<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 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)
<TABLE>
<S> <C>
DELAWARE 94-3235734
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
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
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The registrant had 6,707,071 shares of common stock outstanding as of April
30, 1999.
Exhibit index is located on page 14
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<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--March 31, 1999 and September 30, 1998.... 2
Consolidated Statements of Operations--Three and Six months ended
March 31, 1999 and 1998............................................. 3
Consolidated Statements of Cash Flows--Six months ended March 31, 1999
and 1998............................................................ 4
Notes to Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................... 12
Item 6. Exhibits and Reports on Form 8-K...................................... 12
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
----------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $10,488 $ 9,440
Accounts receivable, net of allowance for doubtful accounts of $550 at March
31, 1999, and $525 at September 30, 1998, respectively...................... 5,346 5,646
Unbilled revenue.............................................................. 1,596 2,405
Prepaid expenses.............................................................. 530 384
----------- -------
Total current assets........................................................ 17,960 17,875
----------- -------
Property and equipment:
Computer equipment............................................................ 3,852 3,740
Office furniture and other.................................................... 1,449 1,407
----------- -------
Total property and equipment................................................ 5,301 5,147
Less: Accumulated depreciation.............................................. (2,919) (2,299)
----------- -------
Net property and equipment.................................................. 2,382 2,848
----------- -------
Deposits and other assets....................................................... 563 118
----------- -------
Software development costs, net of accumulated amortization of $591 at March 31,
1999 and $99 at September 30, 1998, respectively.............................. 3,165 2,787
----------- -------
Total assets................................................................ $24,070 $ 23,628
----------- -------
----------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 1,132 $ 1,137
Accrued liabilities........................................................... 1,828 2,171
Unearned revenue.............................................................. 4,622 2,728
----------- -------
Total current liabilities................................................... 7,582 6,036
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none
outstanding................................................................. -- --
Common stock, $.001 par value, 20,000,000 shares authorized, 6,707,071 and
6,673,307 shares issued and outstanding at March 31, 1999 and September 30,
1998, respectively.......................................................... 7 7
Additional paid-in capital.................................................... 24,073 23,986
Treasury stock, 2,054 shares.................................................. (29) (29)
Deferred compensation......................................................... (20) (28)
Retained deficit.............................................................. (7,543) (6,344)
----------- -------
Total stockholders' equity.................................................... 16,488 17,592
----------- -------
Total liabilities and stockholders' equity.................................. $24,070 $ 23,628
----------- -------
----------- -------
</TABLE>
2
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------- ----------------
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenues:
System sales.................................................................. $6,377 $5,679 $10,831 $10,225
Services and other............................................................ 1,408 762 2,335 1,507
------ ------ ------- -------
Total revenues.............................................................. 7,785 6,441 13,166 11,732
Cost of revenues................................................................ 2,469 1,643 4,672 3,368
------ ------ ------- -------
Gross margin................................................................ 5,316 4,798 8,494 8,364
------ ------ ------- -------
Operating expenses:
General and administrative.................................................... 1,387 2,040 2,857 3,913
Sales and marketing........................................................... 1,345 1,199 2,538 2,175
Product development........................................................... 2,442 2,031 4,494 4,024
------ ------ ------- -------
Total operating expenses.................................................... 5,174 5,270 9,889 10,112
------ ------ ------- -------
Income (loss) from operations............................................. 142 (472) (1,395) (1,748)
Interest, net................................................................... 97 108 209 230
------ ------ ------- -------
Income (loss) before provision for income taxes........................... 239 (364) (1,186) (1,518)
Provision for income taxes...................................................... 12 34 13 34
------ ------ ------- -------
Net income (loss)............................................................... $ 227 $ (398) $(1,199) $(1,552)
------ ------ ------- -------
------ ------ ------- -------
Net income (loss) per share--basic and diluted.................................. $ 0.03 $ (.06) $ (0.18) $ (0.24)
------ ------ ------- -------
------ ------ ------- -------
Weighted average common shares outstanding:
Basic......................................................................... 6,704 6,545 6,690 6,540
------ ------ ------- -------
