<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1997
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 0-27502
-------------
HEALTH SYSTEMS DESIGN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3235734
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1330 BROADWAY, OAKLAND, CALIFORNIA 94612
(Address of principal executive offices) (Zip code)
(510) 763-2629
(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
1932 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 registrant had 6,520,126 shares of common stock outstanding as of June 30,
1997.
Exhibit index is located on page 10
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
June 30, 1997 and September 30, 1996 2
Consolidated Statements of Operations -
Three Months and Nine Months ended
June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Nine Months ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,045,208 $ 15,254,042
Accounts receivable, net of allowance for doubtful
accounts of $175,000 at June 30 1997, and
$100,000 at September 30, 1996 3,752,654 3,661,984
Unbilled revenue 1,351,080 1,469,533
Prepaid expenses 454,845 427,586
------------- --------------
Total current assets 18,603,787 20,813,145
------------- --------------
Property and equipment:
Computer equipment 3,171,933 2,454,204
Office furniture and other 1,089,091 865,725
------------- --------------
Total property and equipment 4,261,024 3,319,929
Less: Accumulated depreciation (1,464,993) (765,203)
------------- --------------
Net property and equipment 2,796,031 2,554,726
------------- --------------
Deposits and other assets 127,002 83,211
------------- --------------
Software development costs, net of accumulated
amortization of $532,313 and $390,508 at June 30, 1997
and September 30,1996, respectively 712,654 305,970
------------- --------------
Total assets $ 22,239,474 $ 23,757,052
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ - $ 3,505
Accounts payable 714,815 693,269
Accrued liabilities 598,718 746,358
Unearned revenue 1,265,893 1,201,913
------------- --------------
Total current liabilities 2,579,426 2,645,045
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.001 par value, 20,000,000 shares
authorized, 6,520,126 and 6,433,766 shares issued and
outstanding at June 30, 1997 and September 30, 1996,
respectively 6,520 6,434
Additional paid-in capital 22,999,061 22,842,130
Treasury stock, 2,054 shares (28,500) (28,500)
Deferred compensation (47,219) (59,039)
Retained deficit (3,269,814) (1,649,018)
------------- --------------
Total stockholders' equity 19,660,048 21,112,007
------------- --------------
Total liabilities and stockholders' equity $ 22,239,474 $ 23,757,052
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</TABLE>
2
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
System sales $ 4,573,229 $ 2,752,282 $ 10,934,056 $ 6,945,238
Services and other 657,571 446,662 1,741,579 1,298,748
------------ ------------ ------------- ------------
Total revenues 5,230,800 3,198,944 12,675,635 8,243,986
Cost of revenues 1,680,797 932,303 4,407,695 2,516,350
------------ ------------ ------------- ------------
Gross margin 3,550,003 2,266,641 8,267,940 5,727,636
------------ ------------ ------------- ------------
Operating expenses:
General and administrative 1,354,046 1,047,653 4,131,753 2,572,303
Sales and marketing 919,592 771,503 2,967,125 1,869,255
Product development 1,530,108 1,078,026 3,317,554 2,574,604
------------ ------------ ------------- ------------
Total operating expenses 3,803,746 2,897,182 10,416,432 7,016,162
------------ ------------ ------------- ------------
Loss from operations (253,743) (630,541) (2,148,492) (1,288,526)
Interest income (expense), net 166,469 230,855 527,696 (158,466)
------------ ------------ ------------- ------------
Loss before provision for
income taxes (87,274) (399,686) (1,620,796) (1,446,992)
Provision for income taxes - - - -
------------ ------------ ------------- ------------
Net loss $ (87,274) $ (399,686) $ (1,620,796) $ (1,446,992)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Net loss per share $ (0.01) $ (0.06) $ (0.25) $ (0.26)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Weighted average common and common
equivalent shares outstanding 6,495,558 6,672,699 6,462,643 5,535,900
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
3
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
----------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,620,796) $ (1,446,992)
Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:
Depreciation and amortization 851,309 400,128
(Gain) loss on asset disposals (439) (5,000)
Amortization of deferred compensation 11,820 15,816
Write-off of debt discount - 350,000
Changes in current assets and liabilities:
Accounts receivable (90,670) (934,156)
Unbilled revenue 118,453 (951,868)
Prepaid expenses (27,259) (474,965)
Accounts payable 21,546 21,949
Accrued liabilities (147,640) 318,766
Unearned revenue 63,980 164,636
-------------- --------------
Net cash used in operating activities (819,696) (2,541,686)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (955,370) (1,201,957)
Proceeds from sale of property and equipment 5,000 5,000
Capitalization of software development costs (548,489) (206,538)
Other assets (43,791) 81,437
