SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1997
Commission File Number 0-12516
Dynamic Healthcare Technologies, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-3389871
(State of Incorporation) (IRS E.I.N.)
101 Southhall Lane, Suite 210, Maitland, Florida 32751
(Address of principal executive offices) (ZIP Code)
(407) 875-9991
(Registrant's telephone number, including area code)
Indicate by checkmark 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
As of October 20, 1997, there were 17,965,083 shares
outstanding, par value $.01 per share, of the issuer's only
class of common stock.
This report consists of nineteen (19) pages.
The index to exhibits appears on page eighteen (18).
Page 1
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
See attached statements following this item number.
Page2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, 1996 September 30, 1997
ASSETS
Current assets:
Cash and cash equivalents $11,450,436 $ 4,974,320
Restricted cash 60,000 --
Accounts receivable, net 5,626,209 7,183,188
Unbilled receivables 2,111,813 2,774,733
Contracts receivable - current 336,499 1,625,157
Other current assets 1,069,705 742,991
Total current assets 20,654,662 17,300,389
Property and equipment, net 2,835,941 3,593,037
Capitalized software development costs, net 5,428,445 7,137,154
Goodwill, net 2,478,103 2,172,345
Contracts receivable - non-current 356,337 4,529,928
Other assets 71,727 60,915
$31,825,215 $34,793,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $2,830,130 $3,565,953
Deferred revenue 5,153,264 6,701,990
Advance billings 2,978,417 1,692,053
Other 501,511 306,571
Total current liabilities 11,463,222 12,266,567
Other 590,987 177,929
Total liabilities 12,054,309 12,444,496
Shareholders' equity:
Series CM preferred stock ($.01 par value;
issued and outstanding 6,000 shares as of
December 31, 1996). 60 --
Common stock ($.01 par value; authorized
40,000,000 shares; issued and outstanding
17,007,153 and 17,964,333 shares as of
December 31, 1996 and September 30, 1997,
respectively). 170,072 179,643
Additional paid-in capital 43,701,731 44,175,603
Accumulated deficit (24,100,957) (22,005,974)
Total shareholders' equity 19,770,906 22,349,272
$31,825,215 $34,793,768
See notes to condensed consolidated financial statements.
Page 3
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
Operating revenues
Computer system equipment
sales and support $ 968,097 $1,959,491 $2,732,828 $4,266,875
Application software licenses 1,417,311 3,595,986 3,812,196 10,818,638
Software support 1,614,441 2,776,688 4,317,624 8,018,489
Services and other 785,298 2,221,989 2,263,851 5,744,735
Total operating revenues 4,785,147 10,554,154 13,126,499 28,848,737
Operating expenses:
Cost of products sold 811,399 1,933,687 2,346,155 4,335,572
Client services expense 1,817,219 2,904,124 4,598,656 8,647,914
Software development costs 820,872 1,549,313 2,022,853 4,472,659
Sales and marketing costs 1,144,847 2,353,645 3,172,663 6,376,872
General and administrative exp. 639,647 1,130,245 1,806,190 3,459,817
Total operating expenses 5,233,984 9,871,014 13,946,517 27,292,834
Operating income (loss) (448,837) 683,140 (820,018) 1,555,903
Other income (expense):
Interest expense and
financing costs (113,318) (7,449) (310,828) (42,688)
Interest income and other (3,176) 210,562 78,470 581,768
Total other income (expense)(116,494) 203,113 (232,358) 539,080
Net earnings (loss) before income
taxes (565,331) 886,253 (1,052,376) 2,094,983
Income tax expense/(benefit) -- -- -- --
Net earnings (loss) $(565,331) $ 886,253 $(1,052,376) $2,094,983
Net earnings (loss) available
for common shareholders $(646,494) $ 886,253 $(1,303,414) $2,094,983
Net earnings (loss) per common
share primary and fully diluted $ (0.09) $ 0.05 $ (0.19) $ 0.11
Weighted average number of common
and common equivalent shares
outstanding 7,138,153 18,418,949 6,959,498 18,353,506
See notes to condensed consolidated financial statements.
Page 4
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (1,052,376) $ 2,094,983
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 1,289,850 2,270,540
Changes in assets and liabilities:
Accounts receivable 960,290 (1,556,979)
Unbilled receivable (574,623) (662,920)
Contracts receivable 92,797 (5,462,249)
Other (340,383) (3,256)
Accounts payable and accrued expenses 292,812 735,823
Deferred revenues 119,869 1,548,726
Advance billings (232,547) (1,286,364)
Net cash provided (used) by operating activities 555,689 (2,321,696)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (1,164,294) (2,811,838)
Purchases of property and equipment (702,035) (1,472,907)
Restricted cash released from escrow 50,000 60,000
Purchase of net assets of Dimensional Medicine, Inc.(1,399,389) --
Net cash used by investing activities (3,215,718) (4,224,745)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 283,627 483,383
Proceeds from subordinated notes - related parties 1,000,000 --
Preferred stock dividends paid (109,782) --
Deferred stock issuance costs (206,467) --
Other 268,463 (413,058)
Net cash flows provided (used) by financing
activities 1,235,841 70,325
Net increase (decrease) in cash and cash equivalents (1,424,188) (6,476,116)
Cash and cash equivalents, beginning of period 2,268,240 11,450,436
Cash and cash equivalents, end of period $ 844,052 $ 4,974,320
See notes to condensed consolidated financial statements.
