Management's Discussion and Analysis
CyCare Systems, Inc. and Subsidiaries
Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company continues to focus its product line on the physician and group
practice marketplace. As these markets continue to evolve toward managed care,
electronic medical records and integrated delivery networks, the demand for
sophisticated information technology is increasing. The Company responded to
these demands by introducing innovative products and services throughout the
year. With the introduction of these new products, the Company took a $3.8
million technology charge in the fourth quarter of 1995 to eliminate certain
products which the Company now regards as obsolete. This charge is discussed
further in Note 3 to the Consolidated Financial Statements.
1995 Compared to 1994
The Company's net income for the year ended December 31, 1995 was $2.0
million which includes a $3.8 million technology charge. Net income for the
year, excluding the technology charge, was $4.3 million versus $3.0 million for
the year ended December 31, 1994, an increase of 43%. Total revenue in 1995
increased to $62.9 million from $53.8 million in 1994, or 17%. Comparable
year-to-year services revenue increased to $47.6 million, up 10%, while systems
revenue increased to $13.7 million, or 50%. Services revenue increased due to
additional monthly license fees and transaction volume growth within CyData, the
Company's wholly owned EDI subsidiary. The growth in systems sales is
attributable to the continuing success of the CS3000, one of the few
client/server-based systems in the market today. The Company anticipates further
success of the product which has been complemented by the roll-out of its
electronic medical records product, CS-CIS, which began shipping in late 1995.
Services margins in 1995 were 61% as compared to 62% from the prior year.
Systems margins increased to 34%, up from 30% in 1994. This increase is
primarily attributable to new account sales in 1995 that have more software and
higher margins than sales to existing customers.
Selling and administrative costs as a percentage of revenues were 35% in
1995, versus 36% in 1994. Overall these costs increased $2.4 million which was
mainly due to the expansion in the Company's sales and marketing teams. Research
and development expenses increased approximately $278,000, or 7%, from 1994. As
a percentage of revenues, research and development costs were 7% in 1995 and 8%
in 1994. The Company is committed to funding future development of its core
group practice product line which includes the CS3000, the CS-CIS medical
records product and the enterprise-wide scheduling product, slated for release
in 1996. Additional dollars are also being spent on the Company's Windows-based
system, SpectraMED, and on expanding the electronic transaction processing
capabilities of its CyData subsidiary.
Interest expense continues to decrease as the Company continues to reduce
its average outstanding debt.
The Company's effective income tax rate for 1995 was 37% versus 40% in 1994.
This reduction was mainly attributable to changes in certain state income tax
laws that had a beneficial impact on the Company's income tax expense.
1994 Compared to 1993
The Company's net income for the year ended December 31, 1994 was $3.0
million, versus $1.2 million for the year ended December 31, 1993, an increase
of 150%. (The net income of $1.2 million for 1993 excludes the $3.7 million gain
[loss after tax] on the sale of the Company's Practice Management business unit
and the $11.9 million restructuring charge incurred in the fourth quarter of
1993. Any further references to 1993 financial results will also exclude these
items.) Total revenue from 1993 to 1994 declined 20% due to the sale of the
Practice Management business unit. Excluding 1993 Practice Management revenue of
$20.8 million, the Company's total revenue increased 15% from 1993 to 1994.
Comparable year-to-year services revenue increased 10%, while systems sales
increased 45%. The systems revenue growth was attributable to the continued
market acceptance of the Company's CS3000 system and successful introduction of
its Windows-based SpectraMED product. Services revenue grew due to increases in
monthly license fees and services, primarily for new CS3000 and SpectraMED
clients, and an increase in transactions processed by the Company's wholly owned
CyData subsidiary.
Services margins increased to 62% in 1994, from 49% the prior year. This
increase was primarily due to the fourth quarter 1993 sale of Practice
Management, a business unit that had lower operating margins than the Company's
remaining business units.
Systems sales were 70% hardware and 30% software in 1994, versus 75% and
25%, respectively, in 1993. Software sales increased 5% as a percentage of
systems sales, but this increase in high-margin software was offset by a
decrease in hardware margins due to customer demand for less profitable personal
computers.
Selling and administrative costs as a percentage of revenue were 36% in 1994
versus 34% in 1993. While selling and administrative costs from continuing
operations decreased due to the sold division, sales and administrative costs as
a percentage of revenue increased 2%. The 2% increase in 1994 was due to the
Company more than doubling its sales and marketing staffs as a result of the
success of its core business products.
Research and development expenses decreased 3% from 1993 to l994. As a
percentage of revenue, research and development costs were 8% in 1994 and 9% in
1993, excluding Practice Management revenues. The Company continued to spend its
research and development dollars enhancing its CS3000 and SpectraMED products,
developing its electronic medical records and enterprise-wide scheduling
products and adding additional capabilities to its EDI products and services.
