<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,
1998.
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 0-270576
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, together with associated preferred stock purchase rights (the
"Common Stock"), as of November 12, 1998 was 24,526,547 shares.
Exhibit Index is on Page 19 herein.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Healthdyne Information Enterprises, Inc. and Subsidiary
Consolidated Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,851 $ 7,777
Trade accounts receivable, less allowance of $570 and $626 at
September 30, 1998 and December 31, 1997, respectively 11,859 5,977
Other current assets 1,458 1,375
------------ -----------
Total current assets 15,168 15,129
Notes receivable 86 335
Purchased software, net of accumulated amortization of $1,209 and $778
at September 30, 1998 and December 31, 1997, respectively 2,046 2,397
Capitalized software, net of accumulated amortization of $264 and $122 at
September 30, 1998 and December 31, 1997, respectively 1,385 564
Property and equipment, net of accumulated depreciation of $2,012 and
$1,451 at September 30, 1998 and December 31, 1997, respectively 2,177 1,939
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $2,460 and $1,939 at September 30, 1998
and December 31, 1997, respectively 7,982 8,503
Other assets 63 73
------------ -----------
Total assets $ 28,907 $ 28,940
============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 3,164 $ 5,175
Accounts payable, principally trade 1,364 863
Accrued liabilities 1,138 2,821
Deferred revenue 4,803 3,597
------------ -----------
Total current liabilities 10,469 12,456
Long-term debt and capital lease obligations, excluding current installments 542 316
Other liabilities 280 476
------------ -----------
Total liabilities 11,291 13,248
------------ -----------
Shareholders' equity:
Preferred stock, without par value. Authorized 20,000 shares;
designated Series A cumulative preferred stock 500 shares;
issued none - -
Common stock, $.01 par value. Authorized 50,000 shares; issued and
outstanding 24,215 and 23,563 shares at September 30, 1998 and
December 31, 1997, respectively 242 236
Additional paid-in capital 39,870 38,280
Deferred compensation - (73)
Accumulated deficit (22,496) (22,751)
------------ -----------
Total shareholders' equity 17,616 15,692
------------ -----------
Commitments
Total liabilities and shareholders' equity $ 28,907 $ 28,940
============ ===========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
2
<PAGE> 3
Healthdyne Information Enterprises, Inc. and Subsidiary
Consolidated Condensed Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software $ 3,301 $ 1,829 $ 8,234 $ 4,900
Services 3,981 2,668 10,834 8,027
------------ ------------ ------------ ------------
Total revenue 7,282 4,497 19,068 12,927
------------ ------------ ------------ ------------
Cost of revenue:
Software 122 201 601 886
Services 1,807 1,436 5,024 4,506
------------ ------------ ------------ ------------
Total cost of revenue 1,929 1,637 5,625 5,392
------------ ------------ ------------ ------------
Gross profit 5,353 2,860 13,443 7,535
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,734 1,315 4,782 4,188
Research and development 930 780 2,848 2,200
General and administrative 1,608 1,255 4,287 3,419
Merger costs 67 - 1,060 -
------------ ------------ ------------ ------------
Total operating expenses 4,339 3,350 12,977 9,807
------------ ------------ ------------ ------------
Operating earnings (loss) 1,014 (490) 466 (2,272)
Losses of affiliate - (120) - (151)
Interest income (expense), net (29) 12 (67) 81
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 985 (598) 399 (2,342)
Income tax (expense) benefit - (42) (144) 57
------------ ------------ ------------ ------------
Net earnings (loss) $ 985 $ (640) $ 255 $ (2,285)
============ ============ ============ ============
Net earnings (loss) per share of common stock:
Basic $ 0.04 $ (0.03) $ 0.01 $ (0.10)
============ ============ ============ ============
Diluted $ 0.04 $ (0.03) $ 0.01 $ (0.10)
============ ============ ============ ============
Shares used in the calculation of net earnings
(loss) per share:
Basic 24,089 23,042 23,826 22,547
============ ============ ============ ============
Diluted 25,497 23,042 25,047 22,547
============ ============ ============ ============
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
Healthdyne Information Enterprises, Inc. and Subsidiary
Consolidated Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 255 $ (2,285)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Other 406 181
Losses of affiliate - 151
Provision for (recovery of) doubtful accounts (55) 47
