<PAGE> 1
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 September 30, 1996.
or
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 0-27056
Healthdyne Information Enterprises, Inc.
----------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2112366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 Parkway Place, Suite 1100, Marietta, Georgia 30067
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 423-8450
--------------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
The number of shares outstanding of the issuer's only class of Common
Stock, $ .01 par value, as of October 31, 1996 was 17,369,965.
Exhibit Index is on Page 19 herein.
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PART I - FINANCIAL INFORMATION; Item 1. Financial Statements
Healthdyne Information Enterprises, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets (in thousands, except per share amounts)
<TABLE>
<CAPTION>
9/30/96 12/31/95
--------- --------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,717 $ 4,013
Trade accounts receivable, less allowances of $68 at
September 30, 1996 and $85 at December 31, 1995 4,797 2,966
Other current assets, net 1,067 1,020
- ---------------------------------------------------------------------------------------------------------
Total current assets 8,581 7,999
Purchased software, net of accumulated amortization of
$455 and $150 at September 30, 1996 and
December 31, 1995, respectively 3,465 2,494
Capitalized software development costs, net of
accumulated amortization of $21 at September 30, 1996 572 --
Property and equipment, net of accumulated depreciation
of $396 and $354 at September 30, 1996 and
December 31, 1995, respectively 1,199 1,136
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $1,278 and $758 at
September 30, 1996 and December 31, 1995,
respectively 8,998 9,614
Other assets 469 491
- ---------------------------------------------------------------------------------------------------------
Total assets $ 23,284 $ 21,734
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current installments of long-term debt and obligations under
capital leases $ 1,598 $ 2,652
Accounts payable 1,392 547
Accrued liabilities 885 760
Deferred service revenue 2,167 1,297
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Total current liabilities 6,042 5,256
Long-term debt and obligations under capital leases,
excluding current installments 5,276 5,382
Other long-term obligations -- 167
- ---------------------------------------------------------------------------------------------------------
Total liabilities 11,318 10,805
- ---------------------------------------------------------------------------------------------------------
Shareholders' equity:
Series A cumulative preferred stock, without par value
Authorized 20,000 shares; designated 500 shares;
issued none -- --
Common stock, $.01 par value. Authorized 50,000 shares;
issued and outstanding 17,330 and 16,503 shares at
September 30, 1996 and December 31, 1995,
respectively 173 165
Additional paid-in capital 22,395 22,012
Accumulated deficit (10,602) (11,248)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,966 10,929
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Total liabilities and shareholders' equity $ 23,284 $ 21,734
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
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Healthdyne Information Enterprises, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software $ 1,629 $ 789 $ 4,781 $ 2,935
Services 2,324 1,288 6,439 2,895
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Total revenue 3,953 2,077 11,220 5,830
- ------------------------------------------------------------------------------------
Cost of revenue:
Software 138 36 450 187
Services 1,226 792 3,449 1,585
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Total cost of revenue 1,364 828 3,899 1,772
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Gross profit 2,589 1,249 7,321 4,058
Operating expenses:
Sales and marketing 764 946 2,445 2,424
Research and development 471 545 1,076 1,373
General and administrative 938 1,100 2,783 2,914
- ------------------------------------------------------------------------------------
Total operating expenses 2,173 2,591 6,304 6,711
- ------------------------------------------------------------------------------------
Operating earnings (loss) 416 (1,342) 1,017 (2,653)
Losses of affiliate -- (288) -- (756)
Minority interest -- 143 -- 163
Interest expense, net (136) (51) (371) (136)
- ------------------------------------------------------------------------------------
Earnings (loss) before taxes 280 (1,538) 646 (3,382)
Income tax benefit -- 327 -- 282
- ------------------------------------------------------------------------------------
Net earnings (loss) $ 280 $ (1,211) $ 646 $ (3,100)
- ------------------------------------------------------------------------------------
Earnings (loss) per common share
and common share equivalent:
Primary $ 0.01 $ (0.08) $ 0.03 $ (0.20)
Fully diluted $ 0.01 $ (0.08) $ 0.03 $ (0.20)
- ------------------------------------------------------------------------------------
Weighted average number of common
shares and common share equivalents:
Primary 18,934 15,500 18,505 15,500
Fully diluted 19,002 15,500 18,689 15,500
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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Healthdyne Information Enterprises, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 646 $ (3,100)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Losses of affiliate -- 756
Minority interest in net loss of subsidiary -- (163)
Depreciation and amortization 1,063 677
Increase in trade accounts receivable (1,859) (775)
Increase in other current assets (182) (495)
Increase (decrease) in current liabilities other than
current installments of long-term debt and
capital lease obligations 2,034 (381)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,702 (3,481)