-------------- --------------
Net cash used in investing activities (1,542,650) (1,322,058)
-------------- --------------
Cash flows from financing activities:
Borrowings from line of credit - 450,000
Payments under line of credit - (958,427)
Borrowings from notes payable - 1,500,000
Payments under notes payable and capital leases (3,505) (2,459,945)
Proceeds from issuance of common stock, net of issuance costs 21,722,965
Proceeds from exercise of common stock options 157,017 483,180
-------------- --------------
Net cash provided by financing activities 153,512 20,737,773
-------------- --------------
Net increase (decrease) in cash and cash equivalents (2,208,834) 16,874,029
Cash and cash equivalents at beginning of period 15,254,042 149,218
-------------- --------------
Cash and cash equivalents at end of period $ 13,045,208 $ 17,023,247
-------------- --------------
-------------- --------------
Supplemental disclosure of cash flow information:
Interest paid $ 21 $ 122,726
Taxes paid $ 5,600 $ 800
Supplemental disclosure of noncash transactions:
Cancellation of advances from stockholder through issuances
of notes payable $ - $ 500,000
Warrants exercised for common stock $ - $ 475,000
</TABLE>
4
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and on substantially the same basis as the
annual audited financial statements. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended June 30, 1997, are not necessarily indicative of
the results that may be expected for the year ended September 30, 1997.
These consolidated financial statements should be read in conjunction with
the financial statements and footnotes thereto for the year then ended
September 30, 1996, included in the Company's Form 10-K Annual Report.
2. NET LOSS PER SHARE
Net loss per common and common equivalent share is based on the weighted
average number of common and common dilutive equivalent shares outstanding
during the period. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common equivalent shares include all common
shares issued and options and warrants to purchase shares of common stock
granted by the Company at a price less than the initial public offering price
during the period March 16, 1995, through the initial public offering date
(using the treasury stock method for options and warrants and based on the
public offering price of $13.00 per share) as if they were outstanding for
all periods presented prior to the initial public offering.
3. INITIAL PUBLIC OFFERING
On March 5, 1996, the Company sold 1,855,000 shares of its common stock
through an initial public offering. As a result, the Company received net
proceeds of $21,722,965. A portion of the proceeds were immediately used to
retire short-term and long-term indebtedness to banks and other creditors.
In connection with the repayment of the private placement notes payable of
$2,000,000, the Company recorded a one-time, non-cash charge to interest
expense of approximately $333,000 in the second quarter of fiscal 1996 to
reflect the write-off of deferred interest. A $17,000 non-cash charge to
interest expense was recorded in the first quarter of fiscal 1996. Also, in
February, 1996, the Company reincorporated in the state of Delaware.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides managed care information systems software to
healthcare organizations that use managed care techniques to deliver
services, manage financial risk and control costs. The Company introduced
its first internally financed and developed application, Diamond 725, in
fiscal 1992, followed by Diamond 950C/S and Diamond Objects in fiscal 1995
and Diamond 725Q in fiscal 1996. The Company's revenues are derived from
licensing Diamond 725, Diamond 725Q, Diamond 950C/S and Diamond Objects,
providing the associated implementation, modification, support and consulting
services, and reselling third party hardware and software products. License
revenues are recognized on a percentage of completion basis based on the
labor hours required to implement the system. Implementation, modification,
support and consulting fees are billed either on an hourly or monthly basis
and are recognized as services are rendered. Third party hardware and
software fees are typically billed and recognized as revenues when delivered
to the client.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $5,231,000 and $3,199,000 for the three months ended
June 30, 1997 and 1996, respectively, representing an increase of 64%. Total
revenues were $12,676,000 and $8,244,000 for the nine months ended June 30,
1997 and 1996, respectively, representing an increase of 54%. The growth in
total revenues is attributable primarily to an increase in the number and
size of Diamond implementations and modification projects in progress during
the period, as well as an increase in third party hardware and software sales.
During the nine months ended June 30, 1997, the Company executed its
largest contract to date with Blue Cross/Blue Shield of North Carolina, which
includes a license to use Diamond 950C/S, as well as implementation and
product modification services. The relationship with Blue Cross and Blue
Shield of North Carolina contributed approximately $1,005,000 and $1,318,000
in revenues for the three and nine months ended June 30, 1997, respectively.