Depreciation and amortization 1,656 1,501
Compensation related to stock options, net 73 129
Increase in trade accounts receivable (5,827) (636)
Increase in other current assets (91) (560)
Increase (decrease) in accounts payable 501 (622)
Decrease in accrued liabilities (1,229) (562)
Increase in deferred service revenue 1,010 707
------- --------
Net cash used in operating activities (3,301) (1,949)
------- --------
Cash flows from investing activities:
Purchased software (534) (256)
Capitalized software development costs (964) (558)
Capital expenditures (282) (467)
Change in other assets 258 (411)
------- --------
Net cash used in investing activities (1,522) (1,692)
------- --------
Cash flows before financing activities (4,823) (3,641)
------- --------
Cash flows from financing activities:
Additional borrowings - 490
Principal payments on long-term debt, net (3,300) (963)
Net borrowings (repayments) under line of credit 1,506 (125)
Proceeds from the issuance of common stock 691 1,533
------- --------
Net cash (used in) provided by financing activities (1,103) 935
------- --------
Net decrease in cash and cash equivalents (5,926) (2,706)
Cash and cash equivalents at beginning of period 7,777 10,772
------- --------
Cash and cash equivalents at end of period $ 1,851 $ 8,066
======= ========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
Healthdyne Information Enterprises, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements
September 30, 1998 and 1997
(Unaudited)
1. General:
The Consolidated Condensed Financial Statements as of September 30, 1998, and
for the three and nine months ended September 30, 1998 and 1997 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, 1997, as well as the supplemental
consolidated financial statements and notes included in the Form 8-K of HIE
dated June 1, 1998 which give retroactive effect to the merger with HUBLink,
Inc. ("HUBLink") which was accounted for as a pooling of interests as discussed
in Note 2.
2. Merger:
On May 12, 1998, the Company completed a stock-for-stock merger (the "Merger")
through a wholly-owned subsidiary with HUBLink, a privately-held integration
software tool company. In connection with the Merger, the Company issued an
aggregate of 2.8 million shares of its Common Stock. The business combination
has been accounted for as a pooling of interests and, accordingly, the
consolidated financial statements for periods prior to the Merger have been
restated to include the accounts and results of operations of HUBLink. In
addition, the Company issued 100,000 shares of its Common Stock to a financial
advisor, which was engaged by HUBLink to assist with possible business
combinations.
The results of operations previously reported by the separate enterprises prior
to the combination and the combined amounts included in the accompanying
consolidated condensed financial statements are summarized below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, 1998 September 30, 1997
-------------- ------------------
(Unaudited)
<S> <C> <C>
Revenue:
HIE $ 4,701 $ 11,207
HUBLink 500 1,720
-------------- ----------------
Combined revenue $ 5,201 $ 12,927
============== ================
Net earnings (loss):
HIE $ 352 $ (167)
HUBLink (709) (2,118)
-------------- ----------------
Combined net earnings (loss) $ (357) $ (2,285)
============== ================
</TABLE>
3. Major Customers:
One customer accounted for 12% of the Company's revenue for the nine months
ended September 30, 1997. No single customer accounted for 10% or more of the
Company's revenue for the nine months ended September 30, 1998, or the three
months ended September 30, 1998 and 1997. One distributor accounted for 14% of
the Company's revenue for the three months ended September 30, 1998. No single
distributor accounted for 10% or more of the Company's revenue for the three
months ended September 30, 1997, or the nine months ended September 30, 1998 and
1997.
5
<PAGE> 6
4. Earnings (Loss) Per Share of Common Stock:
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128"), which prescribes the
calculation methodology and financial reporting requirements for basic and
diluted earnings per share. Basic earnings (loss) per common share available to
common shareholders are based on the weighted average number of common shares
outstanding. Diluted earnings (loss) per common share available to common
shareholders are based on the weighted average number of common shares
outstanding and dilutive potential common shares, such as dilutive stock
options. All prior period net earnings (loss) data presented in these
Consolidated Condensed Financial Statements have been restated to conform to the
provisions of SFAS 128.