------ ------ ------- -------
Diluted....................................................................... 6,754 6,545 6,690 6,540
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
3
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (1,199) $ (1,552)
Adjustments to reconcile net loss to net cash and cash equivalents
Provided by operating activities:
Allowance for doubtful accounts....................................... 25 332
Depreciation and amortization......................................... 1,142 679
Loss on sale of assets................................................ 8 179
Changes in current assets and liabilities:
Accounts receivable................................................. 275 119
Unbilled revenue.................................................... 809 (1,432)
Prepaid expenses.................................................... (146) (87)
Accounts payable.................................................... (5) (423)
Accrued liabilities................................................. (343) 707
Unearned revenue.................................................... 1,894 1,571
--------- ---------
Net cash provided by operating activities......................... 2,460 93
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................................... (259) (783)
Proceeds from sale of property and equipment............................ 75 19
Capitalization of software development costs............................ (870) (927)
Deposits and other assets............................................... (445) 5
--------- ---------
Net cash used in investing activities................................. (1,499) (1,686)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of warrants...................................... 25 --
Proceeds from issuance of common stock to employees..................... 53 --
Proceeds from exercise of common stock options.......................... 9 21
--------- ---------
Net cash provided by financing activities............................. 87 21
--------- ---------
Net increase (decrease) in cash and cash equivalents.................. 1,048 (1,572)
Cash and cash equivalents at beginning of period.......................... 9,440 11,195
--------- ---------
Cash and cash equivalents at end of period................................ $ 10,488 $ 9,623
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Taxes paid............................................................ $ 13 $ 34
</TABLE>
4
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information 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
of normal recurring adjustments, considered necessary for a fair presentation
have been included. Operating results for the three and six month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1999. These consolidated financial
statements should be read in conjunction with the financial statements and
footnotes thereto for the year ended September 30, 1998 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 healthcare organizations under the terms of product license
contracts. Individual sales may include, among others, a combination of software
license, implementation, product enhancements, training, and post-contract
support. Contracts with customers could be terminated under certain
circumstances and revenues recognized could be refundable upon termination in
certain cases, including breach of contract. The termination of significant
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 was required to adopt as of October 1, 1999. SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and supercedes the guidance contained in SOP
91-1. The Company elected to adopt the provisions of the statement effective
October 1, 1997.
The Company generates revenues from licensing the rights to use its software
products directly to end-users and indirectly through remarketers. The Company
also generates revenues from sales of implementation services, fees for product
enhancement, post-contract support, consulting services and reselling hardware
and third party products, and training services performed for customers who
license the Company's products.
If the contract does not require significant production or customization of
software, revenue is recognized when all the following conditions are met: a
signed contract is obtained, delivery has occurred, the fee is fixed and
determinable, and collection is probable. Effective October 1, 1997, the Company
generally recognizes DIAMOND-TM- 725 license revenue upon shipment of the
software to end users, as no significant production or customization of this
software is required, and the installation period is relatively short. The
Company generally recognizes DIAMOND-TM- 950C/S license revenue on a
percentage-of-completion basis based on the labor hours required to implement
the system, as this software generally requires an extended installation period
and can require significant enhancements. If the 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.
5
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
2. REVENUE RECOGNITION (CONTINUED)
Implementation, consulting and training fees are billed either on an hourly
or a monthly basis and are recognized as services are rendered. Third party
software and hardware are typically billed and recognized as revenue when
delivered to the end user.
Post-contract support services are billed on a monthly basis. Customers who
purchase post-contract support services under maintenance agreements have the
right to receive unspecified product updates and upgrades. Customers that do not
purchase post-contract support must purchase product updates and upgrades under
separate agreements that are subject to the criteria of the Company's revenue
recognition policy. Revenues from post-contract support services are recognized
ratably over the term of the support period. If post-contract support services
are included at no cost or at a discount in a license agreement, such amounts
are recorded at their fair market value based on the value established by
independent sale of such post-contract support services to customers and license
fee revenue is correspondingly reduced.
3. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company accounts for capitalized software costs in accordance with SFAS
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." The Company begins capitalizing software development costs
upon the establishment of technological feasibility, which is established upon
the completion of a working model or, in the case of major releases, detailed
program design. Costs incurred prior to technological feasibility are charged to
expense as incurred. Capitalization ceases when the product is considered
available for general release to customers. Capitalized software development
costs are amortized to costs of revenues over the estimated economic lives of
the software products based on actual sales experience and product life
expectancy. Generally, estimated economic lives of the software products do not
exceed 3 years.
4. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted for fiscal
quarters beginning after June 15, 1999. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial statements taken
as a whole.
RECLASSIFICATIONS
During the fourth quarter of fiscal year 1998, the Company's management
decided to revise its expense classifications to be more consistent with
industry standards. This decision resulted in certain product engineering costs
being included in product development instead of cost of revenues. All prior
periods presented have been reclassified accordingly.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides managed care information systems software to payors and
providers of managed care products and services. The Company's principal product
line, DIAMOND-TM-, consists of DIAMOND-TM- 725 and DIAMOND-TM- 950C/S. The
DIAMOND-TM- products enable the Company's customers to manage information about
members, employer groups, providers, health plan and provider contracts,
referrals and authorizations and health care services for accurate provider
reimbursement, risk pool accounting and health care cost management.
The Company's revenues are derived from licensing DIAMOND-TM-products,
providing the associated implementation, product enhancements, post-contract
support, consulting services, reselling hardware and third party products and
training services. If there are no uncertainties surrounding a contract, as
described by generally accepted accounting principles, then the Company
generally recognizes DIAMOND-TM- 950C/S license revenue on a percentage of
completion basis based on the labor hours required to implement the system. The
Company's ability to make individual system sales in a particular period will
significantly impact its financial performance in future periods. As the Company
has pursued larger system sales (DIAMOND-TM- 950C/S), it has seen and expects to
continue to see variability in the recognition of system sales revenue. If there
are no uncertainties surrounding a contract, as described by generally accepted
accounting principles, then the Company generally recognizes DIAMOND-TM- 725
license revenue upon shipment of the software to end users. Implementation,
post-contract support, consulting fees and training are billed either on an
hourly or monthly basis and are recognized as services are rendered. Hardware
and third party products are typically billed and recognized as revenues when
delivered to the client.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $7,785,000 and $6,441,000 for the three months ended
March 31, 1999 and 1998, respectively, representing an increase of 21%. Total
revenues were $13,166,000 and $11,732,000 for the six months ended March 31,
1999 and 1998, respectively, representing an increase of 12%. Two customers
accounted for approximately 59% and 46% of total revenues for the 3 months and
six months ended March 31, 1999, respectively. Blue Shield of California
represented 43% and 28%, while Kaiser Permanente represented 16% and 18% of
total revenues for the three and six months ended March 31, 1999, respectively.
SYSTEM SALES. System sales revenues were $6,377,000 and $5,679,000 for the
three months ended March 31, 1999 and 1998, respectively, representing an
increase of 12%. System sales revenues were $10,831,000 and $10,225,000 for the
six months ended March 31, 1999 and 1998, respectively, representing an increase
of 6%. The increase in system sales revenue is due primarily to DIAMOND-TM-
950C/S license revenue recognized.
SERVICES AND OTHER. Services and other revenues were $1,408,000 and
$762,000 for the three months ended March 31, 1999 and 1998, respectively,
representing an increase of 85%. Services and other revenues were $2,335,000 and
$1,507,000 for the six months ended March 31, 1999 and 1998, respectively,
representing an increase of 55%. The increase in services and other revenues was
due primarily to an increase in consulting fees resulting from a major contract
and an increase in support fees resulting from the Company's larger installed
customer base.