Page 5
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(A) Unaudited Financial Statements:
The accompanying consolidated financial statements have been
prepared by management in conformity with generally accepted
accounting principles for interim financial statements and with
instructions to Form 10-Q and Regulation S-X. Accordingly, they
do not include all the disclosures required by generally
accepted accounting principles for complete financial
statements. All adjustments and accruals considered necessary
for fair presentation of financial information have been
included in the opinion of management, and are of a normal
recurring nature. Quarterly results of operations are not
necessarily indicative of annual results. These statements
should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Dynamic
Healthcare Technologies, Inc. 1997 Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(B) Acquisition of Dynacor, Inc.:
On May 22, 1997, the Company completed the acquisition of
Dynacor, Inc. of Apple Valley, Minnesota ("Dynacor"), a
laboratory information system provider founded in 1978. Dynacor
stockholders received 250,000 common shares of the Company, in
exchange for all of the outstanding common shares of Dynacor.
The acquisition has been accounted for using the pooling of
interests method, and as such, all prior period amounts have
been restated to include the accounts and results of operations
of Dynacor.
(C) Contracts Receivable:
Contracts receivable represent receivables from customers under
long-term financing arrangements.
During the quarter ended March 31, 1997, the Company entered
into a value-added re-marketing agreement with Sunquest
Information Systems, Inc. ("Sunquest") for the non-exclusive
sale of CoPath Client/Server product licenses. The initial
license fee of $3,000,000 is receivable in three (3) annual
installments of $1,000,000 on February 7, 1997, 1998 and 1999.
As of September 30, 1997 contract receivables includes
$1,871,657 under this contract representing the present value of
the two remaining installments with an imputed interest rate of
8.25%.
On July 5, 1997, the Company entered into a multi-site radiology
information system sale payable in varying monthly installments
extending through March, 2002. Total minimum installments due
under this contract aggregate $5,754,000. Deferred revenue
equal to the present value of the minimum payments and estimated
residual value discounted at an imputed rate of 8.5%, of
$3,617,717 was initially recorded. During the third quarter of
1997, $2,979,000 of revenue was recognized upon implementation
of the system and $74,860 of interest income was recognized on
the related contract receivable. As of September 30, 1997 the
carrying value of this contract receivable was $3,512,000, and
there was $638,717 of related deferred revenue.
Also included in contracts receivable are other amounts due from
customers in monthly installments of principal and interest,
which provided for initial five year terms. The future minimum
principal payments to be received under contract receivables as
of September 30, 1997 are summarized as follows:
For the Years Ending September 30,
1998 $1,625,157
1999 1,624,335
2000 656,838
2001 706,849
2002 667,312
Thereafter 874,594
$6,155,085
Page 6
(D) Stockholders' Equity:
On August 29, 1997 all of the Company's then outstanding Series
CM preferred stock was converted to an aggregate of 564,996
shares of the Company's common stock $.01 par value. This
conversion was based on the formula established upon the
issuance of the Company's Series CM preferred stock in
connection with the acquisition of Collaborative Medical
Systems, Inc. ("CMSI"), in December 1996. In accordance with
generally accepted accounting principles, there was no required
adjustment to the original purchase price associated with the
acquisition of CMSI attributable to the conversion of the Series
CM preferred stock.
(E) Recently Issued Accounting Standard:
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128), which is required to be
adopted by the Company for the year ending December 31, 1997.
The provisions of SFAS No. 128 will be adopted in the Company's
financial statements in its 1997 Annual Report. At that time the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods.
Under the new provisions for calculating earnings per share, the
dilutive effect of stock options will be excluded in the
determination of "basic earnings per share" and only included in
"diluted earnings per share." The impact of SFAS No. 128 on the
calculation of actual and pro forma earnings per share for the
three and nine months periods ended September 30, 1997 and 1996
is not expected to be material. <PAGE>
Item 2. Management's discussion and analysis
of financial condition and results of operations.
Page 7
Item 2. Management's discussion and analysis of financial condition
and results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
IN THE SECOND QUARTER OF 1997, DYNAMIC HEALTHCARE TECHNOLOGIES,
INC. (THE "COMPANY"), COMPLETED THE ACQUISITION OF DYNACOR, INC.