Interest expense decreased 45% year-to-year due primarily to a reduction in
average debt outstanding.
The Company's effective income tax rate in 1994 was 40% versus 44% in 1993,
excluding the sale of Practice Management and the restructuring charge. The
decrease is primarily due to the increase in income before taxes, which had the
effect of reducing the relative impact of non-deductible expenses on the income
tax rate.
Financial Position
The Company had working capital of $17.6 million at December 31, 1995,
including $13.6 million in cash. The Company's cash flow from operations in 1995
was $6.6 million.
During 1995, the Company used funds to reduce debt, purchase treasury stock
and for additional investments in software products and capital expenditures.
The Company's long-term debt at December 31, 1995 was $2.9 million versus $4.2
million at December 31, 1994. Under the 1.5 million share repurchase program
authorized by its Board of Directors, the Company purchased 80,227 shares for
$1.9 million in 1995 and 812,800 shares for $7.6 million in 1994. The Company
will continue to purchase shares as considered necessary and as authorized under
the share repurchase program.
The Company has a $3.5 million revolving line of credit that expires in
April 1997. The Company anticipates that its current cash position, together
with funds generated from operations and available from its line of credit, will
be sufficient to meet its working capital requirements, debt obligations and to
finance any capital expenditures. On a long-term basis, the Company plans to
generate cash through operations, bank borrowings and/or raise capital through
private or public offerings to meet future capital needs.
CONSOLIDATED BALANCE SHEETS
CyCare Systems, Inc. and Subsidiaries
(In Thousands
Except Share Data)
December 31 1995 1994
-----------------------
Assets:
Current assets:
Cash and cash equivalents $13,570 $13,760
Accounts receivable, less $820 allowance for doubtful accounts in 1995,
$755 in 1994 6,975 4,184
Unbilled work at estimated realizable value 1,922 1,868
Supply and equipment inventories 1,000 723
Prepaid and other assets 3,378 3,223
Deferred income taxes 42 414
-----------------------
Total Current Assets 26,887 24,172
Property and equipment at cost, less accumulated depreciation and amortization 9,806 9,778
Software products, less $5,115 accumulated amortization in 1995, $3,914
in 1994 7,587 9,353
Goodwill, less $204 accumulated amortization in 1995, $185,000 in 1994 938 545
Other intangibles, less $2,239 accumulated amortization in 1995, $2,142
in 1994 754 252
Other assets 301 296
=======================
Total Assets $46,273 $44,396
=======================
Liabilities And Shareholders' Equity:
Current liabilities:
Current portion of long-term debt $1,300 $1,546
Accounts payable 2,563 1,989
Accrued expenses 3,270 2,753
Accrued payroll 1,021 1,208
Client deposits and unearned income 824 1,225
Income taxes payable 302 196
-----------------------
Total Current Liabilities 9,280 8,917
Long-term debt, less current portion 2,853 4,153
Other long-term liabilities 1,674 2,671
Deferred income taxes 2,381 3,432
Shareholders' equity:
Preferred stock, par value $1.00, 1,000,000 shares authorized, none issued
Common stock, par value $.01,10,000,000 shares authorized; 6,097,957 issued 61 61
in 1995 and 1994
Capital in excess of par value 31,436 29,505
Retained earnings 8,110 7,114
Less treasury stock, 1,003,037 and 1,280,569 shares at cost in 1995 and 1994, (9,522) (11,457)
respectively
-----------------------
Total Shareholders' Equity 30,085 25,223
-----------------------
Commitments
Total Liabilities And Shareholders' Equity $46,273 $44,396
=======================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Cycare Systems, Inc. and Subsidiaries
(In Thousands Except Per Share Data)
Years Ended December 31 1995 1994 1993
----------------------------------
Revenues:
Services $ 47,627 $ 43,329 $ 60,138
Systems 13,724 9,132 6,310
Interest and dividends 881 608 183
Other income 690 743 4,431
----------------------------------
62,922 53,812 71,062
----------------------------------
Costs and Expenses:
Services 18,452 16,349 31,312
Systems 9,006 6,379 4,771
Software product amortization 5,801 2,168 5,953
Research and development 4,347 4,069 4,203
Selling and administrative 21,778 19,334 30,083
Interest 450 464 844
----------------------------------
59,834 48,763 77,166
----------------------------------
Income (loss) before income taxes 3,088 5,049 (6,104)
Income taxes 1,135 2,029 1,657
----------------------------------
Net Income (Loss) $ 1,953 $ 3,020 ($ 7,761)
==================================
Earnings (loss) per share $ 0.38 $ 0.60 ($ 1.39)
Common and common equivalent shares used in the calculation of
earnings (loss) per share 5,183 5,018 5,579
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CyCare Systems, Inc. and Subsidiaries
(In Thousands)
Period Ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income (Loss) $ 1,953 $ 3,020 ($ 7,761)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Amortization of goodwill and intangibles 116 83 943
