<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, 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 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 6,534,908 shares of common stock outstanding as of December
31, 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 -
December 31, 1997 and September 30, 1997 2
Consolidated Statements of Operations -
Three Months ended December 31, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Three Months ended December 31, 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
1
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PAGE PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
(UNAUDITED)
-------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 9,395,975 $ 11,194,757
Accounts receivable, net of allowance for doubtful
accounts of $195,000 at December 31 1997, and
$193,000 at September 30, 1997 6,506,535 5,208,056
Unbilled revenue 1,656,576 994,421
Prepaid expenses 732,659 568,266
------------- -------------
Total current assets 18,291,745 17,965,500
------------- -------------
Property and equipment:
Computer equipment 3,838,627 3,636,153
Office furniture and other 1,280,981 1,149,701
------------- -------------
Total property and equipment 5,119,608 4,785,854
Less: Accumulated depreciation (1,885,532) (1,599,767)
------------- -------------
Net property and equipment 3,234,076 3,186,087
------------- -------------
Deposits and other assets 125,502 127.000
------------- -------------
Software development costs, net of accumulated
amortization of $633,191 and $582,752 in 1997 and 1996,
respectively 913,296 798,540
------------- -------------
Total assets $ 22,564,619 $ 22,077,127
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,032,170 $ 1,202,704
Accrued liabilities 1,983,281 1,740,674
Unearned revenue 3,236,253 1,675,265
------------- -------------
Total current liabilities 6,251,704 4,618,143
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, 6,534,906 and 6,533,406 shares issued and
outstanding at December 31, 1997 and September 30, 1997,
respectively 6,533 6,533
Additional paid-in capital 23,033,532 23,029,552
Treasury stock, 2,054 shares (28,500) (28,500)
Deferred compensation (39,339) (43,279)
Retained deficit (6,659,311) (5,505,322)
------------- -------------
Total stockholders' equity 16,312,915 17,458,984
------------- -------------
Total liabilities and stockholders' equity $ 22,564,619 $ 22,077,127
------------- -------------
------------- -------------
</TABLE>
2
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HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Revenues:
System sales $4,545,848 $ 2,858,214
Services and other 744,894 464,326
------------ -------------
Total revenues 5,290,742 3,322,540
Cost of revenues 2,201,399 1,335,773
------------ -------------
Gross margin 3,089,343 1,986,767
------------ -------------
Operating expenses:
General and administrative 1,873,471 1,333,858
Sales and marketing 975,341 1,069,731
Product development 1,516,095 856,730
------------ -------------
Total operating expenses 4,364,907 3,260,319
------------ -------------
Loss from operations (1,275,564) (1,273,552)
Interest income (expense), net 121,575 183,463
------------ -------------
Loss before provision for
income taxes (1,153,989) (1,090,089)
Provision for income taxes - -
------------ -------------
Net loss (1,153,989) (1,090,089)
------------ -------------
------------ -------------
Net loss per share $ (0.18) $ (0.17)
------------ -------------
------------ -------------
Weighted average common and common
equivalent shares outstanding 6,534,621 6,436,372
------------ -------------
------------ -------------
</TABLE>
3
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HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------------------------
1997 1996
------------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,153,989) $ (1,090,089)
Adjustments to reconcile net loss to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization 340,144 257,670
Loss on disposal of property and equipment - 5,647
Changes in current assets and liabilities:
Accounts receivable (1,298,479) 523,694
Unbilled revenue (662,155) (439,981)
Prepaid expenses (164,393) (15,125)
Accounts payable (170,034) (100,666)
Accrued liabilities 242,607 158,024
Unearned revenue 1,560,988 742,997
------------------ ----------------
Net cash provided by (used in) operating activities (1,305,311) 42,171
------------------ ----------------
Cash flows from investing activities:
Purchases of property and equipment (333,754) (310,640)
Capitalization of software development costs (165,195) (138,636)
Other assets 1,498 (35,644)
------------------ ----------------
Net cash used in investing activities (497,451) (484,920)
------------------ ----------------
Cash flows from financing activities:
Payments under capital leases - (1,403)
Proceeds from exercise of common stock options 3,980 16,798
------------------ ----------------
Net cash provided by financing activities 3,980 15,395
------------------ ----------------
Net increase (decrease) in cash and cash equivalents (1,798,782) (427,354)
Cash and cash equivalents at beginning of period 11,194,757 15,254,042
------------------ ----------------
Cash and cash equivalents at end of period $ 9,395,975 $ 14,826,688
------------------ ----------------
------------------ ----------------
Supplemental disclosure of cash flow information:
Interest paid $ - $ 90
</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, 1997 are not necessarily indicative
of the results that may be expected for the year ended September 30, 1998.
These consolidated financial statements should be read in conjunction with
the financial statements and footnotes thereto for the year then ended
September 30, 1997 included in the Company's Form 10-K Annual Report.
2. REVENUE RECOGNITION
The Company licenses its internally developed software products and
other software products to health care organizations under the terms of
product license contracts. Individual sales may include, among others, a
combination of software license, implementation, program modifications,
training, and support. Contracts with customers may be terminated under
certain circumstances and revenues recognized could be refundable upon
termination in certain cases, including breach of contract. The termination
of customer contracts could have a material adverse effect on the Company's
business, financial condition, or results of operations.
In October, 1997, the AICPA issued SOP 97-2 "Software Revenue
Recognition," which the Company is required to adopt as of October 1, 1999.
Effective October 1, 1997, the Company adopted this pronouncement. There was
no material impact on the financial statements taken as a whole.
The Company generates revenues from licensing the rights to use its
software products directly to end users and indirectly through
distributors. The Company also generates revenues from sales of
post-contract support, implementation, and modification services, and
training services performed for customers who license the Company's products.
If collection is probable, the Company generally recognizes Diamond 950
C/S license revenue on a percentage of completion basis based on the labor
hours required to implement the system, as the implementation of Diamond 950
C/S occurs over a significant period of time and entails significant
modifications. Historically, the Company has recognized Diamond 725 license
revenue on the same basis as Diamond 950 C/S. The Company has concluded,
based upon its favorable experience in standardizing the installation of
Diamond 725, the relatively short installation time required to install the
product, and favorable experience with customer acceptance, that the
installation services performed in installing Diamond 725 qualify as a
service transaction under SOP 97-2. As such, effective October 1, 1997, the
Company will recognize Diamond 725 license revenue for contracts entered into
after September 30, 1997 upon shipment of the software to end users if there
are no uncertainties surrounding the contract. The impact of this change was
to recognize an additional $174,000 in revenue for the quarter ended December
31, 1997.
If a software license agreement provides for acceptance criteria that
extend beyond the published specifications of the applicable product, then
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. In situations where there are
undelivered elements critical to functionality of the software product, the
entire license fee is deferred.
3. EARNINGS PER SHARE
In the fiscal year ending September 30, 1998 the company will report its
net loss per share based on the recently issued Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share." The pro
forma effect of this accounting change on the three months ended December 31,
1997 and 1996 is:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Primary EPS, as reported (0.18) (0.17)
Pro forma effect of SFAS No. 128 - -
----- -----
Basic EPS, pro forma (0.18) (0.17)
----- -----
----- -----
Fully diluted EPS, as reported (0.18) (0.17)
Pro forma effect of SFAS No. 128 - -
----- -----
Diluted EPS, pro forma (0.18) (0.17)
----- -----
----- -----
</TABLE>
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
hardware and third party products. Until fiscal 1998, the Company recognized
license revenues on a percentage of completion basis based on the labor hours
required to implement the system. Effective October 1, 1997, the Company adopted
AICPA Statement of Position 97-2, as described in Note 2. to the financial
statements. 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 $5,291,000 and $3,323,000 for the three months ended
December 31, 1997 and 1996, respectively, representing an increase of 59%.
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.