COST OF REVENUES. Cost of revenues was $2,469,000 and $1,643,000 for the
three months ended March 31, 1999 and 1998, respectively, representing an
increase of 50%. Cost of revenues was $4,672,000 and $3,368,000 for the six
months ended March 31, 1999 and 1998, respectively, representing an increase of
39%. Cost of revenues increased from 26% of total revenues in the three months
ended March 31, 1998 to
7
<PAGE>
32% of total revenues in the three months ended March 31, 1999 and from 29% of
total revenues in the six months ended March 31, 1998 to 35% of total revenues
in the six months ended March 31, 1999. No long-term trend should be implied
from either of these period to period comparisons. Compared to the growth in
revenue, cost of revenues increased primarily due to the personnel costs
associated with the significant increase in revenues related to services
discussed above. The cost of revenues as a percentage of total revenues is
dependent on the mix of license, service, and third party software and hardware
revenues, and may fluctuate over time as this mix changes. During the fourth
quarter of fiscal 1998, the Company's management decided to revise its expense
classifications to be more consistent with industry standards. This decision
resulted in certain product engineering costs being included in product
development instead of costs of revenues. Costs associated with implementation,
customer support, consulting and training services, amortization of capitalized
software and third party hardware and software continue to be classified as cost
of revenues. Corresponding periods in this filing have been reclassified on the
same basis.
OPERATING EXPENSES.
GENERAL AND ADMINISTRATIVE. General and administrative expenditures were
$1,387,000 and $2,040,000 for the three months ended March 31, 1999 and 1998,
respectively, representing a decrease of 32%. General and administrative
expenditures were $2,857,000 and $3,913,000 for the six months ended March 31,
1999 and 1998, respectively, representing a decrease of 27%. The decrease was
due in part to an allowance for doubtful accounts and a loss on the retirement
of equipment recorded in the period ended March 31, 1998. General and
administrative expenses include the salaries and benefits associated with
general management, finance and administration and allocated facilities costs.
General and administrative expenditures as a percentage of total revenues for
the three and six months ended March 31, 1999 were 18% and 22%, respectively,
compared to 32% and 33% for the three and six months ended March 31, 1998,
respectively, primarily due to the decrease in general and administrative
expenses in absolute dollars.
SALES AND MARKETING. Sales and marketing expenditures were $1,345,000 and
$1,199,000 for the three months ended March 31, 1999 and 1998, respectively,
representing an increase of 12%. Sales and marketing expenditures were
$2,538,000 and $2,175,000 for the six months ended March 31, 1999 and 1998,
respectively, representing an increase of 17%. The increase in sales and
marketing expenditures was primarily due to the Company's continued emphasis on
the expansion of its sales and marketing activities. Sales and marketing
expenditures as a percentage of revenues for the three and six months ended
March 31, 1999 were 17% and 19%, respectively compared to 19% for the three and
six months ended March 31, 1998.
PRODUCT DEVELOPMENT. Product development expenditures, net of software
capitalization, were $2,442,000 and $2,031,000 for the three months ended March
31, 1999 and 1998, respectively, representing an increase of 20%. Product
development expenditures, net of software capitalization, were $4,494,000 and
$4,024,000 for the six months ended March 31, 1999 and 1998, respectively,
representing an increase of 12%. The increase in product development
expenditures, net of software capitalization, was due to the decrease in
capitalized software costs as described below. Product development expenditures,
net of software capitalization, as a percentage of revenues for the three and
six months ended March 31, 1999 were 31% and 34%, respectively compared to 32%
and 34% for the three and six months ended March 31, 1998, respectively. As
mentioned above, during the fourth quarter of fiscal 1998, the Company's
management decided to revise its expense classifications to be more consistent
with industry standards. This decision resulted in certain product engineering
costs being included in product development instead of cost of revenues. Costs
associated with implementation, customer support, amortization of capitalized
software and third party hardware and software continue to be classified as cost
of revenues. All prior periods in this filing have been reclassified on the same
basis. The Company believes that product 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.