Depreciation and amortization 1,669 1,743 2,265
Software product amortization 2,223 2,168 2,188
Write off of intangible assets -- -- 7,623
Technology Charge 3,759 -- --
Gain on sale of business unit -- -- (3,675)
Provision for losses on accounts receivable 389 544 907
Provision for deferred income taxes (679) 2,095 (2,392)
(Gain) loss on sale of equipment 2 (22) (31)
Changes in operating assets and liabilities:
Acounts receivable and unbilled work (3,059) (839) 2,544
Other assets (438) 1,382 444
Accounts payable and accrued expenses (184) 313 (2,335)
Contract reserve -- (25) 11
Income taxes payable 1,823 (3,168) 3,875
Other long-term liabilities (997) 509 1,276
--------------------------------------
Net cash provided by operating activities 6,577 7,803 5,882
Investing Activities:
Purchase of property and equipment (1,692) (1,615) (1,241)
Proceeds from sale of equipment 9 155 142
Proceeds from sale of business unit -- -- 24,093
Capitalized software products (4,034) (3,257) (4,872)
Increase in intangible assets (100) (140)
--------------------------------------
Net cash provided by (used in) investing activities (5,817) (4,857) 18,122
Financing activities:
Proceeds from revolving line of credit and long-term borrowings -- 4,100 3,128
Principal payments on revolving line of credit, long-term
borrowings and capital lease obligations (1,546) (5,408) (7,925)
Translation adjustment (29) (4) (2)
Net Proceeds from sale of common stock, warrants, options
and treasury stock 2,550 1,457 623
Purchase of treasury stock (1,925) (7,576) (2,484)
--------------------------------------
Net cash used in financing activities (950) (7,431) (6,660)
--------------------------------------
Increase (decrease) in cash and cash equivalents (190) (4,485) 17,344
Cash and cash equivalents at beginning of year 13,760 18,245 901
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,570 $ 13,760 $ 18,245
======================================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CyCare Systems, Inc. and Subsidiaries
Years Ended December 31, 1993, 1994 and 1995
(In Thousands Except Share Data)
===========================================================================================================================
Common Stock
---------------------- Capital In
Par Excess of Retained Treasury
Shares Value Par Value Earnings Stock Total
===========================================================================================================================
Balance at December 31, 1992 5,592,782 $61 $29,125 $11,861 ($3,309) $37,738
Net loss (7,761) (7,761)
Translation adjustment (2) (2)
Purchase of treasury stock (281,300) (2,484) (2,484)
Proceeds from employee stock
purchase plan offering 71,590 (11) 429 418
Exercise of stock options 35,000 (5) 210 205
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 5,418,072 61 29,109 4,098 (5,154) 28,114
Net income 3,020 3,020
Translation adjustment (4) (4)
Purchase of treasury stock (812,800) (7,576) (7,576)
Proceeds from employee stock
purchase plan offering 54,741 55 329 384
Tax benefit of stock options 212 212
Exercise of stock options 157,375 129 944 1,073
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 4,817,388 61 29,505 7,114 (11,457) 25,223
Net income 1,953 1,953
Translation adjustment (29) (29)
Purchase of treasury stock (80,227) (1,925) (1,925)
Proceeds from employee/director stock
plan offerings 42,204 134 349 483
Issuance of common stock 21,430 106 490 596
Tax benefit of stock options 1,718 1,718
Exercise of stock options 294,125 (27) (928) 3,021 2,066
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 5,094,920 $61 $31,436 $8,110 ($9,522) $30,085
-------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CyCare Systems, Inc. and Subsidiaries
1. Summary of Significant Accounting Principles
Basis of preparation:
The consolidated financial statements include the Company (a Delaware
corporation) and its subsidiaries. Operations in Canada which were insignificant
and made up less than 1% of revenues were discontinued in the first quarter of
1995. All intercompany transactions and accounts have been eliminated.
Nature of operations:
CyCare's principal line of business is in providing systems and services to
the physician group marketplace, and electronic data interchange to the health
care industry. The principal markets for the Company's products and services are
geographically disbursed throughout the United States.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues:
The Company provides information processing services and systems, primarily
to medical group practices, faculty practice plans and medical enterprises
throughout the United States. Initial software license fee revenues are
recognized for financial statement purposes when the contract is signed, and
upon shipment of systems and, if applicable, upon compliance with certain other
conditions. Software maintenance revenues are recognized when billed, a majority
of which are billed monthly.