5. Line of Credit:
The Company negotiated a new $5.0 million line of credit from a bank in
mid-August 1998, of which $2.2 million was available on September 30, 1998. The
line of credit is for a one year term, with borrowings bearing interest at the
bank's prime rate plus 1%. The Company plans to maintain the $5.0 million line
of credit for unanticipated needs and financial flexibility. Based on its
current business plan and business model projections, the Company believes that
currently available cash, anticipated cash flow from operating activities,
especially the collection of accounts receivable, and cash available from the
line of credit mentioned above will be sufficient to meet the Company's capital
requirements for at least the next twelve months and for the foreseeable future.
6. Recent Accounting Pronouncements:
Revenue Recognition
On January 1, 1998, the Company adopted Statement of Position 97-2,
Software Revenue Recognition, issued by the Accounting Standards Executive
Committee in October 1997, effective for financial statements for fiscal
years beginning after December 15, 1997. The implementation of this
statement has not had a material impact on the Company's unaudited
Consolidated Condensed Financial Statements.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, issued by the
Financial Accounting Standards Board ("FASB") in September 1997, effective
for fiscal years beginning after December 15, 1997. Comprehensive income
includes all changes in equity during a period except those resulting in
investments by owners and distributions to owners. The implementation of
this statement has had no impact on the Company's unaudited Consolidated
Condensed Financial Statements. Comprehensive income for the Company is
represented only by Net Income.
Other
The Company continues to evaluate the requirements of Statement of
Financial Accounting Standards No. 131, Disclosures about Sements of an
Enterprise and Related Information, issued by the FASB in September 1997,
effective for fiscal years beginning after December 15, 1997. The
provisions of this standard do not apply to interim periods in the year of
adoption.
6
<PAGE> 7
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.
Without limiting the generality of the foregoing, the words "believe,"
"anticipate," "estimate," "expect," "intend," "plan," "seek," and similar
expressions, when used in this Report and in such other statements, are intended
to identify forward-looking statements. 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 lack of
profitability in the years ended December 31, 1997 and 1995, the Company's
change in strategic direction, competitive pressures, the mix of software and
service revenue, the mix of direct and indirect sales, sales timing, changes in
pricing policies, undetected errors or bugs in the software, delays in product
development, lower-than-expected demand for the Company's software tools or
services, business conditions in the integrated healthcare delivery network
market and other markets, the Company's ability to modify its software for use
in non-healthcare industries, risks associated with possible acquisitions, risks
related to intangible assets, general economic conditions and the risk factors
detailed from time to time in the Company's periodic reports and registration
statements filed with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
the Company's Registration Statement on Form S-3, as amended (Registration No.
333-55703). By making these forward-looking statements, the Company does not
undertake to update them in any manner except as may be required by the
Company's disclosure obligations in filings it makes with the Securities and
Exchange Commission under the Federal securities laws.
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. ("Healthdyne") until November 6, 1995, at which time Healthdyne
distributed all of the outstanding shares of HIE to Healthdyne's shareholders
(the "Spin-Off"). HIE's common stock is publicly traded on the Nasdaq National
Market under the symbol "HDIE." The Company provides software tools and services
to achieve the enterprise-wide integration of information.
7
<PAGE> 8
The Company generates revenue from licensing integration software tools and
providing integration services, such as education, consulting, project
management, information integration, technology-driven re-design, software
maintenance, implementation and expert-sourcing.
Software licenses are generally granted on a perpetual basis for a one-time,
up-front fee. A standard per-student amount is charged for education classes.
Consulting services are generally provided for a fixed fee based on estimated
hours of service to be provided at standard hourly rates. Project management,
information integration, technology-driven re-design and implementation fees are
generally based on actual hours of service at standard hourly rates. Software
maintenance agreements are generally one-year renewable service contracts for a
prepaid standard fee. Expert-sourcing agreements are generally multiple-year
renewable service contracts for a negotiated monthly fee.
On May 12, 1998, the Company completed a stock-for-stock Merger through a
wholly-owned subsidiary with HUBLink, a privately-held integration software tool
company. In connection with the Merger, the Company issued an aggregate of 2.8
million shares of its Common Stock. The business combination has been accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements for periods prior to the Merger have been restated to include the
accounts and results of operations of HUBLink. In addition, the Company issued
100,000 shares of its Common Stock to a financial advisor, which had been
engaged by HUBLink to assist with possible business combinations.
