<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 JUNE 30, 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)
DELAWARE 94-3235734
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1111 BROADWAY, OAKLAND, CALIFORNIA 94607
(Address of principal executive offices) (Zip code)
(510) 251-1330
(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 6,722,471 shares of common stock outstanding as of July
31, 1999.
Exhibit index is located on page 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--June 30, 1999 and September 30, 1998.......................... 2
Consolidated Statements of Operations--Three and nine months ended June 30, 1999 and
1998..................................................................................... 3
Consolidated Statements of Cash Flows--Nine months ended June 30, 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 5. Other Information.......................................................................... 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 SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
--------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................. $ 9,482 $ 9,441
Accounts receivable, net of allowance for doubtful accounts of $550 at June 30, 1999,
and $525 at September 30, 1998, respectively........................................ 5,557 5,646
Unbilled revenue...................................................................... 2,228 2,405
Prepaid expenses...................................................................... 423 384
--------- -------------
Total current assets................................................................ 17,690 17,876
--------- -------------
Property and equipment:
Computer equipment.................................................................... 4,077 3,740
Office furniture and other............................................................ 2,287 1,407
--------- -------------
Total property and equipment........................................................ 6,364 5,147
Less: Accumulated depreciation...................................................... (3,251) (2,300)
--------- -------------
Net property and equipment.......................................................... 3,113 2,847
--------- -------------
Deposits and other assets............................................................... 506 118
--------- -------------
Software development costs, net of accumulated amortization of $910 at June 30, 1999 and
$99 at September 30, 1998, respectively............................................... 3,485 2,787
--------- -------------
Total assets........................................................................ $ 24,794 $ 23,628
--------- -------------
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 1,295 $ 1,137
Accrued liabilities................................................................... 2,351 2,171
Unearned revenue...................................................................... 4,190 2,728
--------- -------------
Total current liabilities........................................................... 7,836 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, 6,722,471 and 6,673,307
shares issued and outstanding at June 30, 1999 and September 30, 1998,
respectively........................................................................ 7 7
Additional paid-in capital............................................................ 24,092 23,986
Treasury stock, 2,054 shares.......................................................... (29) (29)
Deferred compensation................................................................. (16) (28)
Retained deficit...................................................................... (7,096) (6,344)
--------- -------------
Total stockholders' equity............................................................ 16,958 17,592
--------- -------------
Total liabilities and stockholders' equity.......................................... $ 24,794 $ 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 NINE MONTHS ENDED
JUNE 30, JUNE 30
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
System sales........................................................... $ 6,608 $ 5,991 $ 17,438 $ 16,216
Services and other..................................................... 1,220 1,068 3,556 2,575
--------- --------- --------- ---------
Total revenues....................................................... 7,828 7,059 20,994 18,791
Cost of revenues......................................................... 2,965 1,656 7,637 5,024
--------- --------- --------- ---------
Gross margin......................................................... 4,863 5,403 13,357 13,767
--------- --------- --------- ---------
Operating expenses:
General and administrative............................................. 1,252 1,876 4,109 5,789
Sales and marketing.................................................... 1,089 1,143 3,627 3,318
Product development (net of software capitalization)................... 2,149 2,109 6,643 6,133
--------- --------- --------- ---------
Total operating expenses............................................. 4,490 5,128 14,379 15,240
--------- --------- --------- ---------
Income (loss) from operations...................................... 373 275 (1,022) (1,473)
Interest, net............................................................ 96 105 305 335
--------- --------- --------- ---------
Income (loss) before provision for income taxes.................... 469 380 (717) (1,138)
Provision for income taxes............................................... 22 86 35 120
--------- --------- --------- ---------
Net income (loss)........................................................ $ 447 $ 294 $ (752) $ (1,258)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share--basic and diluted........................... $ 0.07 $ 0.04 $ (0.11) $ (0.19)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding:
Basic.................................................................. 6,713 6,607 6,698 6,566
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted................................................................ 6,753 6,826 6,698 6,566
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
3
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................... $ (752) $ (1,258)
Adjustments to reconcile net loss to net cash and cash equivalents
Provided by operating activities:
Allowance for doubtful accounts............................................................ 25 332
Depreciation and amortization.............................................................. 1,796 1,049
Loss on sale of assets..................................................................... 8 175
Changes in current assets and liabilities:
Accounts receivable...................................................................... 64 (180)
Unbilled revenue......................................................................... 177 (1,570)
Prepaid expenses......................................................................... (39) 68
Accounts payable......................................................................... 158 (417)
Accrued liabilities...................................................................... 180 379
Unearned revenue......................................................................... 1,462 1,493
--------- ---------
Net cash provided by operating activities.............................................. 3,079 71
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................................................ (1,322) (829)
Proceeds from sale of property and equipment............................................... 75 19
Capitalization of software development costs............................................... (1,509) (1,622)
Deposits and other assets.................................................................. (388) 9
--------- ---------
Net cash used in investing activities.................................................... (3,144) (2,423)
--------- ---------
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............................................. 28 909
--------- ---------
Net cash provided by financing activities................................................ 106 909
--------- ---------
Net increase (decrease) in cash and cash equivalents..................................... 41 (1,443)
Cash and cash equivalents at beginning of period............................................. 9,441 11,195
--------- ---------
Cash and cash equivalents at end of period................................................... $ 9,482 $ 9,752
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Taxes paid................................................................................. $ 25 $ 120
</TABLE>
4
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. However, 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 nine month period ended
June 30, 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 directly to end-users and
indirectly through remarketers, under the terms of product license contracts.