Supply and equipment inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and equipment:
Depreciation is computed by the straight-line method over the estimated
useful lives of such assets. Leasehold improvements are amortized over the
remaining life of the lease. Property and equipment are summarized below:
Property and equipment are summarized below:
Estimated
useful life
1995 1994 in years
------- ------- ------------
(In Thousands)
Land $ 500 $ 500
Buildings and
improvements 10,090 9,921 5 - 23
Computers
and equipment 19,351 18,806 3 - 8
Furniture
and fixtures 2,503 2,335 8 - 10
Leasehold
improvements 56 56 Lease term
------- -------
32,500 31,618
Less accumulated
depreciation
and
amortization 22,694 21,840
------- -------
Property and
equipment, net $ 9,806 $ 9,778
Research and development:
Research and development costs, principally the design and development
(exclusive of certain costs capitalized as software products) of proprietary
systems, and programming, are expensed as incurred. Routine maintenance of
proprietary software is also expensed as incurred.
Software products:
Certain internal software development costs, primarily coding and testing
and meeting recoverability tests, are capitalized as software products. The cost
of software capitalized is amortized over the greater of its life of three to
five years, or the ratio of current revenues to current and anticipated revenues
from such software.
Income taxes:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes.
Goodwill and intangibles:
Goodwill represents the excess of cost over the fair value of assets at the
date of acquisition of businesses acquired. The goodwill is being amortized over
40 years. The allocated costs of certain contracts and customer lists acquired
in conjunction with the acquisition of businesses are included in intangibles.
The intangibles are being amortized over the related lives ranging from two to
twelve years. The Company assesses the recoverability of goodwill and
intangibles based upon expected future, undiscounted cash flows and other
relevant information.
Earnings per share:
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding during the year. Fully
diluted earnings per share are not presented since such amounts would not have a
material dilutive effect.
Cash and cash equivalents:
Cash and cash equivalents include demand deposits, bank money market
accounts and repurchase agreements since they represent highly liquid
investments with remaining maturities of less than three months when purchased.
Concentration of credit risk:
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of accounts receivable and
unbilled work. A majority of the Company's accounts receivable and unbilled work
are derived from sales in various geographic areas to customers in the health
care industry. The Company performs ongoing credit risk evaluations of its
customer's financial condition and generally does not require collateral. The
Company's significant customers are major, well-known businesses in the health
care industry. Credit losses have been provided for in the financial statements
and have been within management's expectations.
Accounting for stock-based compensation:
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. The Statement allows for a
fair value based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for
stock-based arrangements under Opinion No. 25, Statement No. 123 requires
disclosure of the pro forma effect on net income and earnings per share of its
fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of the statement, if earlier. The Company continues to
evaluate the provisions of Statement No. 123 and has not determined whether it
will adopt the recognition and measurement provisions of that Statement, which
the Company expects would result in increased compensation expense in future
periods.
Reclassifications:
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform with 1995 financial statement presentation.
2. Acquisitions and Dispositions
During December 1995, the Company acquired all of the outstanding stock of
Richard D. Jugel & Company (Jugel), a provider of electronic data interchange
services, for 21,430 shares of CyCare common stock which was valued at $600,000.
This transaction was accounted for as a purchase. In addition, the Company
executed covenants not to compete with two former officers of Jugel for $100,000
cash and a $500,000 note payable. In connection with the acquisition, the
Company acquired assets with a fair value of $196,000 and assumed liabilities of
$8,000. The results of operations of Jugel are not considered significant.
Therefore, pro forma information has not been included.
During 1993, the Company sold substantially all of the assets and certain
liabilities of its Practice Management business unit for $24.1 million in cash.
This business unit provided processing and collection services for
hospital-based physicians throughout the United States. Assets sold approximated
$18.8 million and liabilities assumed by the purchaser were $588,000. In
addition, the Company recorded charges for liabilities related to the
disposition of the business. These charges, which totaled $2.2 million, were for
facilities and workforce adjustments as a result of the sale, as well as certain
transaction related fees. The sale resulted in a profit before tax of
approximately $3.7 million which is included in other income. The Company had
taxable income related to the gain of $10.9 million due primarily to
nondeductible goodwill included in the assets sold.