On December 31, 1997, the Company exercised its option to acquire the remaining
50% ownership interest of Criterion Health Strategies, Inc. ("CHS") it did not
already own. CHS licenses the Criterion data integration software tool and
provides project management, information integration and technology-driven
re-design services. Since HIE did not have a majority ownership interest in CHS
in 1997 and prior years, the operating results of CHS were not included with the
Company's consolidated operating results. HIE's share of CHS' operating results
for 1997 are presented as Losses of Affiliate in the accompanying Consolidated
Condensed Statements of Operations. CHS's operating results were combined with
the Company's beginning on January 1, 1998.
In the fourth quarter of 1997, the Company redefined its strategic direction as
The Integration Solutions Company and focused on providing software tools and
services to achieve the enterprise-wide integration of information. Prior to
making this shift in strategic direction, the Company sold and distributed
certain proprietary and third-party clinical workstation tools including, among
others, the Clinical Assessment and Support System ("CASS"), Document Image
Management, Workflow Management, Intranet and Internet Workflow Management,
Teleradiology Computer Systems and Clinical Image Management tools. The Company
no longer actively sells and distributes the software tools referred to in the
preceding sentence, since such tools are outside the scope of the Company's
redefined strategic direction referred to above.
8
<PAGE> 9
In addition, effective November 21, 1997, HIE combined the operations of its
three subsidiaries (CHS, Integrated Healthcare Solutions, Inc. and Healthcare
Communications, Inc.) with the parent company under a functional organization
structure, i.e., sales, service, research and development and finance. Prior to
that time, each subsidiary operated as an independent, but interrelated, entity
referred to by the Company as an Entrepreneurial Business Unit. As of June 30,
1998, these three subsidiaries had been merged with and into the Company. The
Company changed to the present organizational structure in an attempt to be more
responsive to the marketplace and to streamline operations. The Company believes
that the current organizational structure will expand the depth and breadth of
its integration software tool distribution capability, improve the productivity
of its integration software tool development efforts, enhance the efficiency and
effectiveness of its customer service operations and eliminate duplicate efforts
throughout the organization.
The Company has implemented a Year 2000 compliance program designed to ensure
that the Company's computer systems and applications will function properly
beyond 1999. The Company believes that it has allocated adequate resources for
this purpose and expects its Year 2000 conversions to be completed on a timely
basis.
Internal IT & Non-IT Systems - The Company is in the process of
implementing new software for its accounting, internal network,
timekeeping, and purchasing functions to better manage the growth of
its business. Representations made by software vendors for these
systems, including Year 2000 compliance, will be validated at the
completion of that implementation which is expected to be early 1999.
Non-IT systems, such as telecommunications systems, as well as existing
IT systems are being assessed currently.
Third Parties - The Company has material relationships with third
parties whose Year 2000 compliance is being assessed by way of
questionnaire. These third parties include, but are not limited to,
banks, payroll processing vendors, and telecommunications vendors. The
Company expects the assessment to be complete in early 1999 and will
take the necessary action to minimize the Year 2000 non-compliance risk
with respect to third parties including changing to vendors who are
Year 2000 compliant or installing internal IT systems.
Customers and Distributors - A failure in a customer's system could
result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. The
Company attempts to limit by contract, both with its customers and with
the parties that license technology to the Company, its liability for
damages arising in rendering its products and services. Despite this
precaution, there can be no assurance that the limitations of
liabilities set forth in its contracts would be enforceable or would
otherwise protect the Company from liability for damages. There can be
no assurance that the Company will be able to obtain or maintain
insurance coverage for such liabilities, that such coverage will
continue to be available on acceptable terms, or that such coverage
will be available in amounts to cover one or more large claims. The
assertion of claims against the Company that exceed available insurance
coverage, or changes in the Company's insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on the Company's
business, financial condition and results of operation. Furthermore,
litigation, regardless of its outcome, could result in substantial cost
to the Company and divert management's attention from the Company's
operations. Any contract liability claim or litigation against the
Company could, therefore, have a material adverse effect on the
Company's business, financial condition or results of operations. The
Company is in the process of evaluating the Year 2000 readiness of all
products available currently or previously sold to customers and
distributors. The Company expects this assessment to be complete in
mid-1999.