During the first quarter of fiscal 1998, the Company executed its
largest license contract to date with Kaiser Permanente to use Diamond
950C/S. The relationship with Kaiser contributed approximately $729,000 and
$0 in license and services revenues for the three months ended December 31,
1997 and 1996, respectively.
During the first quarter of fiscal 1997, the Company executed a contract
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 $626,000 and $0 in revenues for the three months
ended December 31, 1997 and 1996, respectively.
The Company's relationship with Blue Cross and Blue Shield of Florida,
which commenced in November 1995, contributed approximately $399,000 in
revenues for the three months ended December 31, 1997 compared with $596,000
in the prior year period.
SYSTEM SALES. System sales revenues were $4,546,000 and $2,858,000 for
the three months ended December 31, 1997 and 1996, respectively, representing
an increase of 59%. Revenues associated with Diamond 950C/S were responsible
for the majority of the increase in systems sales revenues, with significant
increases in Diamond 950C/S license and implementation and fees.
SERVICES AND OTHER. Services and other revenues were $745,000 and
$465,000 for the three months ended December 31, 1997 and 1996, respectively,
representing an increase of 60%. 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
725.
COST OF REVENUES. Cost of revenues was $2,201,000 and $1,336,000 for
the three months ended December 31, 1997 and 1996, respectively, representing
an increase of 65%. 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. Cost
of revenues increased from 40% of total revenues in the three
6
<PAGE>
months ended December 31, 1996 to 41% of total revenues in the three months
ended December 31, 1997, 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, and hardware and third
party software revenues, and may fluctuate over time as these revenue sources
fluctuate.
OPERATING EXPENSES.
GENERAL AND ADMINISTRATIVE. General and administrative expenditures
were $1,873,000 and $1,334,000 for the three months ended December 31, 1997
and 1996, respectively, representing an increase of 40%. The increase in
general and administrative expenses was due primarily to staff additions and
investment in infrastructure to support the Company's expanded operations.
The Company believes that the level of general and administrative expenses
will continue to increase, although at a slower rate as the Company expands
its staff to support a larger client base. General and administrative
expenses include the salaries and benefits associated with general
management, finance and administration, as well as costs associated with
recruiting and facilities.
SALES AND MARKETING. Sales and marketing expenditures were $975,000 and
$1,070,000 for the three months ended December 31, 1997 and 1996,
respectively, representing an decrease of 9%. Sales and marketing expenses
as a percentage of revenues decreased in the three months ended December 31,
1997 when compared to the corresponding period in 1996, primarily as a result
of a decrease in marketing personnel. Although there was a decrease during
this time period, the Company continues to emphasize 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 $1,516,000 and $857,000 for the three months ended
December 31, 1997 and 1996, respectively, representing an increase of 77%.
The Company capitalized $165,000 and $139,000 of product development costs in
the three months ended December 31, 1997 and 1996, respectively. The
increase in product development expenditures, net of capitalization, 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. 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, net of interest expense,
was $122,000 and $183,000 at December 31,1997 and 1996, respectively.
Interest income represents interest earned on the Company's excess cash
balances, which are generally placed in short term investments, money market
funds, and government securities. Interest expense during the prior year
period consisted primarily of interest on capital leases.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $(1,305,000) and
$42,000 in the three months ended December 31, 1997 and 1996, respectively.
In the three months ended December 31, 1997, net cash used in operating
activities consisted primarily of a net loss of $(1,154,000), an increase in
accounts receivable and in unbilled revenue, and a decrease in accounts payable
offset by an increase in unearned revenues. The increase in unearned revenue
was due primarily to the execution of several contracts at the end of the
period. The increase in accounts receivable was due primarily to billing for
these contracts.
Net cash used in investing activities was $497,000 and $485,000 in the
three months ended December 31, 1997 and 1996, respectively, and consisted
primarily of purchases of computer equipment.
Net cash provided by financing activities was $4,000 and $15,000 in the
three months ended December 31, 1997 and 1996, respectively. In the three
months ended December 31, 1997, 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, 1997 and 1996, the Company had cash and cash
equivalents in the amounts of $9,396,000 and $14,827,000, 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 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
10.27 License agreement, dated October 20, 1997, with Kaiser
Permanente
(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, 1998
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
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HEALTH SYSTEMS DESIGN CORPORATION
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
10.27 License agreement with Kaiser Permanente +
11.1 Computation of net loss per share
- ----------
+ Confidential treatment has been requested with respect to portions of this
exhibit.
10
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HEALTH SYSTEMS DESIGN CORP. DIAMOND-TM- SOFTWARE LICENSE
-------------------------------------------------------------
1. PARTIES AND PURPOSE OF AGREEMENT
This license agreement (the "Agreement") is entered into between Kaiser
Foundation Health Plan, Inc.("Customer") and Health Systems Design-TM-
Corp. ("HSD"), a California Corp., the owner and developer of the managed
healthcare software known as Diamond-TM- (the "Software") to specify the
terms under which Customer is authorized to possess and use the Diamond
Software licensed to Customer by HSD under this Agreement.
2. DEFINED TERMS
2.1 DEFINED TERMS: Words or phrases defined in this Section 2 will be
capitalized when used in the text of this Agreement in order to
identify them as "Defined Terms". Words and phrases that are defined
within later sections of this Agreement will be identified with
quotation marks and will be capitalized when used thereafter.
2.2 SOFTWARE: The Diamond software modules identified in Schedule A, in
object code/machine readable and source code formats, as well as
subsequent upgrades and/or modifications, including any copies thereof
whether partial or complete.
2.3 DOCUMENTATION: The applicable Diamond User Documentation, any
technical documentation, and Installation Manual as well as any copies
of any such items, whether partial or complete may be referred to
collectively as "Documentation" and shall be included within the scope
of the defined term "Software".
2.4 CUSTOMER: Any of the entities identified in Schedule B, as well as
any entities that after the effective date of this Agreement become
affiliates, subsidiaries, joint partners or associates of Customer and
are thereby added to the list "Customers" as specified and further
defined in Schedule B., which are licensed to possess and use the
Software under the terms of this Agreement. For ease of reference,
HSD or Customer may be referred to individually as a "Party" and
collectively as the "Parties" and the terms "Affiliate(s)" and
Associate(s) will be defined in Schedule B.
2.5 INSTALLATION: The loading of the Software onto the Customer's
computing environment.
2.6 ACCEPTANCE: Acceptance will be in two forms: Pre-Production
Acceptance and Production Acceptance. Pre-Production Acceptance
refers to Acceptance after installation of the Software delivered
Customer upon the execution of this Agreement and during the
implementation period but before Production Use. Post Production
Acceptance refers to Acceptance of the Software (including applicable
modifications)after Production Use.
2.7 PRODUCTION: The first use of the Software to process live data as
Customer's system of record during the normal course of any part of
Customer's business or other specified Customer use. For purposes of
this Agreement, the terms "Go-
Page 1
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Live" and/or "First Production Use" shall have the same meaning as
"Production".
3. RIGHTS AND SCOPE OF USE GRANTED, RESTRICTIONS ON COPYING
3.1 Customer may use the Software in the United States for its internal
data processing purposes subject to the terms and conditions of this
License Agreement.
3.2 Each entity identified in Schedule B that comprises the definition of
Customer may make one backup, one archival and one off-site
backup/archival copy of the Software. The media containing copies
shall be labeled with HSD's copyright and proprietary rights notices.
3.3 Customer may not copy the Documentation without HSD's prior written
approval.
3.4 The rights of possession and/or use granted to the Customer under this
Agreement constitute all of the rights imparted to the Customer
hereunder with the understanding that those rights not expressly
granted are retained by HSD.
4. PROPRIETARY RIGHTS, LIMITED RIGHT OF ASSIGNMENT
4.1 Customer acknowledges that the Software is proprietary and the
property of HSD and that this Agreement grants specified rights of
possession and use to Customer with the understanding that all rights
of ownership are retained exclusively by HSD. Customer further
acknowledges that the unauthorized use of the Software may expose HSD
to irreparable harm for which the payment of money damages may not
serve as an adequate and/or complete remedy.