("DYNACOR"), IN A POOLING TRANSACTION. ALL PRIOR PERIOD
INFORMATION HAS BEEN RESTATED TO INCLUDE THE ACCOUNTS AND
RESULTS OF OPERATIONS OF DYNACOR.
The Company is a leading provider of enterprise-wide,
patient-centered healthcare information systems. These systems
enable hospitals, physician practice groups and integrated
delivery networks to capture, store, archive and retrieve
clinical, financial and administrative patient information. The
Company's products enhance productivity, reduce costs and
improve the quality of patient care by providing on-line access
to patient information previously maintained on a variety of
media, including paper, X-ray film, magnetic disk, video and
audio. The Company's current product lines include clinical
information systems for use in laboratory, anatomic pathology,
radiology and anesthesiology applications as well as imaging and
electronic health record solutions. The Company provides
support for all of its systems and provides systems integration
and other consulting services to over 600 customers. Key
customers include the University of California at Los Angeles
Medical Center, University of Illinois at Chicago Medical
Center, Methodist Hospital of Memphis, Memorial Sloan-Kettering
Cancer Center, Ohio State University Hospital, Columbia/HCA,
Greater Dayton Area Hospital Association, Advocate Health Care,
Temple University Hospital, UniHealth and Orlando Regional
Health System.
The Company's revenues are derived from the licensing and sale
of systems comprised of internally developed software and third
party software and hardware, professional services, maintenance
and support services. The Company's services include
implementation and training, product management and customer
software development. Revenues from professional services and
maintenance and support services typically increase as the
number of installed systems increases. Computer system
equipment sales revenues are generally recognized when hardware
is shipped. Computer system equipment sales and support
revenues include hardware support contracts for a specific
period from which revenue is recognized ratably over the
corresponding contract period. Application software license
revenues are recognized when application software is delivered
to the customer. Installation and training service revenues,
included with application software licenses, are recognized as
the services are performed. Software support revenues
principally include contracts for remote dial-up problem
diagnosis, maintenance and corrective support services, each of
which covers a specified period for which revenue is recognized
ratably over the corresponding contract period. Services and
other revenues include custom programming services,
post-contract support obligations and other services, which are
provided under separate contract and are recognized as services
are performed.
Cost of products sold includes the cost of hardware sold, costs
of third party software licenses and hardware support
subcontracts. Client service expense includes the direct and
indirect costs associated with implementation and support
personnel. Software development costs include the direct and
indirect salaries and wages of software research and development
personnel, direct research and development expenses, and
software amortization expense, reduced by capitalized software
development costs. Software development costs are expenses
until such time as technological feasibility is established and
then are capitalized in compliance with Statement of Financial
Accounting Standards No. 86 "Accounting for Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Sales and
marketing costs include direct and indirect salaries,
commissions, joint marketing costs, advertising, trade show
costs, user group costs and travel and entertainment expenses
related to the sale and marketing of the Company's products and
services. General and administrative expenses include salaries
and expenses for corporate administration, financial, legal and
human resources.
The sales cycle for the Company's systems is typically six to
eighteen months from initial contact to contract signing. The
product delivery cycle is variable. When application software
licenses are provided by modem, product delivery is immediate.
In other instances, product delivery is over two or more years,
particularly with enterprise-wide electronic healthcare record
solutions involving significant and continuing customer service
requirements. Accordingly, the product delivery cycle depends
upon the combination of products purchased and the
implementation plan defined by the customer in the master sales
agreement. Each customer contract is separately negotiated.
The installation schedule for a clinical information systems, or
departmental electronic healthcare record implementations,
typically require six to twelve months. Under its standard
master sales agreement, the Company generally receives a partial
payment upon execution of the
Page 8
agreement, a hardware installment payment upon delivery of hardware,
installation progress payments upon the completion of defined milestones
and final payment upon system acceptance.
In February 1997, the Company entered into a value added
re-marketing agreement with Sunquest Information Systems, Inc.
(NASDAQ: SUNQ) of Tucson, Arizona. Under the terms of the
agreement Sunquest will pay an initial licensing fee of
$3,000,000 to sub-license Dynamic's CoPath client server
anatomic pathology solution ("CoPath C/S") to their existing
customers. New Sunquest customers licensing CoPath C/S will pay
a separate licensing fee, and Dynamic will receive ongoing
annual maintenance and monthly consulting fees for all
continuing services rendered under this agreement.
Also in February 1997, the Company signed an agreement under
which Dynamic will sell HealthPoint ACS, an advanced clinical
system for the office-based physician in the ambulatory setting.
Under the terms of this agreement, Dynamic will also provide
implementation services, training and telephone support to its
HealthPoint ACS clients.