The Company is in the final stages of development of contingency plans, which
are expected to be implemented by mid-1999.
In light of its compliance efforts, the Company does not believe that the Year
2000 issue will materially adversely affect operations or results of operations,
and does not expect implementation to have a material impact on the Company's
financial statements. However, there can be no assurance that the Company's
systems will be Year 2000 compliant prior to December 31, 1999, or that the
failure of any such system
9
<PAGE> 10
will not have a material adverse effect on the Company's business, operating
results and financial condition. In addition, to the extent the Year 2000
problem has a material adverse effect on business, operations or financial
condition of third parties with whom the Company has material relationships,
such as vendors, suppliers and customers, the Year 2000 problem could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company expects the following external factors to affect the market for
integration software tools and integration services in future years: (1) the
continued consolidation of enterprises within various industries to achieve
economies of scale; (2) the growing importance of information for the survival
and prosperity of various enterprises; (3) the increasing complexity of
information technology; and (4) the year 2000 issue referred to above.
Software revenue is generally recognized upon shipment and the performance of
certain other criteria in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" in 1998 and SOP 91-1, "Software Revenue
Recognition" in 1997. 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 Condensed Balance Sheets include assets designated as
purchased software and capitalized software development costs. Purchased
software includes the cost of purchased integration software tools and the cost
of software acquired in connection with business combinations. It also includes
the cost of licenses to use, embed and sell software tools developed by others.
Certain costs of HIE proprietary software developed internally are capitalized
in accordance with generally accepted accounting principles. The costs of
individual software tools 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 annual
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.
10
<PAGE> 11
Results of Operations
The following table sets forth for the periods indicated (1) the Company's total
revenue and (2) unless otherwise indicated, 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,
--------------------------- --------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Total HIE revenue (in 000's) $ 7,282 $ 4,497 $ 19,068 $ 12,927
========== ========= ========== ==========
Revenue:
Software 45% 41% 43% 38%
Services 55% 59% 57% 62%
---------- --------- ---------- ----------
Total revenue 100% 100% 100% 100%
---------- --------- ---------- ----------
Cost of revenue:
Software (as a percent of software revenue) 4% 11% 7% 18%
Services (as a percent of services revenue) 45% 54% 46% 56%
Total cost of revenue 26% 36% 29% 42%
---------- --------- ---------- ----------
Gross profit 74% 64% 71% 58%
---------- --------- ---------- ----------
Operating expenses:
Sales and marketing 24% 29% 25% 32%
Research and development 13% 17% 15% 17%
General and administrative 22% 28% 22% 27%
Merger costs 1% - 6% -
---------- --------- ---------- ----------
Total operating expenses 60% 74% 68% 76%
---------- --------- ---------- ----------
Operating earnings (loss) 14% (10)% 3% (18)%
Losses of affiliate - (3)% - (1)%
Interest income (expense), net - - (1)% 1%
---------- --------- ---------- ----------
Earnings (loss) before income taxes 14% (13)% 2% (18)%
Income tax expense - (1)% (1)% -
---------- --------- ---------- ----------
Net earnings (loss) 14% (14)% 1% (18)%
========== ========= ========== ==========
</TABLE>
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<PAGE> 12
Comparison of Three Months Ended September 30, 1998 and 1997
Revenue. Total revenue was $7.3 million for the three months ended
September 30, 1998 compared to $4.5 million for the three months ended September
30, 1997, an increase of 62%. The increase of $1.5 million, or 80%, in software
revenue was primarily due to an increase in Cloverleaf integration engine and
OM3 message broker software license fee revenue. The increase of $1.3 million or
49%, in services revenue was due primarily to higher service personnel
productivity as well as an increase in the number of service personnel. HIE
added eleven new distributors in the third quarter of 1998.