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. 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.
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.
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.
The Company generally recognizes DIAMOND-TM- enhancement revenues on a
percentage-of-completion basis based on the labor hours required to complete the
applicable release project.
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
5
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
2. REVENUE RECOGNITION (CONTINUED)
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. The Company recorded amortization of $319,000 and $71,000 for
three months ended June 30, 1999 and 1998, respectively and $810,000 and
$157,000 for the nine months ended June 30, 1999 and 1998.
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, 2000. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial statements taken
as a whole.
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 $7,828,000 and $7,059,000 for the three months ended
June 30, 1999 and 1998, respectively, representing an increase of 11%. Total
revenues were $20,994,000 and $18,791,000 for the nine months ended June 30,
1999 and 1998, respectively, representing an increase of 12%. Two customers
accounted for approximately 66% and 53% of total revenues for the three months
and nine months ended June 30, 1999, respectively. Blue Shield of California
represented 54% and 38%, while Kaiser Permanente represented 12% and 15% of
total revenues for the three and nine months ended June 30, 1999, respectively.
SYSTEM SALES. Systems sales revenues consist of license fees for the
Company's products, implementation and enhancement fees, and revenues associated
with reselling third-party software and hardware. System sales revenues were
$6,608,000 and $5,991,000 for the three months ended June 30, 1999 and 1998,
respectively, representing an increase of 10%. System sales revenues were
$17,438,000 and $16,216,000 for the nine months ended June 30, 1999 and 1998,
respectively, representing an increase of 8%. The increase in system sales
revenue is due primarily to DIAMOND-TM- 950C/S license and implementation
revenue recognized. However, this increase was partially offset by a $343,000
net adjustment to product enhancement revenues resulting from a reorganization
of a project which increased the estimated labor hours to complete that project.
SERVICES AND OTHER. Services and other revenues are comprised of system
support, consulting and training revenues. Services and other revenues were
$1,220,000 and $1,068,000 for the three months ended June 30, 1999 and 1998,
respectively, representing an increase of 14%. Services and other revenues were
$3,556,000 and $2,575,000 for the nine months ended June 30, 1999 and 1998,
respectively, representing an increase of 38%. The increase in services and
other revenues was due primarily to an increase in consulting
7
<PAGE>
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 $2,965,000 and $1,656,000 for the
three months ended June 30, 1999 and 1998, respectively, representing an
increase of 79%. Cost of revenues was $7,637,000 and $5,024,000 for the nine
months ended June 30, 1999 and 1998, respectively, representing an increase of
52%. Cost of revenues increased from 23% of total revenues in the three months
ended June 30, 1998 to 38% of total revenues in the three months ended June 30,
1999. Cost of revenues increased from 27% of total revenues in the nine months
ended June 30, 1998 to 36% of total revenues in the nine months ended June 30,
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 amortization expense and 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 revenue
mix and may fluctuate over time. 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
$1,252,000 and $1,876,000 for the three months ended June 30, 1999 and 1998,
respectively, representing a decrease of 33%. General and administrative
expenditures were $4,109,000 and $5,789,000 for the nine months ended June 30,
1999 and 1998, respectively, representing a decrease of 29%. The decrease was
due in part to allowances made for doubtful accounts and impaired assets booked
during the prior comparable period, as well as a decrease in management
consulting fees. 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 nine months ended June 30, 1999
were 16% and 20%, respectively, compared to 27% and 31% for the three and nine
months ended June 30, 1998, respectively, primarily due to the decrease in
general and administrative expenses in absolute dollars.
SALES AND MARKETING. Sales and marketing expenditures were $1,089,000 and
$1,143,000 for the three months ended June 30, 1999 and 1998, respectively,
representing a decrease of 5%. Sales and marketing expenditures were $3,627,000
and $3,318,000 for the nine months ended June 30, 1999 and 1998, respectively,
representing an increase of 9%. The changes in sales and marketing expenditures
quarter to quarter and year over year were primarily due to the timing of
commissions and marketing activities. Sales and marketing expenditures as a
percentage of revenues for the three and nine months ended June 30, 1999 were
14% and 17%, respectively compared to 16% and 18% for the three and nine months
ended June 30, 1998.