8
<PAGE>
The Company capitalized $186,000 and $762,000 of product development costs
in the three months ended March 31, 1999 and 1998, respectively and $870,000 and
$927,000 of product development costs in the six months ended March 31, 1999 and
1998, respectively. Capitalized product development expenditures as a percentage
of total product development expenditures were 7% and 27% for the three months
ended March 31, 1999 and 1998, respectively, and 16% and 19% for the six months
ended March 31, 1999 and 1998, respectively. The decrease in product development
costs capitalized is due primarily to the stage of development of major
releases. The Company begins capitalizing software development costs upon the
establishment of technological feasibility, which is established upon the
completion of a working model or, in the case of major releases, detailed
program design. Costs incurred prior to technological feasibility are charged to
expense as incurred. Capitalization ceases when the product is considered
available for general release to customers.
INTEREST, NET. Interest income, net of interest expense, was $97,000 and
$108,000 for the three months ended March 31, 1999 and 1998, respectively.
Interest income, net of interest expense, was $209,000 and $230,000 for the six
months ended March 31, 1999 and 1998, respectively. The decrease in interest
income, net of expense, was primarily due to a decrease in rates earned on cash
reserves invested. 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.
PROVISION FOR INCOME TAXES. The provision for income taxes was $13,000 and
$34,000 for the six months ended March 31, 1999 and 1998 respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,460,000 and $93,000 during
the six months ended March 31, 1999 and 1998, respectively. The increase in cash
provided by operating activities, as compared to the prior period, resulted
primarily from depreciation, an increase in unearned revenue and a decrease in
unbilled revenue.
Net cash used in investing activities was $1,499,000 and $1,686,000 during
the six months ended March 31, 1999 and 1998, respectively, and consisted
primarily of capitalization of software development costs and purchases of
property and equipment, as well as security deposits during the current period.
Net cash provided by financing activities was $87,000 and $21,000 during the
six months ended March 31, 1999 and 1998, respectively, consisting primarily of
proceeds from the issuance of common stock to employees.
As of March 31, 1999 and 1998, the Company had cash and cash equivalents in
the amounts of $10,488,000 and $9,623,000, 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.
YEAR 2000 ISSUES
STATE OF READINESS--Because many computer programs and embedded computer
chips are unable to distinguish between the year 1900 and the year 2000, the
Company has executed a plan to analyze, and if necessary, correct problems which
may occur as a result of the Year 2000 date change. The Year 2000 Project (the
Project) began by categorizing potential issues into four groups: the Company's
software developed for sale (DIAMOND-TM- 950C/S and DIAMOND-TM- 725); the
Company's internal systems and networks; third party software and hardware sold
by the Company; and customer systems and equipment, other than that sold and/or
licensed by the Company.
The Project for DIAMOND-TM- 950C/S and DIAMOND-TM- 725 began early in fiscal
1997. As a result of the Company's analysis and testing, the Company believes
the most current releases of DIAMOND-TM- software products are Year 2000
Compliant. The Company defines the term "Year 2000 Compliant" to
9
<PAGE>
mean that the software will not: (a) cease to perform due solely to a change in
date to or after January 1, 2000, nor (b) generate incorrect or ambiguous data
or results with respect to same-century and/or multi-century formulas,
functions, date values, and date data interfaces. The Company continues to
further examine current products, new releases for such products, as well as new
products and releases through testing and code reviews. The Company offers Year
2000 compliant releases at no charge to customers who are under current support
agreements. Other customers may request and pay a fee for these Year 2000
compliant releases.