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchased software (1,080) (1,326)
Capitalized software development costs (593) --
Capital expenditures (345) (525)
Acquisition of business, net of cash acquired -- (565)
(Increase) decrease in other noncurrent assets, net 18 (225)
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Net cash used in investing activities (2,000) (2,641)
- ---------------------------------------------------------------------------------------------------------
Cash flows before financing activities (298) (6,122)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal (payments) borrowings of long-term debt (1,389) 302
Proceeds from the issuance of common stock 391 --
Proceeds from capital contributions -- 10,826
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (998) 11,128
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,296) 5,006
Cash at the beginning of the period 4,013 41
- ---------------------------------------------------------------------------------------------------------
Cash at the end of the period $ 2,717 $ 5,047
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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Healthdyne Information Enterprises, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(Unaudited)
1. General:
The consolidated condensed financial statements as of September 30, 1996 and for
the three and nine months ended September 30, 1996 and 1995 are unaudited. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for the fair presentation of the consolidated financial
position and results of operations and cash flows for the periods presented have
been included. Results for the interim periods are not necessarily indicative of
results that may be expected for the full year.
These consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and notes included in the Annual
Report on Form 10-K of Healthdyne Information Enterprises, Inc. ("HIE" or the
"Company") for the year ended December 31, 1995.
2. Major Customers:
One customer accounted for 29% and 27% of the Company's revenue for the three
and nine-month periods ended September 30, 1996, respectively. In addition, one
distributor provided customers to the Company that accounted for approximately
5% and 9% of the Company's revenue for the three and nine-month periods ended
September 30, 1996.
3. Earnings (Loss) Per Share of Common Stock:
Earnings per share of common stock for the three and nine-month periods ended
September 30, 1996 are based on the weighted average shares of common stock
outstanding and dilutive outstanding stock options computed using the treasury
stock method for primary and fully diluted calculation purposes. Loss per share
for both primary and fully diluted calculation purposes is based on the weighted
average shares of common stock outstanding without regard to the antidilutive
effect of outstanding stock options.
4. Investments in Affiliates:
On June 12, 1996, HIE and a former majority-owned subsidiary, DataView Imaging
International, Inc. ("DataView"), entered into an agreement (the "Agreement")
providing for a restructuring of the relationship between the parties effective
as of April 1, 1996. The Agreement provides, among other things, for (i) a
modification of the existing funding agreement between the parties to limit the
Company's lending commitment to DataView to a maximum of $2,042,000 (the balance
due under such funding agreement as of March 31, 1996); (ii) the repayment by
DataView of certain advances totaling at least $93,000 made by HIE subsequent to
December 31, 1995; (iii) a reduction in HIE's equity interest in DataView from
61.5% to 19.5% through a stock repurchase by DataView financed by HIE; (iv)
certain rights for HIE to use DataView's clinical image management technology in
5
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HIE's service business, as well as non-exclusive product distribution rights;
and (v) a reduction in HIE's representation on the DataView Board of Directors
and a termination of HIE's executive management responsibilities with respect to
DataView.
The Company and Massey Burch Capital Corp. ("Massey Burch") currently each hold
less than 1% of the common stock of Criterion Health Strategies, Inc. ("CHS"), a
HIE affiliate, and an 8% convertible debenture which is convertible into 32% of
the CHS common stock on a fully diluted basis. On July 30, 1996, the Company and
Massey Burch entered into an agreement in principle which contemplates the
purchase by the Company of an option to acquire Massey Burch's investment in CHS
(the "Massey Burch Option"). The Massey Burch Option as currently proposed would
be exercisable at any time during the period from December 31, 1996 through June
30, 1997, with the option exercise price to be payable through the issuance of
the greater of 416,666 shares of the Company's common stock or the equivalent
number of shares having a fair market value of $2 million at the time the option
is exercised. The agreement in principle contemplates that, as consideration for
the grant of Massey Burch Option, the Company will issue to Massey Burch a
warrant to purchase 50,000 shares of the Company's common stock at fair market
value as of the date of grant. The agreement further contemplates that Massey
Burch will be granted registration rights with respect to both the shares of
common stock underlying the warrant and the shares issuable upon the Company's
exercise of the proposed option. Massey Burch will continue to be subject to its
commitment to fund CHS up to a maximum of $2 million of which Massey Burch has
funded $1.4 million as of September 30, 1996. The transactions contemplated by
the agreement in principle are subject to negotiation and execution of
definitive agreements and other customary conditions. There can be no assurance
that definitive agreements will be entered into or, even if entered into, that
the transaction will be consummated as described above or that the Company would
exercise the Massey Burch Option to acquire Massey Burch's interest in CHS.
