<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 December 31, 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 0-27502
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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 Identification Number)
Incorporation or Organization)
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 6,440,966 shares of common stock outstanding as of
December 31, 1996.
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 -
December 31, 1996 and September 30, 1996 2
Consolidated Statements of Operations -
Three Months ended December 31, 1996 and 1995 3
Consolidated Statements of Cash Flows -
Three Months ended December 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1996
(UNAUDITED)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $14,826,688 $15,254,042
Accounts receivable, net of allowance for doubtful
accounts of $125,000 at December 31 1996, and
$100,000 at September 30, 1996 3,138,020 3,661,984
Unbilled revenue 1,909,514 1,469,533
Prepaid expenses 442,711 427,586
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Total current assets 20,316,933 20,813,145
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Property and equipment:
Computer equipment 2,629,355 2,454,204
Office furniture and other 991,860 865,725
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Total property and equipment 3,621,215 3,319,929
Less: Accumulated depreciation (971,911) (765,203)
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Net property and equipment 2,649,304 2,554,726
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Deposits and other assets 118,855 83,211
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Software development costs, net of accumulated
amortization of $433,554 and $390,508 in 1996 and 1995,
respectively 401,561 305,970
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Total assets $23,486,653 $23,757,052
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations $ 2,102 $ 3,505
Accounts payable 592,603 693,269
Accrued liabilities 904,382 746,358
Unearned revenue 1,944,910 1,201,913
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Total current liabilities 3,443,997 2,645,045
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.001 par value, 20,000,000 shares
authorized, 6,440,966 and 6,433,766 shares
issued and outstanding at December 31, 1996
and September 30, 1996, respectively 6,441 6,434
Additional paid-in capital 22,858,921 22,842,130
Treasury stock, 2,054 shares (28,500) (28,500)
Deferred compensation (55,099) (59,039)
Retained deficit (2,739,107) (1,649,018)
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Total stockholders' equity 20,042,656 21,112,007
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Total liabilities and stockholders' equity $23,486,653 $23,757,052
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</TABLE>
2
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HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
1996 1995
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<S> <C> <C>
Revenues:
System sales $ 2,858,214 $ 1,911,491
Services and other 464,326 343,387
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Total revenues 3,322,540 2,254,878
Cost of revenues 1,335,773 704,072
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Gross margin 1,986,767 1,550,806
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Operating expenses:
General and administrative 1,333,858 664,861
Sales and marketing 1,069,731 418,625
Product development 856,730 689,618
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Total operating expenses 3,260,319 1,773,104
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Loss from operations (1,273,552) (222,298)
Interest income (expense), net 183,463 (62,399)
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Loss before provision for
income taxes (1,090,089) (284,697)
Provision for income taxes - -
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Net loss (1,090,089) $ (284,697)
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Net loss per share $ (0.17) $ (0.06)
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Weighted average common and common
equivalent shares outstanding 6,436,372 4,777,036
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</TABLE>
3
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HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,090,089) $ (284,697)
Adjustments to reconcile net loss to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization 257,670 130,279
Loss on disposal of property and equipment 5,647 -
Changes in current assets and liabilities:
Accounts receivable 523,694 (452,787)
Unbilled revenue (439,981) 8,195
Prepaid expenses (15,125) (41,459)
Accounts payable (100,666) (164,318)
Accrued liabilities 158,024 226,647
Unearned revenue 742,997 (139,944)
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Net cash provided by (used in) operating activities 42,171 (718,084)
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Cash flows from investing activities:
Purchases of property and equipment (310,640) (264,138)
Capitalization of software development costs (138,636) (41,132)
Other assets (35,644) 95,853
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Net cash used in investing activities (484,920) (209,417)
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Cash flows from financing activities:
Payments under capital leases (1,403) (19,983)
Proceeds from exercise of common stock options 16,798 3,888
Borrowings from notes payable - 1,500,000
Advances from stockholder - 175,000
Deferred offering costs - (161,847)
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Net cash provided by financing activities 15,395 1,497,058
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Net increase (decrease) in cash and cash eqivalents (427,354) 569,557
Cash and cash equivalents at beginning of period 15,254,042 149,218
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Cash and cash equivalents at end of period $14,826,688 $ 718,775
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Supplemental disclosure of cash flow information:
Interest paid $ 90 $ 28,923
Supplemental disclosure of noncash transactions:
Cancellation of advances from stockholder through issuances
of notes payable $ - $ 500,000
</TABLE>
4
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HEALTH SYSTEMS DESIGN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 three month period ended December 31, 1996 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
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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 725B, 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 725B,
Diamond 725Q, Diamond 950C/S and Diamond Objects, providing the associated
implementation, modification, support and consulting services, and reselling
hardware and third party 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. Hardware and third party software fees are typically billed
and recognized as revenues when delivered to the client.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $3,323,000 and $2,255,000 for the three months ended
December 31, 1996 and 1995, respectively, representing an increase of 47%.
The growth in total revenues is attributable primarily to an increase in the
number and size of Diamond 950C/S implementations in progress during the
period as well as an increase in hardware and third party software sales.