In March 1997, the Company announced the general availability of
CoPath C/S having placed the product in use at the University of
California, San Francisco Medical Center and at the New York
Hospital - Cornell Medical Center. Both of these academic
medical centers were previously beta sites for CoPath C/S.
On May 22, 1997 , the Company completed the acquisition of
Dynacor, Inc. of Apple Valley, Minnesota ("Dynacor"). Dynacor,
a privately-held company founded in 1978, had concentrated on
the design and implementation of laboratory information systems
("LIS"), for hospitals, health maintenance organizations,
physician's office laboratories, and reference laboratories.
This acquisition increased the Company's customer base to in
excess of 600 hospitals, strengthened the Company's position in
the laboratory information systems marketplace, and expanded the
Company's laboratory information system (LIS) development
resources.
In June 1997, the Company announced the appointment of Michael
L. Carlay to the newly created position of Senior Vice
President, Sales and Marketing. Mr. Carlay has over twenty
years experience in the information systems business. Prior to
joining the Company Mr. Carlay held the positions of Vice
President of Sales and Marketing for AMISYS Managed Care Systems
(now HBOC), Vice President of Sales for IBAX Healthcare Systems
(now HBOC), and was a sales executive with IBM's Health Industry
Marketing group.
On July 29, 1997 the Company announced General Services
Administration (GSA) approval for the direct sale of the
Company's CoPath anatomic pathology systems and services to
government agencies. In 1995, CoPath was the first
Commercial-Off-The-Shelf (COTS) system to be integrated into the
Department of Defense's Composite Health Care System (CHCS)
network. CoPath has been implemented at more than 50 military
treatment facilities around the world and is listed in the GSA
Advantage, an on-line electronic ordering system provided
exclusively for Federal Government Agencies. The Company
continues to pursue similar listings for all of its products.
During August 1997, the Company introduced Maxifile
Client/Server, a new open architecture radiology information
system at the American Healthcare Radiology Administrators 25th
Annual National Meeting in Minneapolis, Minnesota. Maxifile
Client/Server is a comprehensive radiology system that
computerizes the clinical, clerical, and administrative
functions in the radiology department. The Company is in the
process of implementing Maxifile Client/Sever at its initial
site.
On September 17, 1997 the Company announced the signing of a
joint marketing agreement with Daou Systems, Inc. of San Diego,
CA (NASDAQ: DAOU). The focus of this agreement is to promote
customer awareness of the potential benefits of using the
Company's enterprise-wide image enabled electronic health record
solution, DynamicVision, coupled with DAOU's expertise and
services in designing, implementing, supporting and managing
advanced computer network systems. The agreement provides for the
payment of fees to each entity when qualified leads result in
contracted business.
On September 29, 1997 the Company announced purchase of IBM's
Medical Records Plus/400 document imaging software. Recognized
as the industry-leading technology solution for the IBM AS/400
platform in healthcare environments, the software will now be
identified as "Dynamic Medical Record Plus." Although the
Company's DynamicVision product is designed as platform
independent, acquiring Dynamic Medical Records Plus provides the
Company with the opportunity to extend development efforts for
increased responsiveness to customer and market needs, and
eliminate the payment of related royalities.
Page 9
The following table sets forth, for the three and nine month
periods ended September 30, 1996 and 1997, certain items in the
Company's statements of operations as a percentage of total
operating revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
Operating revenues:
Computer system equipment sales
and support 20.2 % 18.5 % 20.8 % 14.8 %
Application software licenses 29.6 % 34.1 % 29.1 % 37.5 %
Software support 33.8 % 26.3 % 32.9 % 27.8 %
Services and other 16.4 % 21.1 % 17.2 % 19.9 %
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of products sold 17.0 % 18.3 % 17.9 % 15.0 %
Client services expense 38.0 % 27.5 % 35.0 % 30.0 %
Software development costs 17.1 % 14.7 % 15.4 % 15.5 %
Sales and marketing costs 23.9 % 22.3 % 24.2 % 22.1 %
General and administrative
expense 13.4 % 10.7 % 13.7 % 12.0 %
Total operating expenses 109.4 % 93.5 % 106.2 % 94.6 %
Operating income (loss) -9.4 % 6.5 % -6.2 % 5.4 %
Other income (expense) -2.4 % 1.9 % -1.8 % 1.9 %
Net earnings (loss) -11.8 % 8.4 % -8.0 % 7.3 %
Results of Operations
(Three months ended September 30, 1997 compared to three months
ended September 30, 1996)
Revenues. During the quarter ended September 30, 1997 the
Company reported revenues of $10,554,000 an increase of
$5,769,000 over revenues of $4,785,000 for the same period 1996.
This increase represents an increase of 121%, and is
attributable to an aggressive growth plan being executed by the
Company. The Company continues to introduce new products
through internal software development efforts, and through
strategic acquisitions.