5. Subsequent Events:
On November 4, 1996, the Company sold 2.75 million shares of its common stock
and received approximately $10.5 million, after deducting all offering-related
expenses. The Company intends to use the net proceeds of this offering for
working capital and general corporate purposes, including the satisfaction of
the Company's remaining commitment to CHS, which will not exceed $700,000.
On November 7, 1996, the Company and the two executive officers of CHS (the "CHS
Executives"), each of whom presently owns 13% (26% in the aggregate) of the CHS
common stock on a fully diluted basis, entered into an agreement in principle
which contemplates the grant of an option by the CHS Executives at no cost to
the Company to acquire all of the CHS Executives' ownership interest in CHS (the
"CHS Executives' Option"). The CHS Executives' Option as currently proposed
would be exercisable if, and only if, the Massey Burch Option is exercised (see
Note 4). The exercise price of the CHS Executives' Option would be payable
through the issuance by the Company of an aggregate of 240,000 shares of its
common stock (120,000 shares to each CHS Executive), which shares would vest
periodically from the option exercise date through June 30, 1999. The agreement
further contemplates that the CHS Executives will be
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granted registration rights with respect to the shares issuable upon the
Company's exercise of the proposed option. Finally, the agreement provides for
the conversion of the present CHS stock option plans, for which 10% of the CHS
common stock on a fully diluted basis are presently reserved for issuance by
CHS, to a new Company tandem stock option plan under which 160,000 shares of the
Company's common stock would be reserved for issuance. The transactions
contemplated by the agreement in principle are subject to negotiation and
execution of definitive agreements and other customary conditions. There can be
no assurance that definitive agreements will be entered into or, even if entered
into, that the transaction will be consummated as described above or that the
Company would simultaneously exercise, as required, the Massey Burch Option and
the CHS Executives' Option to acquire Massey Burch's and the CHS Executives'
interests, respectively, in CHS.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Except for the historical information contained herein, this report
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, the Company's limited operating history and lack of profitability in
prior periods, limitations and potential costs inherent in the EBU operational
structure, market acceptance of new products and services offered by the
Company, limited capital resources, and competitive factors, such as new
technologies and pricing pressures, as well as factors discussed or identified
from time to time in the Company's filings with the Securities and Exchange
Commission, including, but not limited to, the Company's annual report on Form
10-K for the fiscal year ended December 31, 1995.
Overview
Healthdyne Information Enterprises, Inc. ("HIE" or the "Company") was
incorporated in Georgia on June 15, 1994 and was a wholly-owned subsidiary of
Healthdyne, Inc. (the "Former Parent") until November 6, 1995 at which time the
Former Parent distributed all of the outstanding shares of HIE to the Former
Parent's shareholders (the "Spin-Off"). HIE's common stock is publicly traded on
the Nasdaq National Market under the symbol "HDIE". In conjunction with its
subsidiaries Healthcare Communications, Inc. ("HCI") and Integrated Healthcare
Solutions, Inc. ("IHS") and its affiliate Criterion Health Strategies, Inc.
("CHS"), the Company is a leading provider of enterprise-wide clinical
information management solutions for emerging integrated healthcare delivery
networks ("IDNs"). Each subsidiary and the affiliate are referred to by the
Company as an Entrepreneurial Business Unit ("EBU").
The Company generates revenue from licensing clinical information
software tools and products and providing related system design, integration,
implementation, support, education and consulting services as discussed below.
HCI. HCI presently contributes the majority of HIE's revenue through
CloverleafTM integration engine software license fees and related
implementation, maintenance and education fees. Software licenses are granted on
a perpetual basis for a one-time, upfront fee. Implementation fees are based on
actual hours of implementation service at standard hourly rates. Software
maintenance agreements are generally one-year renewable service contracts for a
prepaid standard fee. HCI charges a standard per-student amount for its
education classes.