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 $1.9 million for the three months ended
September 30, 1998 compared to $1.6 million for the three months ended September
30, 1997, an increase of 18%. However, as a percentage of revenue, cost of
revenue decreased to 26% from 36% primarily due to the sub-licensing by the
Company of significantly less third-party software tools, as well as an increase
in the level of service personnel productivity in the third quarter of 1998
compared to the third quarter of 1997. Third-party software tools, such as
imaging, workflow and COLD, typically have a higher cost of revenue than
proprietary software tools, such as the Cloverleaf integration engine and OM3
message broker and the EMerge enterprise master person index software tool. The
Company discontinued the marketing, sale and distribution of imaging, workflow,
COLD and certain other software tools that no longer fit its redefined strategic
direction in the fourth quarter of 1997.
Gross profit. The Company's gross profit was $5.4 million for the three
months ended September 30, 1998 compared to $2.9 million for the three months
ended September 30, 1997, an increase of 87%. The increased gross profit in the
third quarter of 1998 was due to the significant increase in the more profitable
Cloverleaf integration engine and OM3 message broker software license fee
revenue discussed above, as well as the higher level of service personnel
productivity also discussed above.
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 $1.7 million for the three
months ended September 30, 1998 compared with $1.3 million for the three months
ended September 30, 1997. The increase of $419,000 in sales and marketing
expense between the periods was due primarily to the increase in sales personnel
costs associated with increased sales staffing. The decrease in sales and
marketing expense from 29% of revenue in the three months ended September 30,
1997 to 24% in the three months ended September 30, 1998 was due to the
significant increase in software and services revenue discussed above.
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<PAGE> 13
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 $930,000 or 13% of revenue for the three
months ended September 30, 1998 compared to $780,000 or 17% of revenue for the
three months ended September 30, 1997, an increase of 19%. Cash expenditures for
research and development increased $203,000, while the level of capitalization
of internally developed software increased to 21% in the third quarter of 1998
from 20% in the third quarter of 1997, due primarily to increased staffing for
various research and development projects.
General and administrative. General and administrative expense
includes, among other things, compensation of finance, human resources and
administrative personnel, goodwill amortization, office rent and insurance.
General and administrative expense was $1.6 million or 22% of revenue for the
three months ended September 30, 1998, compared to $1.3 million or 28% of
revenue for the three months ended September 30, 1997, an increase of 28%. The
increase was due primarily to increased recruiting and outside contractor costs
associated with the Company's increased revenue and personnel growth.
Interest income (expense), net. Net interest expense was $29,000 for
the three months ended September 30, 1998 compared to net interest income of
$12,000 for the three months ended September 30, 1997, representing a change of
$41,000. The change in net interest income (expense) is due primarily to a
decrease in interest income resulting from lower cash balances and increased
short-term borrowings.
Income tax (expense) benefit. The Company did not record any income tax
benefit for the three months ended September 30, 1998 because allowable
carrybacks exceeded income. The Company recorded an income tax expense of
$42,000 for the three months ended September 30, 1997 based on management's
belief at the time that the Company would generate taxable income above the net
operating loss carryforward benefits for the year ended December 31, 1997.
Comparison of Nine Months Ended September 30, 1998 and 1997
Revenue. Total revenue was $19.1 million for the nine months ended
September 30, 1998 compared to $12.9 million for the nine months ended September
30, 1997, an increase of 48%. The increase of $3.3 million, or 68%, in software
revenue was primarily due to an increase in Cloverleaf integration engine and
OM3 message broker software license fee revenue, offset somewhat by a reduction
in third-party software tool revenue. The increase of $2.8 million, or 35%, in
services revenue was due primarily to higher service personnel productivity as
well as an increase in the
13
<PAGE> 14
number of service personnel. HIE added twenty-five new distributors in the nine
months ended September 30, 1998.
Cost of revenue. The cost of revenue was $5.6 million for the nine
months ended September 30, 1998 compared to $5.4 million for the nine months
ended September 30, 1997, an increase of 4%. As a percentage of revenue, cost of
revenue decreased to 29% from 42%, primarily due to the sub-licensing by the
Company of significantly less third-party software tools, as well as an increase
in the level of service personnel productivity in the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997. The
Company discontinued the marketing, sale and distribution of imaging, workflow,
COLD and certain other software tools that no longer fit its redefined strategic
direction in the fourth quarter of 1997.