The Company's relationship with Blue Cross and Blue Shield of Florida,
which commenced in November 1995, contributed approximately $1,161,000 in
revenues for the three months ended June 30, 1997 compared with $1,363,000 in
the prior year period. For the nine months ended June 30, 1997 and 1996, the
project contributed revenues of $2,560,000 and $2,701,000, respectively.
SYSTEM SALES. System sales revenues, which includes license,
implementation, modification and third party hardware and software fees, were
$4,573,000 and $2,752,000 for the three months ended June 30, 1997 and 1996,
respectively, representing an increase of 66%. System sales revenues were
$10,934,000 and $6,945,000 for the nine months ended June 30, 1997 and 1996
respectively, representing an increase of 57%. Revenues associated with
Diamond 950C/S were partially responsible for the increase in systems sales
revenues, with the Company experiencing significant increases in Diamond
950C/S implementation and modification fees for the three months ended June
30, 1997 compared to the year earlier period. A significant increase in
third party hardware and software revenues associated with these sales was
also responsible for the increase in system sales revenues for the three and
nine months ended June 30, 1997.
SERVICES AND OTHER. Services and other revenues, which includes support
fees, were $658,000 and $447,000 for the three months ended June 30, 1997 and
1996, respectively, representing an increase of 47%. Services and other
revenues were $1,742,000 and $1,299,000 for the nine months ended June 30,
1997 and 1996, respectively, representing an increase of 34%. Support fees
continued to account for the majority of services and other revenues. The
increase in services and other revenues was due primarily to the expansion of
the installed base for the Diamond products.
6
<PAGE>
COST OF REVENUES. Cost of revenues was $1,681,000 and $932,000 for the
three months ended June 30, 1997 and 1996, respectively, representing an
increase of 80%. Cost of revenues was $4,408,000 and $2,516,000 for the nine
months ended June 30, 1997 and 1996, respectively, representing an increase
of 75%. Cost of revenues increased primarily as a result of the increased
number of personnel, both HSD employees and independent contractors, required
to implement and support the larger client base. Additionally, the cost of
hardware and third party software increased significantly over the comparable
period proportionate with an increase in hardware and third party software
revenues. Cost of revenues increased from 29% of total revenues in the three
months ended June 30, 1996 to 32% of total revenues in the three months ended
June 30, 1997. The cost of revenues as a percentage of sales is dependent on
the mix of license, service, and third party hardware and software revenues,
and may fluctuate over time as these revenue sources fluctuate.
OPERATING EXPENSES.
GENERAL AND ADMINISTRATIVE. General and administrative expenditures were
$1,354,000 and $1,048,000 for the three months ended June 30, 1997 and 1996,
respectively, representing an increase of 29%. General and administrative
expenditures were $4,132,000 and $2,572,000 for the nine months ended June
30, 1997 and 1996, respectively, representing an increase of 61%. The
increase in general and administrative expenses was due primarily to staff
additions and investment in infrastructure to support the Company's expanded
operations, as well as fulfilling the obligations of being a public company.
SALES AND MARKETING. Sales and marketing expenditures were $920,000 and
$772,000 for the three months ended June 30, 1997 and 1996, respectively,
representing an increase of 19%. Sales and marketing expenditures were
$2,967,000 and $1,869,000 for the nine months ended June 30, 1997 and 1996,
respectively, representing an increase of 59%. The increase in sales and
marketing expenses was due to the Company's continued emphasis on the
expansion of its sales and marketing department to better address market
demand for its products.
PRODUCT DEVELOPMENT. Product development expenditures, net of software
capitalization, were $1,530,000 and $1,078,000 for the three months ended
June 30, 1997 and 1996, respectively, representing an increase of 42%.
Product development expenditures, net of software capitalization, were
$3,318,000 and $2,575,000 for the nine months ended June 30, 1997 and 1996,
respectively, representing an increase of 29%. The Company capitalized
$188,000 and $116,000 of product development costs in the three months ended
June 30, 1997 and 1996, respectively, and $548,000 and $207,000 in the nine
months ended June 30, 1997 and 1996, respectively. The increase in product
development expenditures is due primarily to the continued development of
Diamond 950C/S and Diamond 725, including increased staffing and the hiring
of technical consultants to assist such efforts. Although the product
development costs decreased as a percentage of revenues for the quarter, the
Company believes that research and development expenditures are essential to
maintaining its competitive position and expects these costs to continue to
constitute a significant percentage of total revenues in the future.