4.2 Customer may not provide third-party access to the Software by means
such as service bureau and/or time share arrangements except by prior
agreement of the parties evidenced by a written document(s) executed
by the Parties which will serve as an addendum to this Agreement.
4.3 Customer agrees to take all reasonable precautions to ensure the
continued confidentiality of the Software, which precautions shall
include informing Customer's applicable personnel of the proprietary
nature of the Software.
4.4 HSD will retain ownership of any modifications and/or
Customer-specific modules that are based on the design of the
Diamond Software and/or otherwise integrated into/made an integral
part of the Software, in consideration of the payment of the fees
for same as specified in Schedule A. In the event that custom
interfaces are designed for Customer's use with Diamond, the
ownership of any such interface shall remain with the Customer to
the extent that it provides a link to the Software, but is not
integrated into the Software as an integral part thereof.
4.5 Each Party agrees that it shall not, without prior written consent
of the other Party, use, reproduce, disclose, or provide to
third-parties, other than Customer and/or consultants or
contractors which consultants and/or contractors that have
entered into non-disclosure agreements (NDA) in form and substance
Page 2
<PAGE>
substantially equivalent to that sample NDA attached and made a
part hereof as Attachment1, any confidential documents or
information obtained from the other Party, such as documents,
memoranda, position descriptions, handbooks, financial statements,
client lists, and/or audio or visual recordings, as well as
methods, techniques, and procedures utilized by the respective
Party that are not generally known in the Party's business and/or
industry and which, as a result, gives that Party a competitive
advantage. It is further understood and agreed that access will
be not be granted to "HSD Competitors" as defined in Section 4.8,
below.
4.6 Upon termination of this Agreement by either Party for any reason,
each Party shall, within twenty (20) days return any and all
materials of the type described in the preceding Section 4.5 as
well as the Software and Documentation (together with any and all
copies thereof) to the other Party, except as otherwise specified
in Section 13.5 below. Following termination, the Parties shall
remain obligated not to use, reproduce, disclose or provide such
items or information to third-parties without the prior written
permission of the other Party for as long as any such information
is not generally known in the disclosing Party's industry and/or
otherwise remains confidential/does not enter the public domain as
a result of a breach of this Agreement. In the event that this
provision is held to be void or unenforceable because of its lack
of a definite term, then the parties mutually agree that the
maximum duration of any confidentiality obligation hereunder shall
not exceed ten (10) years following the termination of this
Agreement.
4.7 The Customer's rights granted under this Section 4 are non-exclusive
and non-transferable/non-assignable except as specified in Section
4.9, below.
4.8 Customer may assign this Agreement to a wholly owned subsidiary,
provided that HSD is given at least thirty (30) days prior written
notice of any such intended assignment with the understanding that
assignment shall not be made to an HSD competitor. Any assignment
shall be subject to the prior written Agreement of the entity to
which the assignment is being made affirming that it will abide by
the terms of this Agreement. For purposes of this Agreement, an
"HSD Competitor" shall be defined as any entity engaged in
providing managed health care software solutions and/or any entity
that, in HSD's reasonable opinion, is likely to become an HSD
Competitor.
4.9 In the event that Customer is merged into or acquired by an HSD
Competitor, the continuation of this Agreement and the associated
use of the Software shall be subject to HSD's prior written
approval under terms and conditions that adequately address HSD's
concerns in areas such as the protection of its proprietary
interests and the confidentiality of its trade secrets.
4.10 HSD shall not assign this Agreement and/or its obligations
hereunder without the prior written approval of Customer, which
approval shall not be unreasonably withheld upon a showing that
the proposed assignee has the capacity and the expertise to
perform as required under the Agreement.
5. TERM OF AGREEMENT AND LICENSE FEES
5.1 The term of this Agreement shall be perpetual unless terminated as
provided under the applicable termination provisions of this
Agreement.
Page 3
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5.2 The Diamond license fees ("License Fees") and the fees for the
Implementation Resources are specified in Schedule A, which
Schedule is incorporated and made a part of this Agreement by this
reference. The License Fees allow for an unlimited number of
"Concurrent Users" that are authorized to access the Software at
the same time. For purposes of this Agreement, a User is
equivalent to a computer terminal/CRT, personal computer or other
workstation that has the capacity to access the Software and/or any
database associated with the Software.
5.3 As set forth in Schedule A, the License Fees are divided into Phase
1 and Phase 2. Payment of the License Fees associated with Phase 1
does not obligate Customer to pay the License Fees for Phase 2
should Customer elect not to proceed with Phase 2. HSD shall be
entitled to the Phase 2 payout (the "Payout") referenced in
Schedule A in the event that Customer elects not to proceed with
Phase 2. The Payout shall be due and payable to HSD in the event
that Customer does not proceed with Phase 2 within 12 months of
Customer's Post Production acceptance of the Phase 1Production
Software but in no event later than December 31, 2000. Therefore,
Customer may choose to license the Software only for Customer's
Divisions listed in Phase 1 of Schedule A.
5.4 It is mutually understood and agreed that Customer and HSD will
meet and confer in the interest of adjusting the Phase 2 Payment
Schedule set forth in Schedule A, should Customer find it necessary
to modify the timing and/or sequence of the implementation of the
divisions constituting Phase 2. Any such meeting(s) will be
convened within 15 days of the request for same and the Parties
shall proceed diligently and in good faith to complete any such
revisions within 30 days of their initial meeting. In the event of
modifications to the Phase 2 Payment Schedule under this Section
5.4, any license fee adjustments shall take into account the
membership figures of the affected division(s) and be priced, in
part, on a proportional basis.
5.5 Should Kaiser elect to discontinue the Phase 1 project for any
reason other than for cause, HSD will be entitled to receipt of the
next scheduled major Phase 1 license fee payment. For purposes of
this Section 5.5, a major Phase I License fee payment shall mean
either Pre-Production Acceptance or Post Production Acceptance as
specified in Schedule A. Any such payment will be due and payable
within 30 days of any such election.
5.6 All local, state, and federal sales, use, personal property, or
other similar taxes or duties relating to this license or to
Customer's operation of the Software, shall be the exclusive
obligation of Customer. Payment of said taxes shall be Customer's
obligation independent of its obligation to pay License Fees.
6. ACCEPTANCE AND TESTING
6.1 The following language applies to both Pre Production and
Production Acceptance periods with the commencement of the Test
Period being from the date of first install of Software
(Pre-Production Testing) or first date of Production Use
(Post-Production Testing), depending on which testing period
applies.
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<PAGE>
6.2 For Pre-Production Testing, Customer shall have 30 days to test the
Software and its Operation ("Test Period"). During the
Post-Production Test Period, Customer will have 45 days to test the
Software and it operation. During the Test Period, Customer will
notify HSD as soon as possible of any Priority 1 and/or Priority 2
situations that it observes and documents.
6.3 For purposes of this Agreement, Priority 1 and 2 shall be defined as
specified in the following table:
---------------------------------------------------------------------
PRIORITY TYPE DESCRIPTION
---------------------------------------------------------------------
1 Urgent Production is halted; customer
cannot connect; daily business is
severely impacted; no workaround
---------------------------------------------------------------------
2 High Software is operational but a major
component is not functioning; physical
data lost; data integrity affected; no
workaround
---------------------------------------------------------------------
6.4 HSD shall have 30 days to address and resolve Priority 1 and 2
situations reported by Customer from the time that HSD is able to
identify and confirm any reported "Verified Program Errors". For
purposes of this Agreement a Verified Program Error shall be defined
as those Priority 1 and/or Priority 2 situations that HSD can
replicate using Customer supplied data/information for situations
occurring in the Customer's HSD-approved computing environment (absent
networking and/or telecommunication components associated with any
such computing environment).
6.5 Upon completion of any applicable remedial action, HSD will advise
Customer when such errors/situations are corrected and/or otherwise
addressed. Upon receipt of any such notice/advice Customer will have
10 business days to retest the operation of the Software ("Retest
Period").