3. Corporate Charges
During the fourth quarter of 1995, the Company recorded charges of
approximately $3.8 million, primarily related to previously developed software
technology which the Company will replace with more advanced products. The
charges related primarily to the Company's previously developed medical records
technology, which will be replaced by a more advanced product licensed from Wang
Laboratories, and a mainframe version of the CyCare System 3000, which the
Company has determined would not be viable in a client/server environment.
During the fourth quarter of 1993, the Company wrote down assets and established
reserves totaling $11.9 million, primarily related to its decision to focus
efforts on those products and services perceived to be the most attractive to
the health care marketplace. These adjustments included the discontinuance of
certain products and services formerly offered by the Company, which resulted in
the elimination of the related capitalized software, intangibles and goodwill
associated with these products and services. In addition, the Company's Board of
Directors authorized the repurchase of an additional one million shares of its
common stock from time to time in the open market at prevailing market prices.
As a result of the sale of the Practice Management business unit, the Company
operates fewer offices and has reduced corporate overhead. The write-downs and
reserves related principally to product lines eliminated or de-emphasized and
are as follows:
- --------------------------------------------------------------------------------
(In Thousands)
Capitalized software $ 3,765
Goodwill and intangibles 3,858
Office consolidations, relocation
and severance reserves 753
Retirement benefit 1,612
Other 1,933
-------
$11,921
-------
The impact on the income statement is as follows:
- --------------------------------------------------------------------------------
(In Thousands)
Cost of services 390
Cost of systems sold 350
Software product amortization 3,765
Selling and administrative expenses 7,416
-------
$11,921
-------
4. Long-Term Debt and Line of Credit
Long-term debt consisted of the following at December 31:
1995 1994
- --------------------------------------------------------------------------------
(In Thousands)
First mortgage payable to a bank,
at prime rate plus .25%
monthly principal payments
of $68,334 to April 1999,
collateralized by a building $2,733 $3,553
Term loan payable to a bank, at
prime rate, monthly principal
payments of $37,778 to
April 1999, collateralized
by all assets 1,378 1,831
Other 42 315
------ ------
$4,153 $5,699
------ ------
Less current portion 1,300 1,556
----- -----
Long-term portion $2,853 $4,153
====== ======
Maturities of long-term debt due in each of the next four years is
$1,300,000 in 1996, $1,280,000 in 1997, $1,282,000 in 1998 and $291,000 in 1999.
The Company estimates that the fair market value of the above long-term debt
approximates its recorded value since the interest rates vary with prime. The
Company's borrowing agreements contain covenants which place various
restrictions on financial ratios, levels of net worth and working capital, and
prohibits the payment of dividends.
During the years ended December 31, 1995, 1994 and 1993, the Company made
interest payments which totaled approximately $450,000, $456,000, and $844,000,
respectively.
The Company has a $3,500,000 line of credit with a bank expiring in April
1997. At December 31, 1995 and 1994, the unused portion totaled $3,500,000.
Borrowings under the line of credit bear interest at the bank's prime rate less
.25%.
Information with respect to the line of credit is as follows:
Maximum Average Weighted
amount amount average
Balance of Weighted outstanding outstanding interest rate
end of average during the during the during the
period interest rate period period period
Line of Credit
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 $ ---- ---- ---- ---- ----
Year Ended December 31, 1994 $ ---- ---- ---- ---- ----
Year Ended December 31, 1993 $ ---- 6.5% $4,671,000 $2,647,000 5.5%
The average amount outstanding during the period was computed by dividing
the total of month-end outstanding principal balance by the number of months the
borrowings were outstanding. The weighted average interest rate during the
period was computed by dividing the actual interest expense by the average
short-term debt outstanding.