IHS. IHS' revenue contribution to HIE has rapidly increased since its
formation in early 1995. IHS provides clinical and other information solutions
through the use of both proprietary and third-party software tools and by
providing related system design, integration and consulting services. Software
licenses and sublicenses are generally granted on a perpetual basis for a
one-time, upfront fee. Services are generally provided for a fixed fee based on
estimated hours of service to be provided at standard hourly rates.
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<PAGE> 9
CHS. CHS provides enterprise management and other decision support
products through the use of both proprietary and third-party software tools. The
Company does not currently consolidate the operating results of CHS. However, on
July 30, 1996 and November 7, 1996, the Company entered into two separate
agreements in principle with Massey Burch Capital Corp. ("Massey Burch") and the
two executive officers of CHS, respectively, which together would enable the
Company to acquire a 100% ownership interest in CHS. See Notes 4 and 5 of Notes
to Consolidated Condensed Financial Statements included in Item 1 herein.
On June 12, 1996, the Company entered into an agreement effective April
1, 1996, with a former majority-owned subsidiary DataView Imaging International,
Inc. ("DataView") providing for a restructuring of the relationship between HIE
and DataView as discussed in Note 4 of Notes to Consolidated Condensed Financial
Statements included in Item 1 herein. Subsequent to March 31, 1996, DataView's
financial position, results of operations and cash flows are no longer included
in HIE's consolidated financial statements.
The Company expects the following external factors to affect the market
for healthcare information systems tools, products and services in future years:
(1) the continued and accelerated emergence of IDNs; (2) the shift from the
traditional fee-for-service reimbursement system to the capitated (fixed fee)
payment system for healthcare services; (3) the growing importance of
comprehensive clinical information in the managed patient care environment; (4)
the introduction of cost accounting to the healthcare delivery system; and (5)
the growing world-wide need to control the cost of quality healthcare.
Software revenue is generally recognized upon shipment in accordance
with Statement of Position 91-1, "Software Revenue Recognition". Service revenue
is recognized as the work is performed or, in the case of a fixed fee contract,
on the percentage of completion basis, even though some services are prepaid.
The Company's consolidated balance sheets include assets designated as
purchased software and capitalized software development costs. Purchased
software originates from purchases by HIE of proprietary software tools
developed by third parties and prepaid license fees for software tools to be
distributed by HIE on a non-exclusive basis. Certain costs of HIE proprietary
software developed internally are capitalized in accordance with generally
accepted accounting principles. The costs of individual software tools or
products are being amortized ratably based on the projected revenue associated
with the related software or on a straight-line basis over not more than five
years, whichever method results in a higher level of amortization.
The excess of cost over net assets of businesses acquired (goodwill) is
being amortized over a period of fifteen years. At each balance sheet date, the
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
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Results of Operations
The following table sets forth for the periods indicated: (1) the relative
significance of each EBU to the Company as a whole and (2) the percentage of
total revenue for each component included in the Company's Consolidated
Condensed Statements of Operations:
<TABLE>
<CAPTION>
Percent of Revenue (unless otherwise indicated)
----------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenue (000's omitted) $3,953 $ 2,077 $ 11,220 $ 5,830
-------------------------------------------
HCI 60% 61% 58% 76%
IHS 40 27 41 14
DataView (1) -- 12 1 10
-------------------------------------------
Total revenue 100% 100% 100% 100%
-------------------------------------------
Revenue:
Software 41% 38% 43% 50%
Services 59 62 57 50
-------------------------------------------
Total revenue 100 100 100 100
-------------------------------------------
Cost of revenue:
Software 8 5 9 6
Services 53 61 54 55
-------------------------------------------
Total cost of revenue 35 40 35 30
-------------------------------------------
Gross profit 65 60 65 70
-------------------------------------------
Operating expenses:
Sales and marketing 19 46 22 41
Research and development 12 26 9 24
General and administrative 23 53 25 50
-------------------------------------------
Total operating expenses 54 125 56 115
-------------------------------------------
Operating earnings (loss) 11 (65) 9 (45)
Losses of affiliate -- (14) -- (13)
Minority interest -- 7 -- 2
Interest expense, net (4) (2) (3) (2)
-------------------------------------------
Earnings (loss) before taxes 7 (74) 6 (58)
Income tax benefit -- 16 -- 5
-------------------------------------------
Net earnings (loss) 7% (58)% 6% (53)%
-------------------------------------------
</TABLE>
(1) See Note 4 of Notes to Consolidated Condensed Financial
Statements regarding the restructuring of the relationship
between the Company and Dataview.