6.6 In the event that Customer is unable to confirm the correction of any
such Verified Program Error, Customer shall so advise HSD at which
time HSD will have an additional 30 days in which to provide an
acceptable remedy with the understanding that HSD senior engineering
management will be actively involved in the resolution process. Upon
the completion of any such subsequent remedial action, HSD shall so
advise Customer and the Customer shall have an additional 10 business
days to retest (the "Retest Period").
6.7 Should Customer determine that any such Verified Program Error has
not been corrected and the Software functionality has not been
restored to conform with its Documentation during any such Retest
Period, the Parties shall timely meet and confer in order to
determine if there is an acceptable alternative means of addressing
the situation. Such determination of whether there exists an
acceptable means of addressing the situation shall be made no later
than 10 business days after the Retest Period specified in
Paragraph 6.6 above.
6.8 Should the Parties be unable to agree upon any such mutually
acceptable alternative means of addressing the situations under
this Section 6, any such matter shall then be subject to expedited
disposition pursuant to the dispute resolution procedures specified
in Section 16.2. Any matter arising under this Section 6 of the
Agreement, shall be subject to a maximum amount in controversy not
to exceed the license fees paid by Customer to HSD hereunder.
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6.9 HSD's base "Diamond Client Server Performance Standards" document
is incorporated into and made a part of this Agreement as
Attachment 2 and shall be included as part of the defined term
"Documentation", as a basis for anticipated response/performance
measures in the specified computing environment.
6.10 For purposes of this Agreement, Acceptance occurs (1) if Customer
notifies HSD prior to the end of the Test Period that the Software
performs in accordance with the Documentation, or (2) if Customer
notifies HSD prior to the end of the Retest Period that the
Software performs in accordance with the Documentation. In the
event that Customer does not provide notice to HSD of its
acceptance or non-acceptance prior to the expiration of any such
Test or Retest Period, acceptance shall be deemed to have been
granted.
6.11 It is mutually understood and agreed that upon final acceptance of
the Software delivered with respect to Phase 1 of the Kaiser/HSD
undertaking described herein, only those changes and/or
modifications applicable to subsequent phases/divisions of the
Kaiser/HSD project shall be subject to the acceptance process and
dispute resolution procedures described in this Section 6. The
version of the Software that is first accepted (presumptively in
Phase 1) shall be the base Post Production Software with the
understanding that the incremental changes/modifications thereto
will constitute that aspect of the Software that will be subject to
the acceptance process and dispute resolution process described in
this Section 6.
7. WARRANTY
7.1 HSD warrants that the Software will perform as described in the
Diamond User Documentation and Installation Manual Software for a
period of six (6) months from its first Production use of the
Software in Phase 1 of the Kaiser project. This warranty shall be
conditional upon Customer's computing environment being consistent
with HSD's specifications and in good working order and further
provided that the Software has been properly used, has not been
modified and/or serviced by an entity other than HSD. Upon receipt
of Customer's notice that the Software is not functioning according
to the Documentation, HSD will, at no cost to Customer, timely
provide the technical and-or programming resources, including
personnel with the requisite expertise, necessary to address and
correct the problem provided that HSD can replicate the reported
problem using Customer supplied data in a standard computing
environment.
7.2 HSD hereby warrants, represents and certifies that the Software
provided under this Agreement will automatically and accurately
process calendar dates (including leap year dates) and date
calculations (including, but not limited to, calculating, comparing
and forward or reverse-sequencing) for all dates prior to, through
and beyond January 1, 2000 and that any such processing shall not
require Customer to invoke special procedures.
7.3 HSD acknowledges that Customer is a provider of health care
services; that Customer's use of the Software will be vital to the
business operations of Customer; and that any protracted
interruption of any critical aspects of Customer's business could
result in substantial liability to such Customer. Accordingly, HSD
warrants and represents that it shall not at any time during the
term of this Agreement render the Software unusable or inoperable,
take
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possession of the Software, or other equipment provided to a
Customer by HSD or its agent or agents that is intended to be used
in conjunction with or Software or in any way deliberately take
actions to interfere with the operation of the same or Customer's
businesses unless Customer is found to be breach of a material
provision of this Agreement and then only upon giving Customer the
opportunity to timely cure any such breach and/or default.
7.4 HSD MAKES NO OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
EXCEPT AS SPECIFIED IN SECTION 8.0 BELOW.
8. PATENT AND COPYRIGHT WARRANTY
8.1 At HSD's expense, HSD shall defend Customer against any claim that
the Software infringes a patent or copyright in the United States
and shall pay all costs and damages that a court awards as a result
of such claim. To qualify for such defense and payment, Customer
must: (1) give HSD prompt written notice for such claim; (2) give
complete authority to HSD to compromise or settle and to control
the defense and all related negotiations, and (3) fully cooperate
with HSD in the defense and all related negotiations.
8.2 Customer agrees that if the operation of the Software becomes, or
in the opinion of HSD is likely to become the subject of a patent
or copyright infringement claim, Customer will permit HSD, at HSD's
option and expense to: (1) promptly procure for Customer the right
to continue to use the Software on commercially reasonable terms;
or (2) replace the Software with alternatives that are
substantially equivalent on all material functions of the Software;
or (3) modify the Software in a manner which causes it to function
substantially the same as it had prior to modification so that it
becomes non-infringing.
8.3 Should HSD be unable to secure any of the three options specified
in Section 7.2 under commercially reasonable terms, then the
License Agreement shall terminate and the Customer will be entitled
to a refund of the License Fees paid to HSD under this Agreement
with respect to any successful third-party claim of which HSD
receives notice during the three (3) year period following the
first Production Acceptance. Thereafter the amount of any License
Fee refund payable to Customer under this Section 8.3 shall be
reduced by 20% during each subsequent year.
8.4 The provisions of this Section 8 state HSD's entire obligation to
Customer regarding patent or copyright infringement.
9. GENERAL INDEMNITY
Except as provided elsewhere in this Agreement, HSD and Customer shall
indemnify and hold each other harmless against all liability, loss,
damage and expense (including reasonable attorneys' fees) resulting from
injury to or death of any person (including injury or death of their
respective subcontractors or employees) or loss of or damage to tangible
real or personal property, to the extent that such liability, loss,
expense, damage or liability was proximately caused by the negligent or
willful act or omission by
Page 7
<PAGE>
the party from whom indemnity is sought, including its agents, employees
or subcontractors.
10. LIMITATION OF LIABILITY
10.1 In no event shall either party be liable for consequential damages,
loss of profits, or other special damages in any way associated with
this Agreement, even if either party has been apprised of likelihood
of the same.
10.2 In no event shall HSD be liable for an amount greater than the
amount of License Fees previously paid by Customer to HSD under
this Agreement. Notwithstanding anything to the contrary in the
preceding sentence, during the period between Phase 1
Pre-Production Acceptance and Phase 1 Post-Production Acceptance,
HSD's liability shall not exceed $5,000,000. Following Phase 1
Post Production Acceptance, the HSD's limitation on liability shall
again be the amount of the license fees previously paid by Customer
to HSD under this Agreement.
11. CONFIDENTIALITY
11.1 Confidential Information shall mean information such as customer
lists, business plans, operation plans, client information,
CUSTOMER personnel and medical records, application software
programs and documentation licensed by third parties to CUSTOMER or
HSD, the HSD Software including its Documentation, which are
disclosed by CUSTOMER or HSD to the other party, its employees,
agents, contractors, assignees or successors in the conduct of
business under this Agreement. In addition, Confidential
Information shall also include any other materials relating to
HSD's business or the business of CUSTOMER which are designated in
writing as confidential at the time of disclosure by CUSTOMER or
HSD, or is identified orally at the time of the disclosure as
confidential and confirmed in writing within 10 business days of
such disclosure, and which are disclosed by CUSTOMER or HSD to the
other party, its employees, agents, contractors, assignees or
successors in the conduct of business under this Agreement. The
following information shall not be deemed Confidential Information,
and neither party nor its employees shall have an obligation with
respect to any such information which:
11.1.1 is or falls into the public domain through no wrongful act of
a party or that party's agents or employees; or
11.1.2 is rightfully received from a third party without
restriction and without breach of this Agreement; or
11.1.3 is approved for release by written authorization of an
officer of a party; or
11.1.4 is disclosed pursuant to the requirements of a governmental
agency or operation of law; or
11.1.5 is already in possession of a party or that party's
employees as evidenced by their records and is not the subject
of a separate non-disclosure or confidentiality agreement with
either of them.