During the third quarter 1997 the Company experienced
significant increases in revenues from pathology, radiology and
imaging of $3,091,000, $2,047,000 and $914,000, respectively, as
compared with the third quarter one year ago. Through the
acquisition of Collaborative Medical Systems, Inc. ("CoMed"),
made on December 17, 1996, the Company added an anatomic
pathology information system product line to the Company's
existing product lines ("CoPath"). During the first quarter of
1997 the Company completed a new client server version of
CoPath. This acquisition and internal development effort
resulted in pathology revenues reported during the third quarter
1997 of $3,091,000. There were no such revenues during the
third quarter 1996. Radiology information system revenues for
the third quarter 1997 increased to $4,065,000 as compared to
$2,018,000 during the third quarter 1996. This increase of more
than 100% is attributable to the timing of delivery on a
significant five site radiology sale, which occurred early in
the third quarter of 1997. Imaging revenues increased to
$1,498,000 from $584,000, an increase of more than 250%.
DynamicVision was released for general availability in the
fourth quarter of 1996, and the Company is beginning to complete
the initial sale cycles on the product line.
Page 10
Laboratory information system application software licenses
revenue for the quarter ended September 30, 1997 declined by
$310,000 compared to the same period 1996. LabPro 2000
installations during the second quarter of 1997 consisted of
migrating customers from the prime platform to the IBM AS400
platform. Migration contracts typically have nominal associated
application software license revenue.
Computer system equipment sales and support revenues during the
quarter ended September 30, 1997 increased $991,000 to
$1,959,000 compared to $968,000 for the third quarter of 1996.
Management does expect a higher involvement in the delivery of
computer hardware to customers in connection with the
DynamicVision, CoPath and Maxifile product lines as a result of
the Company's emphasis on offering a sole source solution to
customers. Hardware revenues can cause significant fluctuations
in top line performance, but traditionally have had nominal
impact on earnings due to relatively low margins compared with
other sources of Company revenue.
Application software license revenue during the third quarter of
1997 increased by $2,179,000 or to 34.1% of total revenues
compared to 29.6% during the same period 1996. The Company
experienced increases in pathology, radiology and imaging
application software license revenues of $982,000, $647,000 and
$652,000, respectively, more than offsetting the slight decline
in similar laboratory information system revenues. The
pathology product line acquired in December of 1996, and the
newly developed CoPath C/S product released for general
availability in March 1997, resulted in $982,000 of pathology
application software license revenues during the third quarter
1997. The increase to $1,682,000 from $1,035,000 in radiology
software application license revenues resulted from delivery on
the previously discussed five site radiology sale reported
during the third quarter 1997. The increase to $652,000 in
imaging software application license revenues results from the
closure on initial sales cycles for the DynamicVision product.
The Company announced in October 1997 that three sites were now
using DynamicVision in a live production environment.
Software support revenues increased $1,163,000 to $2,777,000 for
the third quarter of 1997, compared to $1,614,000 for the same
period one year ago. The acquisition of CoMed resulted in third
quarter 1997 software support revenues from pathology of
$1,149,000. Additionally, successful installations continued to
result in increased accretions in software support revenues in
radiology and imaging, which more than offset the decline in
such revenues from laboratory information systems as a result of
phasing out support for the Prime platform. As of September 30,
1997, the Company's recurring annualized billable support base
has increased to $12.3 million, and an additional $1.2 million
of annualized software support revenue is anticipated to be
generated from delivery of the Company's existing new systems
backlog.
Service and other revenues increased by $1,437,000 to $2,222,000
during the third quarter 1997, up from $785,000 for the same
quarter a year ago. This increase is attributable to
approximately $825,000 from pathology training and
implementation services, and a $651,000 increase in radiology
training and implementation services performed during the third
quarter 1997, $469,000 of which resulted from the five site sale
previously discussed.
Cost of Products Sold. Cost of products sold as a percent of
total revenues for the third quarter of 1997 increased by 1.3%
to 18.3% from 17.0% for the same period 1996. Although hardware
revenues during the third quarter of 1997 decreased to 18.5% of
total revenues, a decrease of 1.7% from 20.2% for the same
period in 1996, approximately $420,000 of costs attributable to
third party software licensing were included in the cost of
products sold during the third quarter of 1997. This results
principally from the purchase of the mumps operating system in
connection with both newly acquired pathology and radiology
product lines, and royalties to IBM in connection with imaging
sales. The Company's new client server pathology and radiology
products do not require the Mumps operating system. In
addition, the purchase of IBM's Medical Records Plus/400
document imaging software announced in September 1997 will
eliminate royalties to IBM on sales of this product in
connection with DynamicVision sales to AS/400 customers. Such
royalties incurred during the third quarter 1997 were $131,000.