Note 5. Benefit Plans
The Company has a stock option plan for key employees. Shareholders amended
the plan in 1995 to provide an additional 300,000 shares of common stock for
future grants, bringing the total shares reserved for common stock options to
1,120,000. The plan qualifies as an incentive stock option plan. Non-qualified
stock options can also be issued under the plan. Options are granted at the fair
market value at date of grant. Incentive stock options expire on the fifth
anniversary of the date of grant. The non-qualified options are exercisable
based on terms established by the Board of Directors. All options expire upon
termination of employment. In addition, under certain circumstances all options
may become immediately exercisable. Transactions involving the plan are
summarized as follows:
Option price
Benefit Plans Available Unexercised Exercisable per share
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 126,647 589,000 343,000 $ 4.88 - 10.00
Granted (40,500) 40,500 7.00 - 7.00
Becoming exercisable 142,250 4.88 - 10.00
Exercised (35,000) (35,000) 4.88 - 7.63
Cancelled 30,000 (30,000) (30,000) 6.00 - 9.63
---------------------------------------------------
Balance at December 31, 1993 116,147 564,500 420,250 4.88 - 10.00
Granted (127,500) 127,500 8.25 - 12.75
Becoming exercisable 99,375 4.88 - 7.25
Exercised (157,375) (157,375) 4.88 - 9.00
Cancelled 82,000 (82,000) (82,000) 6.00 - 10.00
---------------------------------------------------
Balance at December 31, 1994 70,647 452,625 280,250 4.88 - 12.75
Amended Plan 300,000
Granted (315,500) 315,500 14.88 - 32.50
Becoming exercisable 92,750 4.88 - 12.75
Exercised (293,500) (293,500) 4.88 - 12.75
Cancelled 39,250 (39,250) (39,250) 4.88 - 19.00
---------------------------------------------------
Balance at December 31, 1995 94,397 435,375 40,250 $ 4.88 - 32.50
---------------------------------------------------
In 1995, shareholders approved the issuance of 50,000 shares of common stock
under a stock plan for non-employee directors of the Company. Under the plan,
non-employee directors received a one-time non-qualified stock option grant of
2,500 shares that vests at a rate of 25% per year and expires five years from
the date of grant. Additionally, any non-employee director serving in such
capacity as of July 1st of each year is granted 1,000 restricted shares. The
term of the restriction is one year from date of grant. However, under certain
circumstances the non-qualified stock option will become immediately exercisable
and all restrictions will be removed from the restricted stock grant. In 1995,
non-qualified stock options were granted for 7,500 shares (at a price of $12.38)
and restricted stock grants were issued for 3,000 shares, leaving 39,500 shares
available for future issuance.
The Company also has an Employee Stock Purchase Plan. In 1995, shareholders
amended the plan to provide an additional 300,000 shares under the plan,
increasing the total authorized to 1,320,000. The purchase price is the lesser
of 85% of the fair market value of the stock at either the beginning or end of
the plan year. Employees may designate up to 10% of their compensation for the
purchase of stock. The number of shares purchased by employees was 39,204 in
1995, 54,741 in 1994 and 71,590 in 1993. At December 31, 1995, 302,701 shares
remained unissued under the plan and will be made available for employee
purchase during the plan year commencing January 1, 1996.
The number of shares of treasury stock the Company purchased was 80,227 in
1995, 812,800 in 1994 and 281,300 in 1993. The average price per share based on
the fair market value on date of purchase was $23.99 in 1995, $9.32 in 1994 and
$8.83 in 1993. Included in the 1994 purchases were 412,800 shares purchased, at
$9.00 per share, from an entity that was owned by a former director of the
Company. The Company utilized 357,759 in 1995, 212,116 in 1994 , and 106,590 in
1993 of treasury shares to fund the Stock Option, Director Stock and Employee
Stock Purchase Plans and for an acquisition as discussed in Note 2.
The Company's 401(k) Savings Plan was established for the benefit of all of
its employees. Participants may contribute an amount not exceeding 15% of
pre-tax compensation, or 10% of after-tax compensation, or a combination of
pre-tax and after-tax contributions not to exceed 19% of compensation, received
during the period of participation in the Plan. The Company's matching
contribution to the Plan is 15% of the employee's first 10% of compensation
contributed. The Company's expense under the Plan, including administrative
costs, amounted to $145,000 in 1995, $204,000 in 1994 and $286,000 in 1993.
Effective December 28, 1993, the Company entered into a retirement benefit
and post-employment benefit program with its Chairman and Chief Executive
Officer in recognition of past services and the additional responsibilities
assumed upon the restructuring of the Company during the fourth quarter of 1993.
Under the retirement benefit element, he is to receive 60% of his average wages
during his last two years of service subject to certain reductions. The Company
accounts for these benefits under the provisions of Statement of Financial
Accounting Standard No. 87 and is to fund the benefits from corporate assets at
the time the payments are required between the ages of 65 and 70. The projected
benefit obligation was $650,000 and $550,000 at December 31, 1995 and 1994,
respectively. The expense recorded was $222,000 in 1995, $210,000 in 1994 and
none in 1993 given the effective date at year end. Any unrecognized prior
service costs are being amortized over a three-year period.
In accordance with the retirement benefit arrangement above, during 1993 the
Company also modified its split-dollar life insurance arrangement with its
Chairman and Chief Executive Officer whereby premiums paid and to be paid under
the policies are not required to be returned to the Company should he reach age
70. Accordingly, the Company expensed the existing premiums recorded as assets
in the fiscal year ended December 31, 1993 and recorded a $692,000 liability for
the present value of the future payments, which are required through 2003. The
total expense of this arrangement recorded during 1993 was $1.6 million and was
reflected in the fourth quarter 1993 corporate restructuring. The expense
recorded, representing interest costs, was $44,000 in 1995 and $23,000 in 1994.