INTEREST INCOME AND EXPENSE. Interest income was $166,000 and $231,000,
respectively, for the three months ended June 30, 1997 and 1996,
respectively. Interest income was $528,000 and interest expense was $158,000
for the nine months ended June 30, 1997 and 1996, respectively.
The interest income for the three months and nine months ended June 30,
1997 and the three months ended June 30, 1996, resulted primarily from the
cash proceeds from the initial public offering completed on March 5, 1996.
Interest expense for the comparable year earlier periods related to capital
leases and interest on notes payable, all of which were substantially paid
off during the first quarter of fiscal 1996.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $820,000 and $2,542,000 in the
nine months ended June 30, 1997 and 1996, respectively. In the nine months
ended June 30, 1997, net cash used in operating activities resulted primarily
from the net loss for the period, partially offset by depreciation and
amortization.
Net cash used in investing activities was $1,543,000 and $1,322,000 in
the nine months ended June 30, 1997 and 1996, respectively, and consisted
primarily of purchases of computer equipment and furniture related to the
expansion of the corporate offices and an increase in software capitalization
due to new product development projects.
Net cash provided by financing activities was $154,000 and $20,738,000 in
the nine months ended June 30, 1997 and 1996, respectively. In the nine
months ended June 30, 1997, net cash provided by financing activities
consisted primarily of proceeds from the exercise of common stock options by
employees. In the nine months ended June 30, 1996, net cash provided by
financing activities consisted primarily of proceeds from the initial public
offering on March 5, 1996.
As of June 30, 1997 and 1996, the Company had cash and cash equivalents
in the amounts of $13,045,000 and $17,023,000, respectively. The Company
believes that available funds and its cash flow from operations will be
adequate to fund its presently anticipated working capital requirements for
at least the next 12 months.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: The statements contained in this report which are not
historical facts are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by forward-looking statements, including the
Company's dependence on a single product line, the recent introduction of
Diamond 950C/S, which is based on client/server technology, dependence of the
Company's results of operations on its relationship with certain large
customers, the variable nature of the Company's operating results, the length
of the Company's sales cycle, the Company's dependence on key personnel,
intense competition, and other risks described in the Company's Securities
and Exchange Commission filings.
8
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
11.1 Statement re: computation of earnings per share
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Health Systems Design Corporation
Date: August 12, 1997
By: /s/ Russell J. Harrison
-------------------------------------
Russell J. Harrison, President and
Chief Executive Officer
By: /s/ Steven J. Correia
-------------------------------------
Steven J. Correia,
Acting Chief Financial Officer
9
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
11.1 Computation of net loss per share
10
<PAGE>
EXHIBIT 11.1
HEALTH SYSTEMS DESIGN CORPORATION
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
1997 1996 1997 1996
------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Net loss $ ( 87,272) $ (399,686) $ (1,620,793) $ (1,446,992)
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
Weighted average common and common equivalent
shares outstanding 6,495,558 6,421,440 6,462,643 5,284,641
Common shares, options and warrants granted
(using the treasury stock method assuming an
initial public offering price of $13.00) since
March 16, 1995 included pursuant to Securities
and Exchange Commission Rules - 251,259 - 251,259
------------ ----------- ------------- --------------
Weighted average common and equivalent shares
outstanding 6,495,558 6,672,699 6,462,643 5,535,900
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
Net income (loss) per common and common
equivalent share $ (0.01) $ (0.06) $ (0.25) $ (0.26)
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,045,208
<SECURITIES> 0
<RECEIVABLES> 3,927,654
<ALLOWANCES> 175,000
<INVENTORY> 0
<CURRENT-ASSETS> 18,603,787
<PP&E> 4,261,024
<DEPRECIATION> 1,464,993
<TOTAL-ASSETS> 22,239,474
<CURRENT-LIABILITIES> 2,579,426
<BONDS> 0
0
0
<COMMON> 6,520
<OTHER-SE> 19,653,528
<TOTAL-LIABILITY-AND-EQUITY> 22,239,474
<SALES> 0
<TOTAL-REVENUES> 12,675,635
<CGS> 0
<TOTAL-COSTS> 4,407,695
<OTHER-EXPENSES> 10,416,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (527,696)<F1>
<INCOME-PRETAX> (1,620,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,620,796)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.25)
<FN>
<F1>INTEREST INCOME
</FN>
</TABLE>
