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: MARCH 31, 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 April 24, 1996, 5,064,295
shares of common stock were outstanding, net of 1,033,662 shares of treasury
stock.
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INDEX
CYCARE SYSTEMS, INC.
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995. 3
Condensed Consolidated Income Statements -
Three months ended March 31, 1996 and 1995. 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995. 5
Notes to Condensed Consolidated Financial
Statements - March 31, 1996. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 7 - 8
PART II. OTHER INFORMATION
- ----------------------------
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K. 9
SIGNATURES 10
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<PAGE>
PART I
FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(In thousands, except per share data)
Unaudited
1996 1995
--------- -------
Cash and cash equivalents $ 12,317 $ 13,570
Accounts receivable, net 7,714 6,975
Unbilled work at estimated realizable value 1,974 1,922
Supply and equipment inventories 995 1,000
Prepaid and other assets 3,423 3,378
Deferred income taxes 6 42
-------- --------
Total Current Assets 26,429 26,887
Property and equipment at cost, net 9,847 9,806
Software products, net 8,074 7,587
Goodwill, net 931 938
Other intangibles, net 704 754
Other assets 271 301
-------- --------
Total Assets $ 46,256 $ 46,273
======== ========
Current portion of long-term debt $ 1,288 $ 1,300
Accounts payable 2,308 2,563
Accrued expenses 2,276 3,270
Accrued payroll 1,674 1,021
Client deposits and unearned income 952 824
Income taxes payable 814 302
-------- --------
Total Current Liabilities 9,312 9,280
-------- --------
Long-term debt, less current portion 2,533 2,853
-------- --------
Other long-term liabilities 1,590 1,674
-------- --------
Deferred income taxes 2,476 2,381
-------- --------
Shareholders' equity:
Common stock 61 61
Capital in excess of par value 31,400 31,436
Retained earnings 9,283 8,110
Less treasury stock (10,399) (9,522)
-------- --------
Total Shareholders' Equity 30,345 30,085
-------- --------
Total Liabilities and Shareholders' Equity $ 46,256 $ 46,273
======== ========
Book value per share $6.00 $5.90
Common shares outstanding excluding treasury shares of
1,039,787 at March 31, 1996 and 1,003,037 at
December 31, 1995. 5,058 5,095
See notes to condensed consolidated financial statements
3
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CONDENSED CONSOLIDATED INCOME STATEMENTS
Three Months Ended March 31, 1996 and 1995
(In thousands, except per share data)
(Unaudited)
1996 1995
------- -------
Revenues:
Services $12,686 $12,048
Systems sales 2,621 3,361
Interest and dividends 191 195
Other income 146 157
-------- --------
15,644 15,761
-------- --------
Costs and Expenses:
Cost of services 4,636 4,597
Cost of systems sold 1,504 2,376
Software product amortization 443 582
Research and development 1,267 1,187
Selling and administrative 5,845 5,248
Interest 87 123
-------- --------
13,782 14,113
-------- --------
Income before income taxes 1,862 1,648
Income taxes 689 635
-------- --------
Net Income $ 1,173 $ 1,013
======== ========
Earnings per share $.23 $.20
======== ========
Common and common equivalent shares used
in the calculation of earnings per share 5,189 5,094
See notes to condensed consolidated financial statements
4
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<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS Three Months Ended March 31, 1996 and 1995
(In thousands)
(Unaudited)
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Operating activities
Net income $ 1,173 $ 1,013
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of goodwill and intangibles 57 27
Depreciation and amortization 435 416
Software product amortization 443 582
Provision for losses on accounts receivable 107 103
Provision for deferred income taxes 131 207
Loss on sale or retirement of equipment 5 1
Changes in operating assets and liabilities:
Accounts receivable and unbilled work (898) (1,856)
Other assets (10) (299)
Accounts payable and accrued expenses (466) (298)
Income taxes payable 557 453
Other long-term liabilities (84) (42)
-------- --------
Net cash provided by operating activities 1,450 307
Investing activities
Purchase of property and equipment (486) (531)
Proceeds from sale of equipment 4 0
Capitalized software products (931) (989)
-------- --------
Net cash used in investing activities (1,413) (1,520)
Financing activities
Principal payments on revolving line of credit,
long-term borrowings and capital lease obligations (332) (542)
Translation adjustment 0 (28)
Net proceeds from sale of common stock, warrants, options
and treasury stock 68 1,412
Purchase of treasury stock (1,026) (148)
-------- --------
Net cash provided by (used in) financing activities (1,290) 694
Decrease in cash and cash equivalents (1,253) (519)
Cash and cash equivalents at beginning of period 13,570 13,760
-------- --------
Cash and cash equivalents at end of period $ 12,317 $ 13,241
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
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CYCARE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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 month period ended March 31, 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 first quarter 1996 net income was $1,173,000, an increase of
$160,000, or 16%, as compared to the first quarter of 1995. First quarter
revenues were $15,644,000 as compared to $15,761,000 in 1995, a 1% decrease,
attributed to reduced systems sales. Systems revenues for the first quarter 1996
were $2,621,000, down 22%, or $740,000, from $3,361,000 reported in the first
quarter of 1995. The reduction in systems sales can be attributed primarily to
the increasing complexity of, and longer and more involved, negotiating cycles.