Gross profit. The Company's gross profit was $13.4 million for the nine
months ended September 30, 1998 compared to $7.5 million for the nine months
ended September 30, 1997, an increase of 78%. The increased gross profit in the
first nine months of 1998 was due to the significant increase in the more
profitable Cloverleaf integration engine and OM3 message broker software license
fee revenue discussed above, as well as the higher level of service personnel
productivity also discussed above.
Sales and marketing. Sales and marketing expense was $4.8 million or
25% of revenue for the nine months ended September 30, 1998 compared to $4.2
million or 32% of revenue for the nine months ended September 30, 1997, an
increase of 14%. The increase in sales and marketing expense between the periods
was due primarily to the increase in sales personnel costs associated with
increased sales staffing, offset somewhat by lower marketing personnel costs. As
a percentage of revenue, sales and marketing decreased due to the significant
increase in software and services revenue discussed above.
Research and development. Research and development expense was $2.8
million or 15% of revenue for the nine months ended September 30, 1998 compared
to $2.2 million or 17% of revenue for the nine months ended September 30, 1997,
an increase of 29%. Cash expenditures for research and development increased
$1.1 million between the two periods, while the level of capitalization of
internally developed software increased to 25% in the nine months ended
September 30, 1998 from 20% in the nine months ended September 30, 1997, due
primarily to increased staffing for various research and development projects.
General and administrative. General and administrative expense was $4.3
million or 22% of revenue for the nine months ended September 30, 1998, compared
to $3.4 million or 27% of revenue for the nine months ended September 30, 1997,
an increase of 25%. The increase was due primarily to increased recruiting and
outside contractor costs associated with the Company's increased revenue and
personnel growth.
14
<PAGE> 15
Merger costs. Merger costs, which resulted from the Company's
acquisition of HUBLink, includes, among other things, investment banking, legal
and accounting fees, travel and severance costs. The total merger costs were
$1.1 million in the nine months ended September 30, 1998. The Company had
accrued for all of the anticipated merger costs in the second quarter, and
incurred merger-related transition costs of $67,000 in the quarter ended
September 30, 1998. The Company anticipates transition costs of approximately
$100,000 to be incurred during the next quarter.
Losses of affiliate. Losses of affiliate, which resulted from the
Company's commitment to fund CHS, totaled $151,000 in the first nine months of
1997. CHS's operating results were consolidated with the Company's beginning on
January 1, 1998.
Interest income (expense), net. Net interest expense was $67,000 for
the nine months ended September 30, 1998 compared to net interest income of
$81,000 for the nine months ended September 30, 1997, representing a change of
$148,000. The change in net interest income (expense) is due primarily to a
decrease in interest income resulting from lower cash balances and increased
short-term borrowings, some of which were repaid by the Company in the second
quarter.
Income tax (expense) benefit. The Company recorded an income tax
expense of $144,000 for the nine months ended September 30, 1998 based on the
inability of a profitable subsidiary to utilize the group's net operating losses
for state reporting purposes. The Company recorded an income tax benefit of
$57,000 for the nine months ended September 30, 1997 based on the projected
effective tax rate for the year ended December 31, 1997.
Liquidity and Capital Resources
The Company had working capital of $4.7 million at September 30, 1998
compared to $2.7 million at December 31, 1997. Cash decreased $5.9 million
during the nine months ended September 30, 1998 compared to a $2.7 million
decrease during the nine months ended September 30, 1997 for the reasons
discussed below.
Net cash used in operating activities totaled $3.3 million for the nine
months ended September 30, 1998 compared to $1.9 million for the nine months
ended September 30, 1997. The $1.4 million total variance between the two
periods is primarily attributable to an increase in accounts receivable offset
by the increased cash flow resulting from the net income recorded during the
nine months ended September 30, 1998 compared to the net loss recorded during
the nine months ended September 30, 1997 and increased accounts payable.
Net cash used in investing activities was $1.5 million for the nine
months ended September 30, 1998 compared to $1.7 million for the nine months
ended September 30, 1997. The decrease was due primarily to a $350,000
investment in CHS in
15
<PAGE> 16
February 1997 which was nonrecurring in 1998 and lower capital expenditures in
the nine months ended September 30, 1998, both offset somewhat by an increased
investment in software during the nine months ended September 30, 1998.