Client Services Expense. Client services expense for the third
quarter 1997 increased $1,087,000 to $2,904,000 from $1,817,000
for the third quarter 1996. However, as a percentage of total
revenues during the respective quarters, client services expense
decreased to 27.5% from 38.0%. The Company previously reported
increased staffing in connection with the 1996 acquisitions of
Dimensional Medicine, Inc. ("DMI") and CoMed, the introduction
of the DynamicVision product line, and the general release of
CoPath C/S. In addition, the Company has been actively
perfecting customer reference sites in order to more actively
support the sales effort for the emerging products. These
increased costs were more than offset by the growth in total
revenues.
Page 11
Software Development Costs. Although software development costs
for the third quarter 1997 increased $728,000 to $1,549,000 from
$821,000 incurred during the same period in 1996, such costs
declined as a percentage of total revenues to 14.7% from 17.1%.
This department was reorganized during the fourth quarter of
1996 to coordinate the talent of the DMI and CoMed acquisitions.
Although the Company capitalized $1,013,000 of software
development costs during the third quarter 1997 compared to
$444,000 for the third quarter 1996, the Company continues to
significantly invest in development efforts as part of the
Company's overall growth strategy.
Sales and Marketing. Sales and marketing costs for the third
quarter 1997 increased by $1,209,000 to $2,354,000 from
$1,145,000. As a percentage of total revenues such costs for
the third quarter 1997 decreased to 22.3% from 23.9% for the
same period 1996. During late 1996 and the first half of 1997,
the Company expanded and trained a national sales and marketing
force in connection with the Company's external growth plans, in
preparation for the launch of the Company's new DynamicVision
product line, the general release of CoPath C/S and to execute a
cross selling strategy. During the third quarter 1997 the
growth in total operating revenues exceeded the relative
increase in sales and marketing expenses.
General and Administrative Expenses. General and administrative
expenses for the third quarter of 1997 increased by $490,000, to
$1,130,000 from $640,000 incurred during the third quarter 1996,
but decreased by 2.7% of total revenues for the quarter from
13.4% to 10.7%. The increased expenses include ongoing
management and administrative expenses resulting from the
acquisitions of CoMed and Dynacor, as well as $135,000 of
management incentive compensation ("MIC"), accrued during the
third quarter 1997. There was no such MIC accrual in 1996.
Other Income (Expense). Net other income for the third quarter
1997 increased by $319,000 to $203,000, as compared to net other
expense of approximately ($116,000) for the same period 1996.
Interest income increased by $204,000 and interest and other
expenses decreased by $106,000 during the third quarter of 1997,
principally due to the availability of proceeds resulting from
the Company's successful secondary offering completed in the
fourth quarter of 1996.
(Nine months ended September 30, 1997 compared to nine months
ended September 30, 1996)
Revenues. The Company's total consolidated revenues were
$28,849,000 for the first nine months of 1997, compared to
$13,126,000 for the corresponding period of 1996, representing
an increase of $15,723,000 or 119.8%. During the nine months
ended September 30, 1997 the Company reported pathology revenues
of $12,683,000 attributable to the acquisition of CoMed in late
1996. There were no such pathology revenues during the nine
months ended September 30, 1996. Radiology revenues resulting
from the Maxifile and PACsPlus product line acquired with DMI in
May 1996, increased to $6,094,000 from $3,399,000 or by
$2,695,000. Management attributes this increase to the expanded
market reach for the product line that consolidation has
provided post acquisition. Laboratory information system
revenue for the nine months ended September 30, 1997, declined
by $1,169,000 to $6,016,000 compared to $7,185,000 reported for
the same period 1996. This was more than offset by aggregate
gains in imaging $1,232,000 and in other revenues of $281,000.
LabPro 2000 installations during the first half of 1997
consisted of migrating customers from the prime platform to the
IBM AS400 platform. Migration contracts typically have nominal
associated application software license revenue. The increase
in imaging revenues result from the closure on initial sales
cycles for the DynamicVision product released for general
availability in November 1996, and other revenues increased
principally as a result of converting add on business from a
customer base expanded through acquisitions.
Computer system equipment sales and support revenues during the
nine months ended September 30, 1997 increased $1,534,000 to
$4,267,000 compared to $2,733,000 for the first nine months of
1996, but declined as a percentage of total revenues to 14.8%
from 20.8% . Management does expect a higher continuing
involvement in the delivery of computer hardware to customers in
connection with the DynamicVision, pathology and radiology
product lines, as a result of the Company's emphasis on offering
a sole source solution to customers. However, the increase in
application software license revenues during the first nine
months of 1997 overshadowed the increase in hardware revenues.
Hardware revenues can cause significant fluctuations in top line
performance, but traditionally have had nominal impact on
earnings due to its relatively low margins compared with other
sources of Company revenue.