In the first quarter, this resulted in the delay of the anticipated award of
several contracts, which adversely affected systems revenues. Quarterly systems
margin percentages grew from 29% to 43% from 1995 to 1996, as a result of a more
favorable mix of higher-margin software versus hardware in the systems sold.
Services revenues increased 5% to $12,686,000 during the first quarter of 1996
as compared to $12,048,000 for the first quarter of 1995. The increase in
services revenues was primarily due to increases in support and networking
services and monthly license fees for the Company's CS3000 customers, and
additional services revenue as a result of the fourth quarter 1995 acquisition
of R.D. Jugel and Company. These increases were partially offset by the
significant reduction of statement business from a client in the second half of
1995. Services margins improved slightly to 63%, up from 62% in the previous
quarter.
Software product amortization was $443,000 in the first quarter of 1996, a
decrease of 24% from the first quarter of the previous year. The reduction of
amortization costs is attributable to a technology charge recorded by the
Company in the fourth quarter of 1995. The charge related primarily to
previously developed software technology, which the Company is replacing with
more advanced products.
Gross research and development dollars for 1996 were comparable to those
reported in 1995. Net research and development increased $80,000, or 7%, to
$1,267,000. The increase is the result of a reduction in the capitalization of
various software products.
Selling and administrative expenses were $5,845,000 during the first quarter of
1996, an increase of $597,000, or 11%, over first quarter 1995. As a percentage
of revenues, selling and administrative costs were 37% of total revenues as
compared to 33% for the same quarter in 1995. The increase in these costs is
mainly due to the expansion of the Company's sales and marketing teams, which
focus primarily on the new electronic medical records product, CS-CIS.
First quarter 1996 interest expense decreased $36,000, or 29%, from the first
quarter of 1995 because of average debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Significant items affecting cash flow during the first quarter of 1996 were as
follows: cash provided from operations was $1,450,000; purchase of property and
equipment was $486,000; capitalization of software products was $931,000;
principal payments on long-term debt were $332,000; and, purchase of treasury
stock was $1,026,000. Cash and cash equivalents as of March 31, 1996 were
$12,317,000.
The Company has not committed to any material capital expenditures.
7
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The Company has a $3,500,000 line of credit with a financial institution. The
entire line is available as of March 31, 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 quarter 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.
RECENT DEVELOPMENTS
See "Letter of Intent with HBOC" in Part II, Item 5 for information regarding a
letter of intent between the Company and HBO & Company.
8
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Letter of Intent with HBOC
On May 10, 1996, the Company and HBO & Company ("HBOC") jointly
announced that they had signed a letter of intent, dated May 9, 1996
(the "Letter of Intent") whereby HBOC will acquire the Company in a
merger transaction. Under the terms of the Letter of Intent, each share
of the Company's common stock ("CyCare Common Stock") would be
exchanged for .43 of a share of HBOC common stock ("HBOC Common
Stock"). 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 $106.50, the exchange ratio would
be adjusted upward to preserve a minimum value to the Company's
stockholders of $45.79 per share of CyCare Common Stock, or (b) exceeds
$125.50, the exchange ratio would be adjusted downward to limit the
Company's stockholders to a maximum value of $53.96 per share of CyCare
Common Stock. The proposed merger is subject to customary conditions,
including the execution of a mutually acceptable merger agreement and
the approval of the Boards of Directors of the Company and HBOC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1996, and the period ended May 13,
1996, the Company did not file any Reports on Form 8-K.
9
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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.
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Date May 13, 1996 /s/ Mark R. Schonau
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Mark R. Schonau
Chief Financial Officer
Secretary and Treasurer
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>
<CIK> 354888
<NAME> CYCARE SYSTEMS, INC.
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