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<PAGE>
11.2 Standard of Care. Each party hereby agrees that it and its
respective officers, employees, agents, contractors, assignees, and
successors shall (i) keep all Confidential Information received
from the other party strictly confidential for a period of 5 years
following the date of any such disclosure, (ii) instruct their
officers, employees, agents, contractors, and permitted assignees
and successors, who have access to such Confidential Information,
to use the same degree of care and discretion with respect to the
Confidential Information of the other party, or of any third party
utilized hereunder, that HSD and CUSTOMER each require with respect
to their own Confidential Information of , (iii) use and disclose
such information solely for the purposes and in the manner set
forth in this Agreement, (iv) not disclose any such information to
any other person, corporation, governmental agency or other entity
without the express written permission of the other party, except
that HSD and CUSTOMER agree that CUSTOMER may disclose HSD Software
and Documentation to its outside consultants having a need to know
for the purpose of rendering to CUSTOMER technical opinions and
advice regarding the HSD Software and Documentation, provided said
consultants agree to hold the HSD Software and Documentation in
confidence and have executed a Non-Disclosure Agreement and with
the understanding that Customer shall not knowingly engage the
services of consultants who are HSD competitors and/or are
affiliated with HSD Competitors. CUSTOMER SHALL USE NO LESS THAN
THE SAME DEGREE OF CARE AND DISCRETION THAT CUSTOMER REQUIRES WITH
RESPECT TO ITS MOST VALUABLE TRADE SECRET INFORMATION.
Notwithstanding the foregoing, CUSTOMER may not disclose HSD's
Confidential Information to any of the parties identified by HSD in
Schedule H, or to their employees, agents or consultants, as such
Schedule H may be updated from time to time by HSD. CUSTOMER shall
institute the necessary security policies and procedures to meet
its obligations hereunder. Notwithstanding the foregoing, the mere
viewing of data input screens or the review of output screens and
reports generated by released HSD Software by third parties, not in
competition with HSD, shall not be deemed a disclosure of HSD
Confidential Information.
11.3 Without limiting the foregoing, CUSTOMER shall use its reasonable
efforts to cooperate with HSD in identifying and preventing
unauthorized use, copying, or disclosure of the HSD Software and
HSD Confidential Information, or any portion thereof.
11.4 Notwithstanding anything otherwise to the contrary in this
Agreement, the limitation of liability provisions of Section 10,
above, each Party shall indemnify and hold harmless the other Party
and its officers and employees from and against any and all
damages, losses, liabilities, costs and expenses (including
reasonable legal fees) to the extent arising out of any breach of
the Confidentiality obligations hereunder by the indemnifying
party, or its subsidiaries and affiliates, or any entity
controlling, controlled by or under common control with the
indemnifying party.
12. NON-SOLICITATION OF PERSONNEL
Neither Party shall solicit for employment, retention and/or use of
services of any personnel presently employed by the
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<PAGE>
other Party or who have been employed by the other Party during the
preceding twelve (12) months without the prior written consent of the
other Party, which consent will not be unreasonably withheld.
13. TERMINATION
13.1 This Agreement shall be subject to termination should either Party
fail to observe or perform any material obligation under this
Agreement subject to the procedures specified in this Section 13.
13.2 In the event of a claim of default/breach under this Section 13,
the Party alleging any such default/breach shall give written
notice of the alleged breach, which notice shall specify the nature
of any such claim in sufficient detail to allow the receiving Party
to investigate same in the interest of being able to respond
thereto.
13.3 This Agreement may be terminated by the Party alleging any such
breach/default thirty (30) days after the date of such notice is
given to the other Party unless (1) the material failure is
corrected within such thirty (30) day period; or (2) if it is not
possible to correct within such thirty (30) days, the defaulting
Party commences correction within thirty (30) days and proceeds
diligently to a cure (3) the matter remains a subject of
disagreement between the Parties and the process of dispute
resolution has been initiated under Section 16, below.
13.4 Upon termination of this Agreement, the Customer shall, within
twenty (20) days, return the Software to HSD, except as otherwise
specified in Section 13.5 below.
13.5 In the event of a post-Production termination resulting from a
material breach by HSD as determined under the applicable
provisions of Section 16 of this Agreement, Customer's rights of
use shall be extended for a period of one-hundred-eighty (180) days
from the date of any such determination. During any such
one-hundred-eighty (180) day period, the terms of this Agreement
shall remain in effect with the understanding that Sections 3, 4,
7, 8, 9, 10, 11, 12, 16, 17 and 19 shall survive termination for a
period not to exceed three (3) years.
14. THIRD-PARTY SOFTWARE PRODUCTS
Third-party software license fees for products to be used in conjunction
with HSD's Diamond Software will be specified in an addendum to Schedule
A. Applicable third-party licenses will be provided to Customer as
attachments to Schedule A.
15. SUPPORT AND IMPLEMENTATION AGREEMENTS
Separate Support and Implementation Agreements will be executed by the
Parties subsequent to the execution of this License Agreement.
16. DISPUTE RESOLUTION
16.1 Any disputes between the Customer and HSD regarding this Agreement
shall be settled by an interim steering committee representing both
parties. HSD and Customer shall mutually agree on the members of
the interim steering
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<PAGE>
committee. Should the interim steering committee fail to resolve
the dispute within 60 days of commencement of this procedure, then
any controversy or dispute between the parties associated with the
interpretation, performance and/or breach of this Agreement shall
be settled, at the request of any Party to this Agreement, by final
and binding arbitration pursuant to the rules of the American
Arbitration Association and as further specified below.
16.2 Notwithstanding anything to the contrary in this Section 16, any
matter submitted for dispute resolution arising under Section 6
shall be subject to an expedited process wherein the steering
committee specified in Section 16.1 shall have 20 days in which to
resolve any such situation at which time any such matter will be
subject to arbitration to be commenced within 20 days thereafter.
16.3 Any dispute submitted to arbitration shall be convened at the
location of the city of the headquarters of the Party not
initiating the arbitration and shall be conducted by a three (3)
person arbitration panel from a commercial alternative dispute
resolution organization such as Judicate. The parties shall each
choose one arbitrator from the list of arbitrators supplied by the
dispute resolution organization, which panel must include
arbitrators with large system software industry experience. The
two selected arbitrators will then select the third member of the
panel and the arbitration hearing will be scheduled within thirty
(30) days of the initiation of the arbitration process.
16.4 California law shall be applied in any such arbitration without
reference to its choice of law statutes and the arbitrators'
findings will include a detailed summary of the law as it applied
to the award and/or findings of the arbitration panel.
Depositions may be taken and discovery may be conducted in any
arbitration under this Agreement subject to limitations imposed by
the arbitrators.
16.5 Each party shall pay its own costs and expenses.
16.6 Any judgment upon any award and/or findings rendered by the
arbitrators may be entered by any state or federal court having
jurisdiction thereof.16.7 This dispute resolution provision shall
not limit either Party's right to obtain any equitable or
provisional remedy, including without limitation, injunctive
relief, orders for recovering possessions or other relief such as
enforcing the reasonably restrictive provisions of this Agreement
from any court of competent jurisdiction deemed necessary by either
Party to protect its intellectual property rights. Notwithstanding
anything to the contrary in this Section 16, any dispute arising
under or associated with this Agreement regarding proprietary
rights in the Software shall be subject to judicial action under
California law with venue in Oakland, California except to the
extent preempted by applicable federal law. The prevailing Party in
any action under Section 16.7shall be entitled to an award of its
attorney fees and applicable costs, including those associated with
appeals of any judgment and/or actions associated with the
enforcement of any such judgment.