Application software license revenue during the first nine
months of 1997 increased by $7,006,000 or to 37.5% of total
revenues compared to 29.1% during the same period 1996. The
Company recognized pathology application software license
revenue of $6,602,000 during the first nine months of 1997,
while during the first nine months of 1996, there were no such
pathology revenues. The pathology product line was acquired
with CoMed in December of 1996. Imaging software application
license revenues increased $604,000 as a result of the
DynamicVision product introduction announced in November 1996.
This product is now completing initial sales cycles. Radiology
software application license revenues
Page 12
increased $628,000 as a
result of post acquisition cross-marketing capabilities, and
deliveries on a five site sale consummated during the third
quarter 1997. The decline in laboratory software application
license revenues of approximately $817,000 is principally
attributed to installations of LabPro 2000 during the first nine
months of 1997 consisting of migrating customers from the prime
platform to the IBM AS400 platform. Migration contracts
typically have nominal associated application software revenue.
Additionally, realignment of the laboratory sales force after
the acquisition of Dynacor, including integration of the new
Premier Series lab product, contributed to this decrease by
diverting attention from normal sales excess.
Software support revenues increased $3,700,000 to $8,018,000 for
the first nine months of 1997, compared to $4,318,000 for the
same period one year ago, an increase of 85.7%. The acquisition
of CoMed resulted in 1997 software support revenues from
pathology of $3,083,000. Additionally, successful installations
continue to result in accretions in software support revenues.
As of September 30, 1997, the Company's recurring annualized
billable support base has increased to $12.3 million, and an
additional $1.2 million of annualized software support revenue
is anticipated to be generated from delivery of the Company's
existing new systems backlog.
Service and other revenues increased by $3,481,000 to $5,745,000
from $2,264,000. This increase principally results from the
training and implementation services in connection with
pathology system installations to the United States Department
of Defense Military Treatment Facilities, and the five site
radiology system sale closed in the third quarter of 1997.
Cost of Products Sold. Cost of products sold as a percent of
total revenues for the first nine months of 1997 decreased by
2.9% to 15.0% from 17.9% for the same period 1996. Although,
hardware revenues during the nine months of 1997 decreased 6.0%
to 14.8% from 20.8%, approximately $848,000 of costs
attributable to third party software licensing, or 2.9% of total
revenues, were included in the cost of products sold. Third
party software licensing costs result from the purchase of the
Mumps operating system in connection with both the newly
acquired pathology and radiology product lines, and royalties to
IBM in connection with imaging sales.
Client Services Expense. Client services expense for the first
nine months of 1997 increased $4,049,000 to $8,648,000 from
$4,599,000 for the first nine months of 1996. However, as a
percentage of total revenues during the respective nine month
periods, client services expense decreased to 30.0% from 35.0%.
The Company previously reported increased staffing in connection
with the 1996 acquisitions of DMI and CoMed, the introduction of
the DynamicVision product line, and the general release of
CoPath C/S. These increased costs were more than offset by the
increase in total revenues.
Software Development Costs. Software development costs for the
first nine months of 1997 increased $2,450,000 to $4,473,000
from $2,023,000, or by 0.1% of total operating revenues to 15.5%
from 15.4% incurred during the same period of 1996. This
department was reorganized during the fourth quarter of 1996 to
coordinate the talent of the DMI and CoMed acquisitions.
Although the Company capitalized $2,812,000 of software
development costs during the first nine months of 1997 compared
to $1,048,000 for the same period of 1996, the Company, as
outlined in the secondary offering, continues to significantly
invest in development efforts as part of the Company's overall
growth strategy.
Sales and Marketing. Sales and marketing costs for the first
nine months of 1997 increased by $3,204,000 to $6,377,000 from
$3,173,000, but declined by 2.1% of total revenues to 22.1% from
24.2% for the same period of 1996. During late 1996 and the
first half of 1997, the Company expanded and trained a national
sales and marketing force in connection with the Company's
external growth plans, in preparation for the launch of the
Company's new DynamicVision product line, and the general
release of CoPath C/S. These increases in sales and marketing
costs have been more than offset by the Company's growth in
total revenues.
General and Administrative Expenses. General and administrative
expenses for the first nine months of 1997 increased by
$1,654,000, to $3,460,000 from $1,806,000 incurred during the
first nine months of 1996, but decreased as a percentage of
total revenues by 1.7% to 12.0% from 13.7%. The Company has
experienced considerable growth through the recent purchase
acquisitions of CoMed and DMI. Additionally, $267,000 of
compensation has been accrued and expensed for the nine months
ended September 30, 1997 under the management incentive
compensation plan. There was no such expense incurred during
the same period in 1996. Despite these cost increases, the
Company has experienced offsetting cost reductions, principally
in finance and administration, associated with consolidating the
recent acquisitions.