10
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Comparison of Three Months Ended September 30, 1996 and September 30, 1995
Revenue. Total revenue was $4.0 million for the three months ended
September 30, 1996 compared to $2.1 million for the three months ended September
30, 1995, an increase of 90% even though DataView's revenue is no longer
included in the Company's consolidated revenue effective April 1, 1996 as
discussed above. HCI and IHS contributed equally to the revenue growth in the
third quarter of 1996, with HCI's revenue growth being attributable primarily to
increased software revenue and IHS' revenue growth being attributable primarily
to increased service revenue. Software revenue increased 106% in the third
quarter of 1996 due primarily to increased CloverleafTM integration engine
license fees and secondarily to community person index ("CPI"), imaging and
workflow software tool license fees. Service revenue increased 80% in the third
quarter of 1996 due primarily to the growth of IHS to meet the demand by IDNs
for system design and integration services and the development of clinical
information solutions.
Cost of revenue. Cost of revenue includes, among other things,
compensation of service personnel, travel and software royalties and
amortization. The cost of revenue was $1.4 million for the three months ended
September 30, 1996 compared to $828,000 for the three months ended September 30,
1995, an increase of 65%, substantially all of which is related to the growth in
revenue. The decrease in cost of revenue from 40% of revenue to 35% of revenue
between the third quarter of 1995 and the third quarter of 1996 is due primarily
to improved productivity of the IHS service organization.
Gross profit. The Company's gross profit was $2.6 million for the three
months ended September 30, 1996 compared to $1.2 million for the three months
ended September 30, 1995, an increase of 107%, due primarily to the revenue
growth discussed above. Even though there was a slight shift in the revenue mix
toward software, which generally has a higher gross profit contribution than
service revenue, the primary reason for the improved gross profit as a percent
of revenue was the improved productivity of the IHS service organization.
Sales and marketing. Sales and marketing expense includes, among other
things, compensation of sales and marketing personnel, sales commissions, travel
and advertising. Sales and marketing expense was $764,000 for the three months
ended September 30, 1996 compared to $946,000 for the three months ended
September 30, 1995, a decrease of 19%, due primarily to the exclusion of
DataView from the Company's consolidated operating results for the third quarter
of 1996 as discussed above and secondarily to utilization of a more
cost-effective international distribution network in 1996. Sales and marketing
expense as a percent of revenue decreased from 46% for the third quarter of 1995
to 19% for the third quarter of 1996, reflecting the increased productivity of
the Company's internal sales force and its distributors.
Research and development. Research and development expense includes,
among other things, compensation of research and development personnel,
depreciation and lease expense of research and development equipment and travel.
Research and development expense was $471,000 for the three months ended
September 30, 1996 compared to $545,000 for the three months ended September 30,
1995, a decrease of 14%, due primarily to the capitalization of internally
developed software costs totaling
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$148,000 in the third quarter of 1996 and secondarily to the exclusion of
DataView from the Company's consolidated operating results for the third quarter
of 1996 as discussed above. No such costs qualified for capitalization under
generally accepted accounting principles in the third quarter of 1995.
General and administrative. General and administrative expense
includes, among other things, compensation of finance, accounting and
administrative personnel, goodwill amortization, office rent and insurance.
General and administrative expense was $938,000 for the three months ended
September 30, 1996 compared to $1.1 million for the three months ended September
30, 1995, a decrease of 15%, due primarily to the net effect of (1) decreased
staffing, outside service expense and other administrative costs at HCI
resulting from cost control measures initiated during the fourth quarter of 1995
and the first quarter of 1996 and (2) the exclusion of DataView from the
Company's consolidated operating results for the third quarter of 1996 as
discussed above, both somewhat offset by (3) increased goodwill amortization
related primarily to the step acquisition of HCI during 1995 (as discussed
below); (4) identifiable expenses of being a new public company; and (5)
increased IHS administrative staffing costs to support IHS' current and
projected growth.
Losses of affiliate. Losses of affiliate, which resulted from the
Company's commitment to fund CHS, totaled $288,000 in the third quarter of 1995.
The December 1995 transaction with Massey Burch which provided for a sharing of
the Company's funding commitment to CHS had the additional result of relieving
the Company of the requirement to report a loss from CHS during the first nine
months of 1996.