Should the Chairman and Chief Executive Officer not attain age 70, the Company
would receive a return of all prior premiums paid from the policy proceeds.
NOTE 6. INCOME TAXES
Significant components of the federal and state income tax expense for the
years ended December 31 are:
1995 1994 1993
- --------------------------------------------------------------------------------
(In Thousands)
Current:
Federal $ 1,687 $ (57) $ 3,271
State 127 (9) 778
----------------------------------------------
Total Current $ 1,814 $ (66) $ 4,049
Deferred:
Federal (631) 1,823 (2,081)
State (48) 272 (311)
----------------------------------------------
Total Deferred: (679) 2,095 (2,392)
$ 1,135 $ 2,029 $ 1,657
==============================================
Total income tax payments, net of refunds received, were approximately
($116,000) in 1995, $3,134,000 in 1994 and $223,000 in 1993.
The following table reconciles the differences between the effective income
tax rate and the federal statutory income tax rate for the years ended December
31:
1995 1994 1993
- --------------------------------------------------------------------------------
Federal statutory rate 34% 34% (34%)
Goodwill - - 55
State taxes net
of federal benefit 2 4 5
Other 1 2 1
----------------------------------------------
37% 40% 27%
==============================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31 are as
follows:
1995 1994 1993
- --------------------------------------------------------------------------------
(In Thousands)
Deferred tax liabilities: $ 599 $ 732 $ 637
Tax versus financial
reporting depreciation
Capitalizing versus
expensing certain
software develop-
ment costs 2,784 3,678 3,230
Prepaid expenses
and other 435 885 861
------------------------------------------
Total deferred tax liabilities 3,818 5,295 4,728
Deferred tax assets:
Tax versus financial
reporting liabilities 1,384 2,157 3,248
Prepaid software
licenses 95 120 557
------------------------------------------
Total deferred tax assets 1,479 2,277 3,805
------------------------------------------
Net deferred tax liabilities $ 2,339 $ 3,018 $ 923
==========================================
NOTE 7. Commitments
The Company leases premises and equipment under non-cancelable operating
leases at various dates through 2003. Certain of these leases contain renewal
and purchase option clauses under various terms.
Rental expense charged to operations was approximately $4,714,000 in 1995,
$4,704,000 in 1994 and $6,284,000 in 1993. The approximate annual rental
commitments in each of the next five years and thereafter is approximately
$2,100,000 in 1996, $1,714,000 in 1997, $1,396,000 in 1998, $635,000 in 1999,
$370,000 in 2000 and $638,000 thereafter.
The Company also acts as lessor for portions of its building and computer
equipment with a cost of $8,549,000, accumulated depreciation of $5,235,000 and
a net carrying value of $3,314,000. At December 31, 1995, future minimum lease
receivables under the lease agreements are approximately $832,000 in 1996,
$752,000 in 1997, $563,000 in 1998, $298,000 in 1999, $110,000 in 2000, and
$20,000 thereafter.
NOTE 8. Quarterly Results (Unaudited)
Quarterly financial results for the years ended December 31, 1995 and 1994
are summarized below.
Note 8 - Quarterly Results
1995 1994
- --------------------------------------------------------------------------------
(In Thousands Except Per Share Data)
Revenues 1st Quarter $ 15,761 $ 12,996
2nd Quarter 16,463 13,163
3rd Quarter 16,184 13,423
4th Quarter 14,514 14,230
Gross profit: 1st Quarter $ 8,206 $ 6,938
2nd Quarter 8,707 7,208
3rd Quarter 8,231 7,276
4th Quarter 4,519 7,494
Net income (loss): 1st Quarter $ 1,013 $ 608
2nd Quarter 1,113 680
3rd Quarter 1,142 776
4th Quarter (1,315) 956
Earnings (loss) per share 1st Quarter $ 0.20 $ 0.12
2nd Quarter 0.21 0.14
3rd Quarter 0.22 0.16
4th Quarter (0.25) 0.19
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
CyCare Systems, Inc.
We have audited the accompanying consolidated balance sheets of CyCare
Systems, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CyCare Systems,
Inc. and subsidiaries at December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
February 14, 1996
REPORT OF CYCARE MANAGEMENT
To the Shareholders of CyCare Systems, Inc.
February 14, 1996
Management recognizes that it is primarily responsible for the integrity and
fairness of all information and representations contained in the consolidated
financial statements and notes thereto, as well as other sections of the annual
report. In preparing the consolidated financial statements, we have made
informed judgments and estimates in accounting for transactions and events and
given due consideration to materiality.