17. INSURANCE
17.1 HSD shall obtain and maintain in full force and effect through at
least the duration of Maintenance Support Services, the insurance
coverage described in this Section, with one or more insurance
carriers.
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<PAGE>
17.2. Liability
(a) Commercial Form General Liability Insurance with limits as
follows:
General Aggregate $2,000,000
Products Completed/Operations Aggregate $2,000,000
Personal and Advertising Injury $1,000,000
Errors and Omissions $1,000,000
Each Occurrence $2,000,000
(b) Business Auto Liability Insurance for owned scheduled,
non-owned, or hired automobiles with a combined single limit
of no less than $1,000,000 per occurrence.
(c) Workers' Compensation and Employers liability Insurance in a
form and amount covering HSD's full liability under Workers'
Compensation Insurance and Safety Act in accordance with
applicable state and federal laws.
17.3 HSD, upon execution of the Agreement, shall furnish Customer with
Certificates of Insurance evidencing such coverage. Premiums on all
insurance policies shall be paid by HSD and shall be deemed included
in HSD's obligations under the Agreement at no additional charge.
18. NON-DISCRIMINATION AND MEDICARE
HSD recognizes that as a government contractor Customer is subject to
various federal laws, executive orders and regulations regarding equal
opportunity and affirmative action which may also be applicable to
subcontractors. HSD, therefore, agrees that all applicable equal
opportunity and affirmative action clauses shall be incorporated herein
as required by federal laws, executive orders, and regulations, which
include the following: (a) The nondiscrimination and affirmative action
clauses contained in: Executive Order 11246, as amended, relative to
equal opportunity for all persons without regard to race, color,
religion, sex or national origin; the Vocational Rehabilitation Act of
1973, as amended, relative to the employment of qualified handicapped
individuals without discrimination based upon their physical or mental
handicaps; the Vietnam Era Veterans Readjustment Assistance Act of 1974,
as amended, relative to the employment of disabled veterans and veterans
of the Vietnam era, and the implementing rules and regulations
prescribed by Secretary of Labor in Title 41, Part 60 of the Code of
Federal Regulations (CFR). (b) The utilization of small and minority
business concerns clauses contained in: the Small Business Act, as
amended; Executive Order 11625; and the Federal Acquisition Regulation
(FAR) at 48 CFR Chapter 1, Part 19, Subchapter D, and Part 52,
Subchapter H, relative to the utilization of minority business
enterprises, small business concerns and small business concerns owned
and controlled by socially and economically disadvantaged individuals,
in the performance of contracts awarded by federal agencies. (c) The
utilization of labor surplus area concerns clauses contained in: the
Small Business Act, as amended; Executive Order 12073; 20CFR Part 654,
Subpart A; and the FAR at 48CFR Chapter 1, Part 20 of Subchapter D and
Part 52 of Subchapter H, relative to the utilization of labor
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<PAGE>
surplus area concerns in the performance of government contracts. If this
Agreement is determined to be subject to the provisions of Section 952
of P.L. 96-499, which governs access to books and records of
subcontractors of services to Medicare providers where the cost or value
of such Services under the contract exceeds $10,000 over a 12-month
period, then HSD agrees to permit representatives of the Secretary of
the Department of Health and Human Services and of the Comptroller
General to have access to the contract and books, documents and records
of HSD, as necessary to verify the costs of the contract, in accordance
with criteria and procedures contained in applicable Federal
regulations. HSD hereby certifies to CUSTOMER that HSD shall comply
during the term of this Agreement with the provisions of the Immigration
Reform and Control Act of 1986 and any regulations promulgated
thereunder. HSD hereby certifies that it has obtained a properly
completed Employment Eligibility Certificate (INS Form 1-9) for each
worker hired by HSD after November 5, 1986.
19. GENERAL PROVISIONS
19.1 Notices.
All notices given hereunder shall be in writing and sent by
telefax/facsimile and/or an internationally recognized courier such
as DHL to the addresses and/or telephone numbers below, which
information may be changed by notice conforming to the requirements
of this Notice Section. Notices delivered by telefax and/or courier
shall be deemed to have been received on the date of successful
transmission thereof if received during business hours or otherwise
on the next business day following its receipt.
Customer: Kaiser Permanente, National Purchasing Organization
1800 Harrison St.
Oakland, CA. 94612
Attn: IT Commodity Manager
510.267-2545
HSD: Health Systems Design Corp.
1330 Broadway, Suite 1200
Oakland, California 94612
Attn: Chief Financial Officer
Facsimile: 510 763-2081
19.2 If any material aspect of this Agreement is found invalid, void
and/or unenforceable by a court of competent jurisdiction and/or by
arbitration, the Agreement shall be subject to termination unless
the Parties agree otherwise.
19.3 No term and/or provision of the Agreement shall be deemed waived
and/or any breach excused unless such waiver or consent is
specified in writing and signed by the Party claimed to have waived
and/or consented. No such consent and/or waiver, whether express
or implied, shall constitute a consent, waiver and/or excuse for
any other, different or subsequent breach.
19.4 The obligations of the Parties to perform under this Agreement
shall be suspended in the event that any such performance cannot be
rendered by reason of matters beyond the control of the affected
Party, including Acts of God, war and/or insurrection.
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19.5 This document, and the Schedule A referenced herein,
represents the entire understanding between the parties and
supersedes any and all prior understandings between the Parties,
whether verbal or written.
20. EXECUTION
This Agreement shall be effective as of the date of the signature/acceptance by
the duly authorized signatories below.
CUSTOMER: KAISER FOUNDATION HEALTH PLAN HEALTH SYSTEMS DESIGN CORP.
Signed Signed
- --------------------------------- ----------------------------------
Name Name Russell J. Harrison
- --------------------------------- ----------------------------------
Title Title Chief Executive
- --------------------------------- Officer/President
----------------------------------
Date Date 10/17/97
- --------------------------------- ----------------------------------
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SCHEDULE A - KAISER PRICING SCHEDULE
DIAMOND CLIENT/SERVER SYSTEM MODULES INCLUDED:
Membership & Eligibility; Group & Plan Maintenance; Utilization
Management; Claims Pricing & Adjudication; Authorization, Capitation
& Risk Fund Accounting; Premium Billing; AP; EDI; Provider Network
Management; Letters; Customer Service & Reports
LICENSE FEES
- ------------
<TABLE>
<S> <C>
PHASE I: Northwest, Northeast, Central East and Southeast Divisions [ * ]
PHASE I IS LIMITED TO 3,000,000 MEMBERS WITHIN
THE ABOVE NAMED DIVISIONS. ADDITIONAL MEMBERS
WILL BE CHARGED AT A RATE OF [ * ]. HSD WILL
CREDIT CUSTOMER FOR ANY ADDITIONAL PHASE I
MEMBER CHARGES [ * ] PER MEMBER ABOVE
3,000,000 MEMBERS) IF THE TOTAL MEMBERSHIP AT
PHASE I & II POST PRODUCTION ACCEPTANCE IS LESS
THAN 8,500,000 MEMBERS. ANY APPLICABLE
CREDIT/PAYMENT WILL BE REMITTED 30 DAYS AFTER
POST PRODUCTION ACCEPTANCE OF PHASE II.
PHASE I PAYMENT SCHEDULE:
25% Contract Execution [ * ]
25% Pre Production Acceptance [ * ]
40% Post Production Acceptance [ * ]
5% Execution of Implementation Agreement [ * ]
5% Execution of Support Agreement [ * ]
PHASE I PAYOUT [ * ]
PHASE II: California, Rocky Mountain, Southwest Divisions and [ * ]
others
PHASE I & II ARE LIMITED TO 8,500,000 MEMBERS.