The Company's relationship with Blue Cross and Blue Shield of Florida,
which commenced in November 1995, contributed approximately $596,000 in
revenues for the quarter compared with $287,000 in the prior year
period. The relationship with Shared Medical Systems (SMS)
accounted for approximately $234,000 in revenues for the quarter, compared
with approximately $325,000 in the year earlier period.
SYSTEM SALES. System sales revenues were $2,858,000 and $1,912,000 for
the three months ended December 31, 1996 and 1995, respectively, representing
an increase of 49%. Revenues associated with Diamond 950C/S sales were
responsible for the majority of the increase in systems sales revenues, with
significant increases in Diamond 950C/S license, implementation and
modification fees. Revenues associated with Diamond 725B and Diamond 725Q
also increased from the comparable period, substantially as the result of an
increase in hardware and third party software revenues associated with these
sales.
SERVICES AND OTHER. Services and other revenues were $465,000 and
$343,000 for the three months ended December 31, 1996 and 1995, respectively,
representing an increase of 36%. 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 Diamond
725B.
COST OF REVENUES. Cost of revenues was $1,336,000 and $704,000 for the
three months ended December 31, 1996 and 1995, respectively, representing an
increase of 90%. 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
31% of total revenues in the three months ended December 31, 1995 to 40% of
total revenues in the three months ended December 31, 1996, although no
long-term trend should be implied from this quarter to quarter comparison.
The cost of revenues as a percentage of sales is dependent on the mix of
license, service, hardware and third party software revenues, and may
fluctuate over time as these revenue sources fluctuate.
6
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OPERATING EXPENSES.
GENERAL AND ADMINISTRATIVE. General and administrative expenditures were
$1,334,000 and $665,000 for the three months ended December 31, 1996 and
1995, respectively, representing an increase of 101%. 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 $1,070,000
and $419,000 for the three months ended December 31, 1996 and 1995,
respectively, representing an increase of 155%. The Company continues to
emphasize the expansion of its sales and marketing department to better
address market demand for its products. Sales and marketing expenses as a
percentage of revenues increased in the three months ended December 31, 1996
when compared to the corresponding period in 1995, primarily as a result of
aggressive hiring of sales and marketing personnel.
PRODUCT DEVELOPMENT. Product development expenditures, net of software
capitalization, were $857,000 and $690,000 for the three months ended
December 31, 1996 and 1995, respectively, representing an increase of 24%.
The Company capitalized $139,000 and $41,000 of product development costs in
the three months ended December 31, 1996 and 1995, respectively. The
increase in product development expenditures, net of capitalization, is due
primarily to the continued development of Diamond 950C/S and Diamond 725B,
including increased staffing and the hiring of technical consultants to
assist such efforts. 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 near future.
INTEREST INCOME AND EXPENSE. Interest income was $184,000 and interest
expense was $62,000 for the three months ended December 31, 1996 and 1995,
respectively.
The interest income for the three months ended December 31, 1996, was the
result of the cash proceeds from the initial public offering completed on
March 5, 1996. Interest expense for the comparable year earlier period
related to capital leases and interest on notes payable, all of which were
substantially paid off by the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $42,000 and
($718,000) in the three months ended December 31, 1996 and 1995,
respectively. In the three months ended December 31, 1996, net cash provided
by operating activities consisted primarily of a decrease in accounts
receivable and increases in unearned revenue and accrued liabilities offset
by the net loss for the period and an increase in unbilled revenues. The
increase in unearned revenue was due primarily to the execution of several
contracts at the end of the period. The increase in accrued liabilities was
due primarily to the accrual of wages and benefits. The increase in
unbilled revenue in the three months ended December 31, 1996, was due
primarily to the timing of billing milestones relative the percentage
completion of certain projects.
Net cash used in investing activities was $485,000 and $209,000 in the
three months ended December 31, 1996 and 1995, respectively, and consisted
primarily of purchases of computer equipment and furniture related to the
expansion of the corporate offices.
Net cash provided by financing activities was $15,000 and $1,497,000 in
the three months ended December 31, 1996 and 1995, respectively. In December
1995, the Company raised $2,000,000 in notes issued in a private placement.
In the three months ended December 31, 1996, net cash provided by financing
activities consisted primarily of proceeds from the exercise of common stock
options by employees.
7
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As of December 31, 1996 and 1995, the Company had cash and cash
equivalents in the amounts of $14,827,000 and $719,000, 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 SMS, Blue Cross and Blue Shield of
Florida, and other 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 filings.