Minority interest. The minority interest in net loss of subsidiary
totaling $143,000 in the third quarter of 1995 related to HCI, and such minority
interest is no longer applicable as a result of HIE's increased ownership
interest in HCI to 100% effective December 31, 1995. HIE acquired 100% ownership
interest in HCI through a three-step acquisition of a 44% interest in October
1994, an additional 13% interest in May 1995 and the remaining 43% interest
effective December 31, 1995.
Interest expense, net. Net interest expense was $136,000 for the three
months ended September 30, 1996 compared to $51,000 for the three months ended
September 30, 1995, an increase of 167%, due primarily to the net effect of (1)
increased interest associated with financing the increased HCI ownership
interest referred to above and (2) reduced HCI interest expense under a
financing agreement renegotiated at a lower interest rate effective January 1,
1996.
Income tax benefit. The Company has no provision for income taxes for
the three months ended September 30, 1996 due to the utilization of available
net operating loss carryforward benefits. The income tax benefit of $327,000 for
the three months ended September 30, 1995 relates to HCI, which filed a separate
income tax return prior to HIE increasing its ownership interest in HCI to 100%
effective December 31, 1995.
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Comparison of Nine Months Ended September 30, 1996 and September 30, 1995
Revenue. Total revenue was $11.2 million for the nine months ended
September 30, 1996 compared to $5.8 million for the nine months ended September
30, 1995, an increase of 92% even though DataView's revenue is no longer
included in the Company's consolidated revenue effective April 1, 1996 as
discussed above. During the first nine months of 1995, 76% of the Company's
revenue was attributable to software license fees for the integration engine
software tool and related services as compared to 58% for the first nine months
of 1996. The Company completed development of or acquired and began marketing
additional software tools, acquired distribution rights to other software tools
and expanded the system design and integration services capability of IHS during
1995. While revenue from integration engine license fees and related services
increased, the general availability of these new software tools and the growth
of IHS to meet the demand by IDNs for clinical information solutions are
primarily responsible for the Company's increased revenue.
Cost of revenue. The cost of revenue was $3.9 million for the nine
months ended September 30, 1996 compared to $1.8 million for the nine months
ended September 30, 1995, an increase of 120%, substantially all of which is
related to the growth in revenue. The increase in cost of revenue from 30% of
revenue to 35% of revenue between the first nine months of 1995 and the first
nine months of 1996 is primarily attributable to the shift in revenue mix toward
service, which typically has a higher cost of revenue than software.
Gross profit. The Company's gross profit was $7.3 million for the nine
months ended September 30, 1996 compared to $4.1 million for the nine months
ended September 30, 1995, an increase of 80%, due primarily to the revenue
growth discussed above. Gross profit as a percent of revenue decreased from 70%
for the first nine months of 1995 to 65% for the first nine months of 1996. The
revenue mix shifted from 50% software and 50% services for the first nine months
of 1995 to 43% software and 57% services for the first nine months of 1996. The
main reason for the shift was the increase in system design and integration
services provided by IHS. While software revenue, which has relatively high
gross profit margins, increased from $2.9 million for the nine months ended
September 30, 1995 to $4.8 million for the nine months ended September 30, 1996,
a 63% increase, services revenue, which normally has lower gross profit margins
than software, increased from $2.9 million for the nine months ended September
30, 1995 to $6.4 million for the nine months ended September 30, 1996, an
increase of 122%.
Sales and marketing. Sales and marketing expense was $2.4 million for
both the nine-month periods ended September 30, 1996 and 1995 due primarily to
the net effect of increased sales personnel costs, sales commissions and travel
expenses associated with increased sales staffing and the increase in revenue,
offset somewhat by the exclusion of DataView from the Company's consolidated
operating results for the second and third quarters of 1996 as discussed above
and secondarily to utilization of a more cost-effective international
distribution network in 1996. Sales and marketing expense as a percent of
revenue decreased from 41% for the first nine months of 1995 to 22% for the
first nine months of 1996, reflecting the increased productivity of the
Company's internal sales force and its distributors.
13
<PAGE> 14
Research and development. Research and development expense was $1.1
million for the nine months ended September 30, 1996 compared to $1.4 million
for the nine months ended September 30, 1995, a decrease of 22%, due primarily
to the capitalization of internally developed software costs totaling $593,000
in the first nine months of 1996 and secondarily to the exclusion of DataView
from the Company's consolidated operating results for the second and third
quarters of 1996 as discussed above. No such costs qualified for capitalization
under generally accepted accounting principles in the first nine months of 1995.