The Company's internal systems and networks have been inventoried and
inquiries were made of each vendor. Substantially all systems, including
hardware, development tools, and software used in the company's information
systems are Year 2000 compliant. For the products that are not currently Year
2000 compliant the vendors have put plans into effect to correct their product
before the end of calendar year 1999.
Third party software and hardware which is sold by the Company has been
inventoried and inquiries were made of each vendor. With a few exceptions, all
third party software and hardware are Year 2000 compliant. For the products that
are not currently Year 2000 compliant the vendors have put plans into effect to
correct their product before the end of calendar year 1999.
During the last fiscal year, the Company communicated its state of readiness
to address Year 2000 issues to its clients. Clients were also notified of the
Company's ability to correct any issues associated with a Year 2000 problem in
the Company's software. Clients were also informed that their other hardware and
software systems may have unresolved issues relating to the Year 2000 problem
which may adversely affect the operation of the Company's DIAMOND-TM- software,
even though the Company has resolved its own problems.
COSTS TO ADDRESS THE ISSUES--As of March 31, 1999, the Company had not
separately tracked costs related to the Year 2000 problem, since the analysis
phase for the Company's DIAMOND-TM- software coincided with the testing and
quality assurance phase of the Company's general releases. However, based on an
estimate of the amount of time incurred by the Company's analysis team, costs
related to the Year 2000 problem have, to date, not been material and have not
been capitalized by the Company.
Although the Company believes that its products are Year 2000 compliant, it
is continuing its testing and analysis program. Any remaining costs related to
the Year 2000 problem are not expected to be material for the DIAMOND-TM-
software. Projected costs for the Company's internal systems and networks; third
party software and hardware sold by the Company; and customer systems and
equipment, other than that sold and/or licensed by the Company are also not
expected to be material.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES--The project is ongoing. The
Company's and its client's normal business activities and operations could be
adversely affected by the Year 2000 problem. However, due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of its clients, the Company is unable to
determine at this time whether the consequences of the potential Year 2000
failure(s) would have a material adverse impact on the Company's results of
operations, liquidity or financial condition. If the Company's DIAMOND-TM-
products, the third party hardware and software its sells, its internal systems
or its clients systems fail or experience significant difficulties related to
the Year 2000 problem then the Company's results of operations, liquidity or
financial condition could be materially adversely affected.
CONTINGENCY PLAN--The Company does not currently have a contingency plan in
place. Should there be Year 2000 problems still remaining in the Company's
software developed for sale (DIAMOND-TM- 950C/S and DIAMOND-TM- 725); the
Company's internal systems and networks; third party software and hardware sold
by the Company; and customer systems and equipment, other than that sold and/or
licensed by the Company, the Company intends to prioritize requests, based on
severity, and correct the related problem.
10
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"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. Such risks and uncertainties include the
Company's dependence on a single product line; the dynamic nature of the market
in which the company's product line competes; variability of operating results
due to the long sales cycle and implementation period of the company's products;
continued market acceptance of the Company's products; development of new
products and enhancements of the current product; dependence of the Company's
results of operations on certain large customers; the Company's ability to
attract and retain qualified personnel; intense competition and other risks
described in the Company's other Securities and Exchange Commission filings.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders was held on March 23, 1999.
(b) The following directors were elected at the meeting:
Russell J. Harrison
Richard C. Auger
Catherine C. Roth
Christopher J. Herron
J. Mathew Mackowski
Arthur M. Southam, M.D.
The foregoing constitute all members of the Board of Directors of the
Company.
(c) At the annual meeting, the shareholders voted to approve a proposal to amend
the 1996 Omnibus Equity Incentive Plan to increase the number of shares
authorized for issuance thereunder by 150,000.