PRODUCT DEVELOPMENT. Product development expenditures, net of software
capitalization, were $2,149,000 and $2,109,000 for the three months ended June
30, 1999 and 1998, respectively, representing an increase of 2%. Product
development expenditures, net of software capitalization, were $6,643,000 and
$6,133,000 for the nine months ended June 30, 1999 and 1998, respectively,
representing an increase of 8%. The increase in product development
expenditures, net of software capitalization, was due in part to a one-time
third party development fee, partially offset by an increase in software costs
capitalized in the three months ended June 30, 1999. Product development
expenditures, net of software capitalization, as a percentage of revenues for
the three and nine months ended June 30, 1999 were 27% and 32%, respectively
compared to 30% and 33% for the three and nine months ended June 30, 1998,
respectively.
8
<PAGE>
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.
The Company capitalized $869,000 and $696,000 of product development costs
in the three months ended June 30, 1999 and 1998, respectively and $1,739,000
and $1,623,000 of product development costs in the nine months ended June 30,
1999 and 1998, respectively. Capitalized product development expenditures as a
percentage of total product development expenditures were 29% and 25% for the
three months ended June 30, 1999 and 1998, respectively, and 21% for the nine
months ended June 30, 1999 and 1998, respectively. The increase in product
development costs capitalized, for the three months ended June 30, 1999, 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 $96,000 and
$105,000 for the three months ended June 30, 1999 and 1998, respectively.
Interest income, net of interest expense, was $305,000 and $335,000 for the nine
months ended June 30, 1999 and 1998, respectively. The decrease in interest
income, net of expense, was primarily due to the amount of cash invested and a
decrease in rates earned on cash reserves. 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 $22,000 and
$86,000 for the three months ended June 30, 1999 and 1998, respectively. The
provision for income taxes was $35,000 and $120,000 for the nine months ended
June 30, 1999 and 1998, respectively. The decrease in the provision for income
taxes was due to foreign sales in the prior comparable period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,079,000 and $71,000 during
the nine months ended June 30, 1999 and 1998, respectively. The increase in cash
provided by operating activities, as compared to the prior period, resulted
primarily from depreciation and an increase in unbilled revenue.
Net cash used in investing activities was $3,144,000 and $2,423,000 during
the nine months ended June 30, 1999 and 1998, respectively. The increase in cash
used by investing activities consisted primarily of capitalization of software
development costs, purchases of marketable securities and purchases of property
and equipment, as well as security deposits paid during the current period.
Net cash provided by financing activities was $106,000 and $909,000 during
the nine months ended June 30, 1999 and 1998, respectively. The decrease in cash
provided by financing activities, was primarily due to fewer exercises of
employee stock options during the current period.
As of June 30, 1999 and 1998, the Company had cash and cash equivalents in
the amounts of $9,482,000 and $9,752,000, 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.
9
<PAGE>
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 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 June 30, 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
10
<PAGE>
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.
This is a Year 2000 Readiness Disclosure Statement within the meaning of the
Year 2000 Information and Readiness Disclosure Act (P.L. 105-271).
"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 5. OTHER INFORMATION
On August 3, 1999, the Company issued a press release announcing the
appointment of Arthur M. Southam, M.D. as president and interim chief executive
officer.
Dr. Southam succeeds Russell J. Harrison who is stepping down from his
executive post with the Company, as well as from the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: August 16, 1999 By: /s/ ARTHUR M. SOUTHAM, M.D.
-----------------------------------------
Arthur M. Southam, M.D.
PRESIDENT AND INTERIM 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
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
11.1 Computation of net income (loss) per share
</TABLE>
14
<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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss)......................................................... $ 447 $ 294 $ (752) $ (1,258)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding:
Basic................................................................... 6,713 6,607 6,698 6,566
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully Diluted........................................................... 6,753 6,826 6,698 6,566
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:
Basic................................................................... $ 0.07 $ 0.04 $ (0.11) $ (0.19)
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted................................................................. $ 0.07 $ 0.04 $ (0.11) $ (0.19)
--------- --------- --------- ---------
--------- --------- --------- ---------
</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.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 9,482
<SECURITIES> 0
<RECEIVABLES> 6,107
<ALLOWANCES> 550
<INVENTORY> 0
<CURRENT-ASSETS> 17,690
<PP&E> 6,364
<DEPRECIATION> 3,251
<TOTAL-ASSETS> 24,794
<CURRENT-LIABILITIES> 7,836
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 16,951
<TOTAL-LIABILITY-AND-EQUITY> 24,794
<SALES> 0
<TOTAL-REVENUES> 20,994
<CGS> 0
<TOTAL-COSTS> 7,637
<OTHER-EXPENSES> 14,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (305)<F1>
<INCOME-PRETAX> (717)
<INCOME-TAX> 35
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (752)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
<FN>
<F1>INTEREST INCOME
</FN>
</TABLE>