8
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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: February 13, 1997
By: /s/ Richard C. Auger
------------------------------
Richard C. Auger, Chairman and
Chief Executive Officer
By: /s/ Richard E. Malone
-----------------------------
Richard E. Malone,
Chief Financial Officer
9
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HEALTH SYSTEMS DESIGN CORPORATION
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of the Registrant, as amended
(Incorporated by reference from Exhibit 3.1 to Registration
Statement No. 333-0094)
3.2 By-laws of the Registrant (Incorporated by reference from Exhibit
3.2 to Registration Statement No. 333-0094)
4.1 Specimen Common Stock Certificate (Incorporated by reference from
Exhibit 4.1 to Registration Statement No. 333-0094)
10.1 Office building lease, dated February 24, 1994, as amended, for the
Registrant's principal executive offices (Incorporated by reference
from Exhibit 10.1 to Registration Statement No. 333-0094)
10.2 1994 Equity Incentive Plan (Incorporated by reference from Exhibit
3.1 to Registration Statement No. 333-0094)*
10.3 1996 Omnibus Equity Incentive Plan (Incorporated by reference from
Exhibit 10.3 to Registration Statement No. 333-0094)*
10.4 Marketing Agreement dated January 31, 1994 between the Registrant
and Shared Medical Systems Corporation (Incorporated by reference
from Exhibit 10.4 to Registration Statement No. 333-0094)+
10.6 Promissory Note, dated May 31, 1995, issued by the Registrant to
SVB (Incorporated by reference from Exhibit 10.6 to Registration
Statement No. 333-0094)
10.7 Commercial Security Agreement, dated May 31, 1995, between the
Registrant and SVB (Incorporated by reference from Exhibit 10.7 to
Registration Statement No. 333-0094)
10.8 Commercial Guaranty, dated May 31, 1995, made by J. Matthew
Mackowski for the benefit of SVB (Incorporated by reference from
Exhibit 10.8 to Registration Statement No. 333-0094)
10.9 Commercial Guaranty, dated May 31, 1995, made by Catherine C. Roth
for the benefit of SVB (Incorporated by reference from Exhibit 10.9
to Registration Statement No. 333-0094)
10.10 Commercial Guaranty, dated May 31, 1995, made by Richard C. Auger
for the benefit of SVB (Incorporated by reference from Exhibit
10.10 to Registration Statement No. 333-0094)
10.11 Commercial Guaranty, dated May 31, 1995, made by David M. Roth for
the benefit of SVB (Incorporated by reference from Exhibit 10.11 to
Registration Statement No. 333-0094)
10.12 Business Loan Agreement, effective August 22, 1995, between the
Registrant and SVB (Incorporated by reference from Exhibit 10.12 to
Registration Statement No. 333-0094)
10.13 Promissory Note, dated August 15, 1995, issued by the Registrant to
SVB (Incorporated by reference from Exhibit 10.13 to Registration
Statement No. 333-0094)
10.14 Commercial Security Agreement, dated August 15, 1995, between the
Registrant and SVB (Incorporated by reference from Exhibit 10.14 to
Registration Statement No. 333-0094)
10.15 Loan Modification Agreement, dated January 4, 1996, to SVB Business
Loan Agreement (Incorporated by reference from Exhibit 10.15 to
Registration Statement No. 333-0094)
10.16 Promissory Note, dated May 6, 1994, issued by the Registrant to
Wells Fargo Bank, National Association (Incorporated by reference
from Exhibit 10.16 to Registration Statement No. 333-0094)
10.17 Note and Warrant Purchase Agreement dated December 14, 1995 between
the Registrant and the Purchasers listed on Exhibit A thereto
(Incorporated by reference from Exhibit 10.17 to Registration
Statement No. 333-0094)
10.23 Advisory Agreement dated July 18, 1995 between the Registrant and
Mackowski & Shepler (Incorporated by reference from Exhibit 10.23
to Registration Statement No. 333-0094)
10.24 Form of Indemnification Agreement between the Registrant and its
directors and executive officers (Incorporated by reference from
Exhibit 10.24 to Registration Statement No. 333-0094)
10.25 Registrant's 401(k) Plan, as amended (Incorporated by reference
from Exhibit 10.25 to Registration Statement No. 333-0094)
10.26 License Agreement, dated March 25, 1996 between the Registrant and
Blue Cross/Blue Shield of Florida (Incorporated by reference from
Exhibit 10.26 to Registration Statement No. 333-0094)+
11.1 Computation of net loss per share
21.1 List of Subsidiaries (Incorporated by reference from Exhibit 21.1
to Registration Statement No. 333-0094)
23.1 Consent of Arthur Andersen LLP (Incorporated by reference from
Exhibit 23.1 to Registration Statement No. 333-0094)
10
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- -----------
+ Confidential treatment has been granted with respect to portions of this
exhibit.
* Indicates, as required by Item 14(a)(3), a management contract or
compensation plan required to be filed as an exhibit to this Form 10-K.
11
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EXHIBIT 11.1
HEALTH SYSTEMS DESIGN CORPORATION
COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS ENDED DECEMBER 31,
1996 1995
----------- ------------
Net loss $(1,090,089) $ (284,697)
----------- ------------
----------- ------------
Weighted average common and common equivalent
shares outstanding 6,436,372 4,452,689
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 - 324,347
----------- ------------
Weighted average common and equivalent shares
outstanding 6,436,372 4,777,036
----------- ------------
----------- ------------
Net income (loss) per common and common
equivalent share $ (0.17) $ (0.06)
----------- ------------
----------- ------------
12
