
SIGNATURE 10
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</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
Unaudited
1996 1995
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<S> <C> <C>
Cash and cash equivalents $ 9,963 $ 13,570
Accounts receivable, net 11,845 6,975
Unbilled work at estimated realizable value 2,054 1,922
Supply and equipment inventories 1,038 1,000
Prepaid and other assets 3,515 3,378
Deferred income taxes 561 42
-------- --------
Total Current Assets 28,976 26,887
Property and equipment at cost, net 9,837 9,806
Software products, net 8,641 7,587
Goodwill, net 924 938
Other intangibles, net 653 754
Other assets 288 301
-------- --------
Total Assets $ 49,319 $ 46,273
======== ========
Current portion of long-term debt $ 1,279 $ 1,300
Accounts payable 4,073 2,563
Accrued expenses 3,143 3,270
Accrued payroll 1,811 1,021
Client deposits and unearned income 1,117 824
Current and deferred income taxes 350 302
-------- --------
Total Current Liabilities 11,773 9,280
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Long-term debt, less current portion 2,213 2,853
-------- --------
Other long-term liabilities 377 1,674
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Deferred income taxes 3,161 2,381
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Shareholders' equity:
Common stock 61 61
Capital in excess of par value 31,333 31,436
Retained earnings 10,574 8,110
Less treasury stock (10,173) (9,522)
-------- --------
Total Shareholders' Equity 31,795 30,085
-------- --------
Total Liabilities and Shareholders' Equity $ 49,319 $ 46,273
======== ========
Book value per share $6.27 $5.90
Common shares outstanding excluding treasury shares of
1,030,287 at June 30, 1996 and 1,003,037 at
December 31, 1995. 5,068 5,095
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED INCOME
STATEMENTS Periods Ended June 30,
1996 and 1995 (In thousands, except
per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Services $12,766 $12,325 $25,452 $24,373
Systems sales 5,413 3,763 8,034 7,124
Interest and dividends 146 208 337 403
Other income 111 167 257 324
------- ------- ------- -------
18,436 16,463 34,080 32,224
------- ------- ------- -------
Costs and Expenses:
Cost of services 4,744 4,621 9,380 9,218
Cost of systems sold 3,714 2,565 5,218 4,941
Software product amortization 408 570 851 1,152
Research and development 1,288 1,095 2,555 2,282
Selling and administrative 6,161 5,739 12,006 10,987
Interest 87 119 174 242
------- ------- ------- -------
16,402 14,709 30,184 28,822
------- ------- ------- -------
Income before income taxes 2,034 1,754 3,896 3,402
Income taxes 743 641 1,432 1,276
------- ------- ------- -------
Net Income $ 1,291 $ 1,113 $ 2,464 $ 2,126
======= ======= ======= =======
Earnings per share $.25 $.21 $.47 $.41
======= ======= ======= =======
Common and common equivalent shares used
in the calculation of net income per share 5,223 5,205 5,206 5,158
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Operating activities
Net income $ 2,464 $ 2,126
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of goodwill and intangibles 115 53
Depreciation and amortization 898 839
Software product amortization 851 1,152
Provision for losses on accounts receivable 188 200
Provision for deferred income taxes 261 63
Loss on sale or retirement of equipment 7 3
Changes in operating assets and liabilities:
Accounts receivable and unbilled work (5,190) (2,177)
Other assets (163) (760)
Accounts payable and accrued expenses 2,466 (167)
Current income taxes 127 1,234
Other long-term liabilities (1,297) (658)
-------- --------
Net cash provided by operating activities 727 1,908
Investing activities
Purchase of property and equipment (940) (891)
Proceeds from sale of equipment 6 3
Capitalized software products (1,905) (1,848)
-------- --------
Net cash used in investing activities (2,839) (2,736)
Financing activities
Principal payments on revolving line of credit,
long-term borrowings and capital lease obligations (661) (884)
Translation adjustment (28)
Net proceeds from sale of common stock, warrants,
options and treasury stock 192 1,831
Purchase of treasury stock (1,026) (148)
-------- --------
Net cash provided by (used in) financing
activities (1,495) 771
Decrease in cash and cash equivalents (3,607) (57)
Cash and cash equivalents at beginning of period 13,570 13,760
-------- --------
Cash and cash equivalents at end of period $ 9,963 $ 13,703
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CYCARE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report for the year ended December 31, 1995.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The Company's net income for the three months ended June 30, 1996 increased 16%
to $1,291,000 as compared to $1,113,000 for the corresponding prior year period.
Net income for the first six months of 1996 increased to $2,464,000 from
$2,126,000, or 16%, a year ago. These increases are the result of additional
demand for the Company's CS3000 system and the electronic data interchange (EDI)
services offered by CyData, the Company's wholly-owned subsidiary.
For the second quarter, systems sales hit an eight year high of $5,413,000
versus $3,763,000, up 44% or $1,650,000 compared to second quarter 1995. Year to
date systems sales increased to $8,034,000 from $7,124,000, up 13% or $910,000.
Quarter to quarter, systems margins decreased slightly to 31%. Year to date
margins increased 4% over a year ago to 35%. This increase in margin is
attributable to additional software sales which typically reflect a higher
margin. Aggressive sales efforts in the Company's CS3000 and SpectraMED products
contributed to the $1,159,000 increase in year over year software sales.
The Company reported services revenues for the second quarter of $12,766,000
compared to $12,325,000 during the second quarter 1995, an increase of $441,000
or 4%. Year to date services revenues totaled $25,452,000 up 4% or $1,079,000,
from $24,373,000 a year ago. Growth in these revenues is attributable to an
increase in ancillary services associated with the CS3000 and SpectraMED
products, primarily software maintenance, systems integration, conversions and
installations. CyData year to date claims volumes increased to 26,000,000 from
approximately 22,000,000 a year ago. CyData continues to expand its remittance
and eligibility functions to further enhance its suite of EDI products.