The Company's internal accounting controls are designed to provide
reasonable assurance that assets are safeguarded from loss or unauthorized use
and produce adequate records for preparation of financial information. There are
limits inherent in all systems of internal accounting control based on the
recognition that the cost of such systems should not exceed the benefits to be
derived. We believe our systems provide the appropriate balance.
Management has cooperated in providing information and full access to
records to the Company's independent auditors, Ernst & Young LLP, during the
course of their audit of the consolidated financial statements. Ernst & Young
LLP meets annually with the Board of Directors, which includes members who are
not employees of the Company, to review internal accounting control, auditing
and financial reporting matters.
/s/ Jim H. Houtz /s/ Mark R. Schonau
Jim H. Houtz Mark R. Schonau
Chairman of the Board, President Chief Financial Officer, Secretary
and Chief Executive Officer and Treasurer
ELEVEN - YEAR COMPARISON OF SELECTED FINANCIAL DATA
CyCare Systems, Inc. and Subsidiaries
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
Revenues $ 62,922 $ 53,812 $ 71,062 $ 75,635 $ 75,444 $ 79,429 $ 86,215 $ 83,734 $ 67,718 $ 57,186 $ 48,585
Net income(loss) $ 1,953 $ 3,020 $ (7,761) $ 1,499 $ 612 $(11,657) $ 3,079 $ 486 $ 3,762 $ 2,866 $ 3,116
Capital additions $ 1,692 $ 1,615 $ 1,241 $ 772 $ 1,416 $ 1,958 $ 2,482 $ 6,368 $ 10,340 $ 10,350 $ 6,509
Working capital $ 17,607 $ 15,255 $ 18,287 $ 9,867 $ 8,712 $ 8,028 $ 12,145 $ 12,624 $ 19,057 $ 18,546 $ 16,451
Total assets $ 46,273 $ 44,396 $ 48,730 $ 60,843 $ 64,558 $ 70,229 $ 87,469 $ 92,670 $ 75,276 $ 64,906 $ 53,273
Long-term debt $ 2,853 $ 4,153 $ 5,690 $ 7,200 $ 8,305 $ 12,072 $ 15,948 $ 20,215 $ 10,263 $ 5,717 $ 1,014
Financial Ratios:
Percent recurring
service revenue
to total 76% 81% 85% 85% 87% 82% 79% 80% 71% 61% 51%
Return on revenues-
Before tax 4.9% 9.4% (8.6%) 3.3% 1.8% (21.0%) 5.7% 1.1% 5.7% 8.9% 11.2%
After tax 3.1% 5.6% (10.9%) 2.0% .8% (14.7%) 3.6% .6% 5.6% 5.0% 6.4%
Return on common
shareholders'
equity 7.1% 11.3% (23.6%) 4.0% 1.7% (27.8%) 6.6% 1.1% 9.1% 7.7% 11.5%
Total debt to total
capitalization .54 .76 .73 .61 .74 .94 .83 1.05 .71 .67 .52
Current ratio 2.9:1 2.7:1 2.7:1 1.8:1 1.6:1 1.4:1 1.7:1 1.6:1 2.4:1 2.5:1 2.1:1
Per Share Data:
Earnings (loss)
Per share $ 0.38 $ 0.60 $ (1.39) $ 0.27 $ 0.11 $ (2.10) $ 0.54 $ 0.09 $ 0.70 $ 0.55 $ 0.67
Book value per
common share $ 5.90 $ 5.24 $ 5.19 $ 6.75 $ 6.54 $ 6.44 $ 8.56 $ 7.95 $ 7.92 $ 7.28 $ 6.72
Dividends per
share(2)
Employees
(December 31) 493 464 450 1,069 1,131 1,188 1,257 1,445 976 1,018 677
States and provinces
covered 53 53 53 53 53 53 52 53 53 53 53
Securities Information
The common stock of CyCare Systems, Inc. is listed on the New York Stock
Exchange under the symbol CYS. The high, low and closing transaction prices as
reported by the NYSE are set forth in the following tables.
1995 High Low Close
- --------------------------------------------------------------------------------
4th Quarter 34 1/2 22 5/8 25 5/8
3rd Quarter 39 1/2 27 1/4 33 1/4
2nd Quarter 27 1/2 22 1/8 27 1/4
1st Quarter 23 3/8 14 1/2 21 7/8
1994 High Low Close
- --------------------------------------------------------------------------------
4th Quarter 15 7/8 10 3/4 14 7/8
3rd Quarter 13 3/4 11 1/2 12 5/8
2nd Quarter 12 1/2 9 5/8 12 1/4
1st Quarter 11 1/8 7 3/4 10 3/8