Set forth below is a tabulation with respect to the matters voted on at the
meeting:
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD ABSTENTIONS BROKER NON- VOTES
---------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
PROPOSAL TO AMEND THE 1996 OMNIBUS EQUITY INCENTIVE PLAN...... 6,062,673 215,097 200 --
</TABLE>
<TABLE>
<CAPTION>
FOR NOMINEE INSTRUCTED WITHHELD FROM NOMINEE
------------ ------------- -----------------------
<S> <C> <C> <C>
ELECTION OF DIRECTORS:
RUSSELL J. HARRISON........................................... 6,275,270 300 2,700
RICHARD C. AUGER.............................................. 6,275,270 300 2,700
CATHERINE C. ROTH............................................. 6,275,270 300 2,700
CHRISTOPHER J. HERRON......................................... 6,275,270 300 2,700
J. MATTHEW MACKOWSKI.......................................... 6,274,970 300 3,000
ARTHUR M. SOUTHAM, M.D........................................ 6,275,170 300 2,800
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.3.3 Amendment No. 3 to the Health Systems Design Corporation 1996
Omnibus Equity Incentive Plan dated January 28, 1999
11.1 Statement re: net income (loss) 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.
12
<PAGE>
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.
<TABLE>
<S> <C> <C>
HEALTH SYSTEMS DESIGN CORPORATION
Date: May 17, 1999 By: /s/ RUSSELL J. HARRISON
----------------------------------------
Russell J. Harrison
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ STEVEN L. MOORE
----------------------------------------
Steven L. Moore
CHIEF FINANCIAL OFFICER
</TABLE>
13
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<S> <C>
10.3.3 Amendment No. 3 to the Health Systems Design Corporation 1996 Omnibus Equity Incentive Plan dated
January 28, 1999
11.1 Computation of net income (loss) per share
</TABLE>
14
<PAGE>
EXHIBIT 10.3.3
AMENDMENT NO. 3 TO THE
HEALTH SYSTEMS DESIGN CORPORATION
1996 OMNIBUS EQUITY INCENTIVE PLAN
HEALTH SYSTEMS DESIGN CORPORATION, having adopted the Health Systems Design
Corporation 1996 Omnibus Equity Incentive Plan, as amended by Amendment No. 1
effective February 24, 1997 and Amendment No. 2 effective February 9, 1998 (the
"Plan"), hereby amends the Plan, effective as of January 28, 1999, by deleting
the numeral 1,400,000 from the first sentence of Section 4.1 and substituting
the numeral 1,550,000 therefor.
15
<PAGE>
EXHIBIT 11.1
HEALTH SYSTEMS DESIGN CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss)................................. $ 227 $ (398) $ (1,199) $ (1,552)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding:
Basic........................................... 6,704 6,545 6,690 6,540
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully Diluted................................... 6,754 6,545 6,690 6,540
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:
Basic........................................... $ 0.03 $ (0.06) $ (0.18) $ (0.24)
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted......................................... $ 0.03 $ (0.06) $ (0.18) $ (0.24)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Net Income (Loss) Per Common Share:
Basic net income (loss) per common share (Basic EPS) excludes dilution and
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Diluted net income per common share
(Diluted EPS) reflects the potential dilution that could occur if stock options
or other contracts to issue common stock were exercised or converted into common
stock. The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net income per common
share. In periods where losses are recorded, common stock equivalents would
decrease the loss per share and are therefore not added to the weighted average
shares outstanding.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 10448
<SECURITIES> 0
<RECEIVABLES> 5896
<ALLOWANCES> 550
<INVENTORY> 0
<CURRENT-ASSETS> 17960
<PP&E> 5301
<DEPRECIATION> 2919
<TOTAL-ASSETS> 24070
<CURRENT-LIABILITIES> 7582
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 16481
<TOTAL-LIABILITY-AND-EQUITY> 24070
<SALES> 0
<TOTAL-REVENUES> 13166
<CGS> 0
<TOTAL-COSTS> 4672
<OTHER-EXPENSES> 9889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (209)<F1>
<INCOME-PRETAX> (1186)
<INCOME-TAX> 13
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1199)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
<FN>
<F1>Interest Income
</FN>
</TABLE>