General and administrative. General and administrative expense was
approximately $2.8 million for the nine months ended September 30, 1996 compared
to $2.9 million for the nine months ended September 30, 1995, a decrease of 4%.
The decrease of $131,000 between the two periods was primarily due to the same
factors which accounted for the decrease in general and administrative expense
between the three months ended September 30, 1995 compared to the three months
ended September 30, 1996 discussed above.
Losses of affiliate. Losses of affiliate, which resulted from the
Company's commitment to fund CHS, totaled $756,000 in the first nine months of
1995. The December 1995 transaction with Massey Burch which provided for a
sharing of the Company's funding commitment to CHS had the additional result of
relieving the Company of the requirement to report a loss from CHS during the
nine months ended September 30, 1996.
Minority interest. The minority interest in net loss of subsidiary
totaling $163,000 in the first nine months of 1995 related to HCI, and such
minority interest is no longer applicable as a result of HIE's increased
ownership interest in HCI to 100% effective December 31, 1995.
Interest expense, net. Net interest expense was $371,000 for the nine
months ended September 30, 1996 compared to $136,000 for the nine months ended
September 30, 1995, an increase of 173%, due primarily to the same factors which
accounted for the increase in net interest expense between the three months
ended September 30, 1995 compared to the three months ended September 30, 1996
discussed above.
Income tax benefit. The Company has no provision for income taxes for
the nine months ended September 30, 1996 due to the utilization of available net
operating loss carryforward benefits. The income tax benefit of $282,000 for the
nine months ended September 30, 1995 relates to HCI, which filed a separate
income tax return prior to HIE increasing its ownership interest in HCI to 100%
effective December 31, 1995.
Liquidity and Capital Resources
The Company has historically financed both its operations since
inception and its investments in EBUs primarily through equity investments by
the Former Parent, which totaled $22 million. Following the Spin-Off, the Former
Parent had no obligation or intention to make additional advances or equity
infusions in the Company. Accordingly,
14
<PAGE> 15
subsequent to the end of the third quarter of 1996, the Company sold 2.75
million shares of its common stock and received approximately $10.5 million,
after deducting all offering-related expenses. The Company intends to use the
net proceeds of this offering for working capital and general corporate
purposes, including satisfaction of the Company's remaining funding commitment
to CHS, which will not exceed $700,000. The Company's present financial
condition and its plans for future working capital and other capital
requirements are further discussed below.
The Company has working capital of $2.5 million ($13 million on a pro
forma basis) at September 30, 1996 compared to $2.7 million at December 31,
1995. Cash decreased $1.3 million during the first nine months of 1996 compared
to a $5.0 million increase during the first nine months of 1995 for the reasons
discussed below.
Net cash provided by operating activities totaled $1.7 million for the
nine months ended September 30, 1996 compared to net cash used in operating
activities of $3.5 million for the nine months ended September 30, 1995. The
$5.2 million total variance between the two periods reflects increased cash
flow from the net earnings recorded during the nine months ended September 30,
1996 compared to the net loss recorded in the nine months ended September 30,
1995 and various changes in the components of working capital, most notably
increases in deferred revenue and accounts payable offset somewhat by increased
trade accounts receivable due to increased revenue and higher days revenue in
accounts receivable.
Net cash used in investing activities was $2.0 million for the nine
months ended September 30, 1996 compared to $2.6 million for the nine months
ended September 30, 1995. During the nine months ended September 30, 1996
compared to the comparable period in the prior year, the Company made a
slightly lower level of investments in a third-party developed software tool
and prepaid licenses for other software tools, while capitalizing $593,000 of
internally developed software costs in the nine months ended September 30,
1996, but none in 1995. The slight decrease in capital expenditures reflects
the Company's current preference for leasing rather than purchasing computer
equipment. The acquisition of business in the nine-month period ended September
30, 1995 relates to HCI as previously discussed.
Net cash used in financing activities was $998,000 during the nine
months ended September 30, 1996 compared to net cash provided by financing
activities of $11.1 million during the nine months ended September 30, 1995.