Margins on services revenues remained constant for the quarter at 63% as
compared to the second quarter 1995. Year over year margins increased slightly
to 63% from 62% in the prior year.
Second quarter software product amortization decreased to $408,000 from
$570,000, down $162,000, or 28%. Year to date amortization decreased to $851,000
from $1,152,000, down $301,000, or 26% from the prior year. During the fourth
quarter of 1995, the Company recorded a technology charge for previously
developed software products. 1996 amortization decreased from prior year as a
result of this charge.
7
<PAGE>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net research and development expenses totaled $1,288,000 as compared to
$1,095,000, an increase of $193,000, or 18% from the comparable period last
year. On a year to date basis, net expense increased to $2,555,000 from
$2,282,000, up $273,000, or 12% from a year ago. These expenses increased as the
Company continues its concentration on further enhancements to its core
products.
Selling and administrative expenses for the second quarter increased to
$6,161,000 versus $5,739,000 in the second quarter 1995, an increase of 7% or
$422,000. Year to date selling and administrative expenses increased to
$12,006,000 from $10,987,000 the prior year, an increase of 9% or $1,019,000.
Much of this increase can be attributed to additional staffing in the sales and
sales support areas of the Company's various business units. Incentive
compensation directly related to the Company's 1996 performance also led to the
increase in selling and administrative expenses for the year.
Interest expense continues to decrease as the Company's outstanding debt is
reduced. Second quarter expenses totaled $87,000 as compared to $119,000 a year
ago, a decrease of $32,000 or 27%. Year to date interest expense decreased to
$174,000 from $242,000 in 1995, a decrease of $68,000 or 28%.
LIQUIDITY AND CAPITAL RESOURCES
Significant items affecting cash flow in 1996 were as follows: cash provided
from operations was $727,000; purchases of property and equipment were $940,000;
capitalization of software products was $1,905,000; principal payments on long
term debt were $661,000; and, purchase of treasury stock was $1,026,000. Cash
and cash equivalents as of June 30, 1996 were $9,963,000.
The Company has not committed to any material capital expenditures.
The Company has a $3,500,000 line of credit with a financial institution. The
entire line was available as of June 30, 1996
The Company's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its common stock at prevailing market rates. To date, the
Company has purchased 1,455,700 shares at an average price of $10.03 per share.
This includes 43,000 shares purchased at an average price of $23.86 per share
during the first six months of 1996.
The Company anticipates that funds generated from operations and the Company's
remaining cash and cash equivalents will be sufficient to meet its working
capital requirements, debt obligations and to finance any capital expenditures.
8
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Shareholder's Meeting held on May 21, 1996, the
shareholders elected by a vote of 4,333,213 for and 243,491 abstain to
elect Jim H. Houtz and James L. Schamadan, M.D. for additional terms on
the Company's Board of Directors. The following directors continued
their term of office after the meeting: Richard J. Burgmeier, A.
Theodore Engkvist and Frank H. Bertsch.
The following proposals were also approved at the Company's Annual
Meeting:
1. Approval of the Amendment to Certificate of Incorporation
to increase authorized shares of common stock.
For: 2,774,208 Against: 1,802,496
2. Approval of the CyCare Systems,Inc. 1995 Long-Term Incentive
plan.
For: 2,080,360 Against: 1,967,365 Non-Vote: 528,979
ITEM 5. OTHER INFORMATION
Merger Agreement with HBOC
The Company, HBO & Company ("HBOC") and HBO & Company of Georgia
("HBOC-GA") have executed an Agreement of Merger dated May 18, 1996
(the "Merger Agreement") that provides, subject to the terms and
conditions thereof, for the merger of the Company with and into HBOC-GA
(the "Merger"). Under the terms of the Merger Agreement, each share of
the Company's common stock ("CyCare Common Stock") would be exchanged
for .86 of a share of HBOC common stock ("HBOC Common Stock"), subject
to possible adjustment. If the average HBOC Common Stock closing price
during the twenty (20) consecutive trading days ending on the third
trading day before the date of the Company's special meeting of
stockholders to consider the Merger (a) falls below $52.25, the
exchange ratio would be adjusted upward to preserve a minimum value to
the Company's stockholders of $44.93 per share of CyCare Common Stock,
or (b) exceeds $65.00, the exchange ratio would be adjusted downward to
limit the Company's stockholders to a maximum value of $55.90 per share
of CyCare Common Stock. The proposed merger is subject to customary
conditions, including, but not limited to, approval of the stockholders
of the Company.
All regulatory approvals have been received. A special meeting of the
Company's stockholders has been called to vote on the Merger and will
be held at 9:00 A.M. on August 21, 1996.
9
<PAGE>
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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Date August 13, 1996 Mark R. Schonau
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Mark R. Schonau
Chief Financial Officer
Secretary and Treasurer
CYCARE SYSTEMS, INC.
Index to Exhibits
27. Financial Data Schedule
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,963
<SECURITIES> 0
<RECEIVABLES> 11,845
<ALLOWANCES> 0
<INVENTORY> 1,038
<CURRENT-ASSETS> 28,976
<PP&E> 9,837
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,319
<CURRENT-LIABILITIES> 11,773
<BONDS> 2,213
0
0
<COMMON> 61
<OTHER-SE> 31,734
<TOTAL-LIABILITY-AND-EQUITY> 49,319
<SALES> 8,034
<TOTAL-REVENUES> 34,080
<CGS> 5,218
<TOTAL-COSTS> 9,380
<OTHER-EXPENSES> 15,412
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 3,896
<INCOME-TAX> 1,432
<INCOME-CONTINUING> 2,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,464
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