ADDITIONAL MEMBERS WILL BE CHARGED BASED ON
ADDITIONAL MEMBER PRICING SCHEDULE.
PHASE II PAYMENT SCHEDULE:
40% Installation of Software for California Division [ * ]
20% Post Production Acceptance for California Division [ * ]
20% Installation of Software for Rocky Mountain Division [ * ]
10% Post Production Acceptance for Rocky Mountain Division [ * ]
5% Installation of Software for Southwest Division [ * ]
5% Post Production Acceptance for Southwest Division [ * ]
</TABLE>
* Confidential portions omitted and filed separately with the Commission.
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SCHEDULE A - KAISER PRICING SCHEDULE (CONTINUED)
IMPLEMENTATION FEES
- -------------------
<TABLE>
<S> <C> <C>
Project Director Monthly [ * ]
Senior Project Manager Monthly [ * ]
Field Application Manager Monthly [ * ]
Technical Manager Monthly [ * ]
Implementation Manager Hourly [ * ]
Implementation Analyst Hourly [ * ]
Conversion Specialist Hourly [ * ]
Interface Specialist Hourly [ * ]
Application Trainer Hourly [ * ]
</TABLE>
SOFTWARE SUPPORT FEES
- ---------------------
No Greater than [ * ] of the value of the license fee per annum
DEVELOPMENT FEES
- ----------------
Hourly Fee for Engineering Enhancements/Development [ * ]
KAISER ADDITIONAL MEMBER PRICING
<TABLE>
<CAPTION>
AVERAGE
PRICE PER PRICE PER
MEMBERS MEMBER INCREMENTAL MEMBER
---------- --------- ------------- -------------
<S> <C> <C> <C>
3,000,000 [ * ] [ * ] [ * ]
8,500,000 [ * ] [ * ] [ * ]
9,000,000 [ * ] [ * ] [ * ]
9,500,000 [ * ] [ * ] [ * ]
10,000,000 [ * ] [ * ] [ * ]
10,500,000 [ * ] [ * ] [ * ]
11,000,000 [ * ] [ * ] [ * ]
11,500,000 [ * ] [ * ] [ * ]
12,000,000 [ * ] [ * ] [ * ]
12,500,000 [ * ] [ * ] [ * ]
13,000,000 [ * ] [ * ] [ * ]
13,500,000 [ * ] [ * ] [ * ]
14,000,000 [ * ] [ * ] [ * ]
14,500,000 [ * ] [ * ] [ * ]
15,000,000 [ * ] [ * ] [ * ]
</TABLE>
* Confidential portions omitted and filed separately with the Commission.
Page 16
<PAGE>
SCHEDULE B TO KAISER LICENSE AGREEMENT
"Kaiser Foundation Health Plan, Inc. ("Kaiser")" is a California nonprofit
public benefit corporation that enrolls members and arranges for the medical,
hospital, and related services in Northern and Southern California and
Hawaii. In addition, Kaiser shall mean any other entities that become
subsidiaries or affiliates after the Effective Date of this Agreement, and
any of the following Kaiser divisions, subsidiaries or corporations:
Kaiser and any entity controlled by or under common control with Kaiser,
including, as of the date hereof:
Kaiser Foundation Hospital
Kaiser Foundation Health Plan of Colorado
Kaiser Foundation Health Plan of Georgia, Inc.
Kaiser Foundation Health Plan of Kansas City, Inc.
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Kaiser Foundation Health Plan of North Carolina
Kaiser Foundation Health Plan of Connecticut, Inc.
Kaiser Foundation Health Plan of Massachusetts, Inc.
Kaiser Foundation Health Plan of New York
Kaiser Foundation Health Plan of the Northwest
Kaiser Foundation Health Plan of Ohio
Kaiser Foundation Health Plan of Texas
Kaiser Foundation Rehabilitation Center
Kaiser Foundation Research Institute
Kaiser Permanente Insurance Corporation
Kaiser Permanente International
CHP Companies, Inc.
Community Health Plan
Any entity which may be identified by Kaiser in the future by written notice
to Contractor or which has entered into a joint venture, alliance or
affiliation agreement with any of the entities referred to above provided
such agreement remains in effect as of the date hereof and such entity shall
be added as a purchaser ("Purchaser") by an amendment ("Amendment") to this
Agreement. Such entities currently include but are not limited to those
listed below. In the event that such entity is added to this Agreement, it
shall be responsible directly to Contractor for its financial and liability
matters under this Agreement Amendment. Kaiser, the third party entity and
Contractor shall be signatories to any resulting Amendment.
Group Health Cooperative of Puget Sound
Group Health Northwest
Kaiser/Group Health
Page 17
<PAGE>
SCHEDULE B TO KAISER LICENSE AGREEMENT (CONTINUED)
Any medical professional corporation which has entered into a medical
services agreement with any of the entities referred to immediately above,
provided such agreement remains in effect, including, as of the date hereof
and such medical professional corporation shall be added as a Purchaser by an
Amendment to this Agreement. Such medical professional corporations
currently include but are not limited to those listed below. In the event
that such medical professional corporation is added to this Agreement, it
shall be responsible directly to Contractor for its financial and liability
matters under this Agreement Amendment. Kaiser, the medical professional
corporation and Contractor shall be signatories to any resulting Amendment.
The Permanente Federation
The Permanente Medical Group, Inc.
Southern California Permanente Medical Group
Colorado Permanente Medical Group, P.C.
Hawaii Permanente Medical Group, Inc.
Permanente Medical Group of Mid-America, P.A.
Mid-Atlantic Permanente Medical Group
The Carolina Permanente Medical Group, P.A.
Northeast Permanente Medical Group
Northwest Permanente, P.C. Physicians and Surgeons
Ohio Permanente Medical Group, Inc.
Permanente Medical Association of Texas
Page 18
<PAGE>
KAISER/HSD LICENSE AGREEMENT - ATTACHMENT 1
NON-DISCLOSURE AGREEMENT
- -------------------------------------------------------------------------------
This non-disclosure agreement ("Agreement") is entered into between the
undersigned ("Recipient") and Health Systems Design Corp. ("HSD") in
consideration of Recipient being provided access to confidential information
owned by HSD. Recipient may be an individual and/or a business entity as
specified in Section 15, below.
1. Information that will be disclosed in the course of business discussions
will include proprietary and confidential information not generally
known in the Managed Healthcare Software Industry ("Confidential
Information") in tangible formats and/or on media or in visual or verbal
form. All such materials will be identified or marked as confidential
when disclosed or subsequently marked/identified as confidential.
2. It is mutually understood and agreed that the Confidential Information is
being disclosed for the purpose specified below and may be used for only
that purpose.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3. In recognition of HSD's proprietary interests and the advisability of
taking reasonable and prudent measures to protect those interests
Recipient agrees as follows:
3.1 Recipient agrees to safeguard the Confidential Information with
the same degree of care Recipient uses to protect its own valuable
confidential business information and otherwise exercise a high degree of
care in dealing with any such information in recognition of its
proprietary nature.
3.2 Recipient shall not copy the Confidential Information without
HSD's prior written authorization and agrees that any copies so authorized
shall include any and all confidentiality/proprietary rights notices (such
as copyright) contained therein.
3.3 Recipient shall permit access to the Confidential Information
strictly on a "need-to-know basis" only to those employees who have
first been advised of the proprietary nature of the Confidential
Information and who agree to maintain the confidentiality thereof. For
the purposes of this Agreement "employees" shall include third parties
retained on a contract basis with the understanding that contract
technical personnel/consultants shall only be granted access to
Confidential Information subject to HSD's prior written consent.