Prior to the Spin-Off, the Former Parent funded HIE's operations and
investments as reflected in the $10.8 million capital contribution during the
nine-month period ended September 30, 1995. The long-term debt payments shown
in the nine-month period ended September 30, 1996 relate primarily to the
payoff of the $1.1 million note payable associated with the HCI
step-acquisition effective December 31, 1995. The proceeds from the issuance of
common stock relate primarily to the exercise of stock options held by
employees of the Former Parent.
The Company has $1.6 million of debt financing maturing over the next
twelve months, of which $1.0 million could be satisfied with HCI's products
and/or services at the lender's option. During May 1996, HCI renewed its $1.0
million line of credit with a bank on essentially the same terms and conditions
as the expiring line of credit with said bank.
15
<PAGE> 16
The Company is currently pursuing, but has no commitment to receive, at least a
$2 million line of credit from a bank or a financial institution for
unanticipated needs and financial flexibility. Based on its current business
plan and business model projections, the Company believes that current available
cash, including the net proceeds from the recent public stock offering referred
to above, and anticipated cash flow from operating activities will be sufficient
to meet the Company's capital requirements, including the payment of all
maturing debt in cash and its remaining funding commitment to CHS, for at least
the next twelve months and for the foreseeable future.
In 1995, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 121 ("SFAS 121), Accounting for the
Impairment of Long-lived Assets and for the Long-lived Assets to be Disposed
of, and No. 123 ("SFAS 123"), Accounting for Stock-based Compensation, both of
which standards are effective in 1996. The adoption of SFAS 121 did not have
a material effect on the Company's consolidated financial statements. The
Company does not expect the effect of the adoption of SFAS 123 disclosure to be
material.
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 - Statements of Computation of Per Share Earnings (Loss).
27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, the Company did not
file any reports on Form 8-K.
17
<PAGE> 18
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.
Healthdyne Information Enterprises, Inc.
November 12, 1996 By: /s/ Joseph G. Bleser
-----------------------
Joseph G. Bleser
Vice President -Finance,
Chief Financial Officer, Treasurer
and Secretary
(duly authorized and principal
financial officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11 Statements of Computation of Per Share
Earnings (Loss)
27 Financial Data Schedule (for SEC use only)
</TABLE>
19
<PAGE> 1
EXHIBIT 11
Healthdyne Information Enterprises, Inc. and Subsidiaries
Statements of Computation of Per Share Earnings (Loss)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings (loss) $ 280 $ (1,211) $ 646 $ (3,100)
-------- -------- -------- --------
Primary shares:
Weighted average number of
common stares outstanding 17,272 15,500 16,959 15,500
Additional shares issuable from
assumed exercise of options 1,662 -- 1,546 --
-------- -------- -------- --------
18,934 15,500 18,505 15,500
-------- -------- -------- --------
Earnings (loss) per common share
and common share equivalent $ 0.01 $ (0.08) $ 0.03 $ (0.20)
-------- -------- -------- --------
Fully diluted shares:
Weighted average number of
common shares outstanding 17,272 15,500 16,959 15,500
Additional shares issuable from
assumed exercise of options 1,730 -- 1,730 --
-------- -------- -------- --------
19,002 15,500 18,689 15,500
-------- -------- -------- --------
Earnings (loss) per common share
and common share equivalent $ 0.01 $ (0.08) $ 0.03 $ (0.20)
-------- -------- -------- --------
</TABLE>
Note (1): Since stock options are antidilutive to the loss per common
share calculations, they are not considered in such calculations.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE HEALTHDYNE
INFORMATION ENTERPRISES, INC. CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE HEALTHDYNE INFORMATION
ENTERPRISES, INC. CONSOLIDATED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,717
<SECURITIES> 0
<RECEIVABLES> 4,865
<ALLOWANCES> 68
<INVENTORY> 0
<CURRENT-ASSETS> 8,581
<PP&E> 1,595
<DEPRECIATION> 396
<TOTAL-ASSETS> 23,284
<CURRENT-LIABILITIES> 6,042
<BONDS> 5,276
0
0
<COMMON> 173
<OTHER-SE> 11,793
<TOTAL-LIABILITY-AND-EQUITY> 23,284
<SALES> 0
<TOTAL-REVENUES> 11,220
<CGS> 0
<TOTAL-COSTS> 3,899
<OTHER-EXPENSES> 6,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 371
<INCOME-PRETAX> 646
<INCOME-TAX> 0
<INCOME-CONTINUING> 646
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 646
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