Net cash used in financing activities was $1.1 million for the nine
months ended September 30, 1998 and net cash provided by financing activities
was $935,000 for the nine months ended September 30, 1997. Most of the variance
between the two periods is attributable to the payment of $3.3 million of debt
financing that matured on January 2, 1998. In addition, HUBLink obtained
proceeds of $1.2 million from the issuance of common stock during the nine
months ended September 30, 1997.
The Company negotiated a new $5.0 million line of credit from a bank in
mid-August 1998, of which $2.2 million was available on September 30, 1998. The
line of credit is for a one year term, with borrowings bearing interest at the
bank's prime rate plus 1%. The Company plans to maintain the $5.0 million line
of credit for unanticipated needs and financial flexibility. Based on its
current business plan and business model projections, the Company believes that
currently available cash, anticipated cash flow from operating activities,
especially the collection of accounts receivable, and cash available from the
line of credit mentioned above will be sufficient to meet the Company's capital
requirements for at least the next twelve months and for the foreseeable future.
Recent Accounting Pronouncements
On January 1, 1998, the Company adopted Statement of Position 97-2,
Software Revenue Recognition, issued by the Accounting Standards Executive
Committee, and Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, issued by the Financial Accounting Standards Board. The
Company continues to evaluate the requirements of Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, which does not apply to interim periods in the year of
adoption.
16
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
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, 1998, the Company filed
the following reports on Form 8-K:
(1) Amendment No. 1 on Form 8-K/A to the Company's Current Report on
Form 8-K dated June 1, 1998 reporting pursuant to Items 5 and 7
and containing Supplemental Consolidated Financial Statements and
notes thereto; and
(2) Amendment No. 2 on Form 8-K/A to the Company's Current Report on
Form 8-K dated June 1, 1998 reporting pursuant to Items 5 and 7
and containing Supplemental Consolidated Financial Statements and
notes thereto.
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 16, 1998 By: /s/ Cheryl N. Blanco
--------------------------------------
Cheryl N. Blanco
Vice President - Controller,
Chief Accounting Officer,
Assistant Treasurer and
Assistant Secretary
(duly authorized and principal
accounting officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. 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 Subsidiary
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,
--------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net earnings (loss) $ 985 $ (640) $ 255 $ (2,285)
=================================================
Weighted average number of common shares
outstanding 24,089 23,042 23,826 22,547
=================================================
Basic net earnings (loss) per share $ 0.04 $ (0.03) $ 0.01 $ (0.10)
=================================================
Shares used in the calculation of diluted net
earnings (loss) per share:
Weighted average number of common shares
outstanding 24,089 23,042 23,826 22,547
Additional shares issuable from assumed
exercise of options (see note 1) 1,408 0 1,221 0
-------------------------------------------------
25,497 23,042 25,047 22,547
=================================================
Diluted earnings (loss) per share $ 0.04 $ (0.03) $ 0.01 $ (0.10)
=================================================
</TABLE>
Note 1: Since stock options are anti-dilutive to the diluted loss per common
share calculation, stock options are not considered in such diluted loss per
share calculation for the three and nine months ended September 30, 1997.
16
<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 SEP 30, 1998 AND THE HEALTHDYNE INFORMATION ENTERPRISES,
INC. CONSOLIDATED CONDENSED BALANCE SHEET AS OF SEP 30, 1998. THIS SCHEDULE 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,851
<SECURITIES> 0
<RECEIVABLES> 12,429
<ALLOWANCES> 570
<INVENTORY> 0
<CURRENT-ASSETS> 15,168
<PP&E> 4,189
<DEPRECIATION> 2,012
<TOTAL-ASSETS> 28,907
<CURRENT-LIABILITIES> 10,469
<BONDS> 542
0
0
<COMMON> 242
<OTHER-SE> 17,374
<TOTAL-LIABILITY-AND-EQUITY> 28,907
<SALES> 0
<TOTAL-REVENUES> 19,068
<CGS> 0
<TOTAL-COSTS> 5,625
<OTHER-EXPENSES> 12,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> 399
<INCOME-TAX> 144
<INCOME-CONTINUING> 255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 255
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