4. The obligations of Paragraph 3 shall not apply to any material/information
to which Recipient can demonstrate by credible evidence that any of the
following exceptions apply:
4.1 Information that is in the public domain and/or which enters the
public domain through no breach of this Agreement;
4.2 Information previously known to Recipient;
4.3 Information received from a third party who has the legal right to
possess and disseminate any such information;
4.4 Information independently developed without the use of Confidential
Information;
Page 19
<PAGE>
4.5 Confidential Information approved for release by HSD's written
authorization to the extent of and subject to such conditions as may be
imposed in such written authorization; and
4.6 Confidential Information disclosed in response to a valid order of a
court and/or other governmental body of the United States or any political
subdivisions thereof, but only to the extent of and for the purposes of
such order, provided, however, that the Recipient shall timely notify HSD
of the order so that HSD may seek a protective order.
5. Recipient acknowledges its obligation to control access to and/or
exportation of technical data under the applicable export laws and
regulations of the United States, and agrees to adhere to and comply with
such laws and regulations with respect to any technical data received under
this Agreement.
6. Confidential Information, including all copies thereof, shall be returned
to HSD or destroyed within 10 days of HSD's instruction to Recipient
regarding the handling/disposition of any such Confidential Information.
7. It is mutually understood and agreed that any violation of Section 3,
above, would likely cause irreparable injury to HSD for which it would have
no adequate remedy at law and that HSD shall be entitled to seek immediate
judicial relief such as restraining orders. All other disputes arising
under this Agreement shall be subject to binding arbitration conducted by a
private dispute resolution service, such as Judicate, conducted under
applicable American Arbitration Association rules. The prevailing party in
any action or arbitration under this Section 7 shall be entitled to an
award of attorney fees and costs including any fees/costs associated with
the enforcement of any such arbitration award and/or court order(s).
8. Nothing contained in this Agreement or in any discussions undertaken or
disclosures made pursuant hereto shall (a) be deemed a commitment to engage
in any business relationship, contract or future dealing with the other
party, or (b) limit either party's right to conduct similar discussions or
perform similar work to that undertaken pursuant hereto, so long as said
discussions or work do not violate any term of this Agreement.
9. No patent, copyright, trademark or other proprietary right is licensed,
granted or otherwise transferred by this Agreement or any disclosure
hereunder, except for the right to use such information in accordance with
the terms of this Agreement and for no other purpose than specified herein.
10. This Agreement shall continue in full force and effect for a period of 5
years following the last disclosure of Confidential Information hereunder.
11. This Agreement may not be assigned by either party without the prior
written consent of the other and no permitted assignment shall relieve a
party of its obligations hereunder with respect to Confidential Information
disclosed to that party prior to the assignment. Any assignment in
violation of this Section shall be void. This Agreement shall be binding
upon the parties and their respective successors and assigns.
12. If any provision of this Agreement shall be held invalid or unenforceable,
such provision shall be deemed deleted from this Agreement and replaced by
a valid and enforceable provision which so far as possible achieves the
original intent of the Agreement.
13. Notices hereunder shall be deemed received 3 business days after mailing to
the addresses set forth below (or subsequently modified) unless sent by
overnight service such as Federal Express in which case delivery will be as
of the date/time indicated by the records of any such delivery service.
14. This Agreement represents the entire understanding between the parties with
respect to the subject matter hereof and supersedes all prior
communications, agreements and understandings
Page 20
<PAGE>
relating thereto. The provisions of this Agreement may not be modified,
amended or waived, except by a written instrument duly executed by both
parties. This Agreement shall be subject to California Law except as to
its choice of law statutes.
15. By signature below the undersigned warrant that they have the authority to
enter into this Agreement individually and/or in any applicable
representative capacity:
FOR HSD: FOR RECIPIENT:
--------------------------------
Company Name
By: By:
---------------------------- ----------------------------
Name Name
------------------------ ---------------------------
Title: Title:
-------------------------- --------------------------
_________________________ , 1997 _________________________ , 1997
Address /Telephone and Facsimile:
1300 Broadway, Suite 1200 ------------------------------------
Oakland, CA 94612 ------------------------------------
510 763-2629 ------------------------------------
510 763-2081 (Fax) ------------------------------------
Page 21
<PAGE>
KAISER/HSD LICENSE AGREEMENT - ATTACHMENT 2
DIAMOND CLIENT/SERVER BASE PERFORMANCE STANDARDS
As Diamond is a distributed system, overall system performance is constrained
by the slowest component. Cost trade-offs on hardware, production operations,
user behavior, volume, network traffic, database server loading, and others
directly affect one another so uniquely between installations that
performance data monitoring of each component (server, network, client) in an
environment modeled as closely as possible to Kaiser's production system is a
requirement before HSD can certify the accuracy of these numbers.
Diamond base performance standards are as follows:
RESPONSE TIME IS DEFINED AS A USER INTERACTION COMPRISED OF THE TIME INTERVAL
BETWEEN A USER PRESSING THE ENTER KEY AND THE WINDOW BEGINNING TO
REFRESH/REPAINT WITH THE SPECIFIC DATA OR APPROPRIATE ERROR MESSAGE. EACH OF
THESE USER INTERACTIONS IS COMPOSED OF DIFFERING LEVELS OF DATABASE
INTERACTIONS. THEY RANGE FROM SIMPLE DATABASE QUERIES, TO COMPLEX,
MULTI-FACETED INTERACTIONS COMPRISED OF MANY TABLE QUERIES, INSERTS AND/OR
UPDATES.
The following is based upon previous and ongoing Diamond 950 performance
analysis on an HSD sanctioned system configuration:
1. Screen-to-screen changes, after initial screen open, shall be three (3)
seconds or less 90% of the time.
2. Table look-ups shall not exceed three (3) seconds, 90% of the time.
3. Complex application interactions involving multiple database accesses shall
not exceed three (3) seconds 90% of the time.
Examples of the above standards are:
Business Function Base End-to-End user response time
Auth Inquiry 1s
Auth Entry 3s
Claim Inquiry 1s
Member Demo Update 2s
Claim Entry 3s
Eligibility Update 3s
Member Entry 3s
Member Disenrollment 3s
Provider Inquiry 3s
Claim Adjudication 3s
In order to achieve the above performance standards, the CUSTOMER's
processing environment must have the following minimal characteristics:
1. A UNIX Server with sufficient processing power to sustain expected user
loads running Oracle RDBMS Version 7.x. In a distributed environment, this
is true for all servers in the configuration.
2. PC workstations with Intel Pentium 133 MHz or faster processor, 24MB of RAM
running Windows 3.1 or later Windows version with Diamond Client/Server
application code on a local hard disk with a 12 msec or faster access time,
WINSOCK compliant TCP/IP stack and SQL*Net V2.x or later.
3. A network configuration with sufficient bandwidth to sustain expected user
load. Example, 100MB FDDI.
Page 22
<PAGE>
EXHIBIT 11.1
HEALTH SYSTEMS DESIGN CORPORATION
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Net loss $ (1,153,989) $ (1,090,089)
-------------- --------------
-------------- --------------
Weighted average common and equivalent shares
outstanding 6,534,621 6,436,372
-------------- --------------
-------------- --------------
Net income (loss) per common and common
equivalent share $ (0.18) $ (0.17)
-------------- --------------
-------------- --------------
</TABLE>
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,395,975
<SECURITIES> 0
<RECEIVABLES> 6,701,535
<ALLOWANCES> 195,000
<INVENTORY> 0
<CURRENT-ASSETS> 18,291,745
<PP&E> 5,119,608
<DEPRECIATION> 1,885,532
<TOTAL-ASSETS> 22,564,619
<CURRENT-LIABILITIES> 6,251,704
<BONDS> 0
0
0
<COMMON> 6,533
<OTHER-SE> 16,306,382
<TOTAL-LIABILITY-AND-EQUITY> 22,564,619
<SALES> 0
<TOTAL-REVENUES> 5,290,742
<CGS> 0
<TOTAL-COSTS> 2,201,399
<OTHER-EXPENSES> 4,364,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (121,575)
<INCOME-PRETAX> (1,153,989)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,153,989)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,153,989)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