Page 13
Other Income (Expense). Net other income for the first nine
months of 1997 increased by $771,000 to income of $539,000, as
compared to net other expense of approximately $232,000 for the
same period 1996. Interest income increased by $496,000, and
interest and other expenses decreased by $268,000 for the first
nine months of 1997 principally due to the availability of
proceeds resulting from the Company's successful secondary
offering completed in the fourth quarter of 1996.
Liquidity and Capital Resources
As of September 30, 1997 the Company had cash equivalents of
$4,974,000, working capital of $5,034,000, and a working capital
ratio of 1.41 to 1.
Accounts receivable and unbilled receivables as of September 30,
1997 increased from similar balances on December 31, 1996 by
$1,557,000 and $663,000, or increases of 28% and 31%,
respectively. These balances as a percentage of the Company's
total annualized revenues continue to decline. Annualized
revenues for the nine months ended September 30, 1997 exceed
1996 revenues by more than 45%. As a result, days sales
outstanding in accounts receivable and unbilled receivables has
declined to 68.2 days and 26.3 days, respectively, as of
September 30, 1997.
Contracts receivable as of September 30, 1997 increased
$5,462,000 to $6,155,000 as compared to the balance of $693,000
on December 31, 1996. During the third quarter 1997, the
Company entered into an agreement with a customer for a five
site radiology system installation priced on a "Per Procedure"
basis. The customer committed to a minimum number of monthly
procedures at a fixed price per procedure for a period extending
through 60 months from completion of installation. The
receivable has been established at the present value of the
guaranteed minimum payments and the estimated residual in
accordance with generally accepted accounting principles. As of
September 30, 1997 the balance on this contract receivable was
$3,512,000. In addition, the Company entered into a licensing
agreement with Sunquest Information Systems, Inc. resulting in
initial licensing fees receivable in three installments of
$1,000,000 each. The first installment was collected upon
signing on February 7, 1997. The remaining two installments are
due no later than February 7, 1998 and February 7, 1999, and as
of September 30, 1997 had a carrying value of $1,872,000. The
remaining change is attributable to scheduled collections on
monthly installment receivables from radiology information
system customers. As of September 30, 1997 all contract
receivables are current with applicable payment terms.
Other current assets as of September 30, 1997 declined $327,000
to $743,000 from the 1996 year end balance of $1,070,000, as a
result of realization of other asset balances acquired through
CoMed. The cash surrender value of terminated life insurance of
approximately $110,000 collected by the Company, and vendor
advances returned to the Company of approximately $145,000
significantly accounted for this change.
During the first nine months of 1997 the Company capitalized
$2,812,000 of software development costs and purchased
$1,473,000 of additional property and equipment exclusive of the
acquisition of Dynacor in May 1997. Development efforts
resulted in the general availability of CoPath Client Server
during the first quarter of 1997, and significant enhancements
to DynamicVision resulting in three newly live installations as
recently announced. The Company also continued to develop
enhancements to PACS Plus and began developing a client server
version of Maxifile for radiology. Property purchases were made
primarily to accommodate the growth of the Company. First, the
Company uniformly equipped the offices of the recently acquired
CoMed operation in Waltham, Massachusetts and Dynacor in
Minneapolis, Minnesota. Additionally, the Company acquired
computer equipment for the sales force to automate pipeline
management, and a new telephone system. The Company plans to
continue an aggressive internal and external growth strategy.
Accounts payable and accrued expenses increased $736,000 to
$3,566,000 as of September 30, 1997 from $2,830,000 as of
December 31, 1996. As of September 30, 1997 the Company accrued
$267,000 of compensation under an approved management incentive
compensation plan. There were no such accrued costs during
1996. Additionally, a general increase in the level of business
activity attributed to this increase.
Deferred revenue as of September 30, 1997 increased by
$1,549,000 to $6,702,000 from $5,153,000. During the third
quarter 1997, the Company received a renewal for the Department
of Defense ("DOD") military treatment facilities software
support agreement. This support extends from October 1, 1997
through September 30, 1998, and resulted in an increased
deferred revenue of $1,217,000 as of September 30, 1997. In
addition, as of September 30, 1997 $639,000 of revenue under the
multi-site radiology sale was deferred pending final delivery
and installation of the systems. These gains offset typical
seasonal declines in support revenues attributable to January 1
and July 1 renewal dates for most of the annual support
contracts.
Page 14
Advanced billings as of September 30, 1997 declined by
$1,286,000 to $1,692,000 from the 1996 year end balance of
$2,978,000. Deliveries to the DOD hospitals during the first
six months of 1997 were significantly billed and paid in advance
prior to December 31, 1996.
Other current and non-current liabilities as of September 30,
1997 decreased by an aggregate of $608,000 from the December 31,
1996 balance of $1,092,000 to $484,000, principally as a result
of retiring Dynacor pre-existing debt after acquisition in May
1997. Additionally, during the first nine months of 1997 the
Company received $483,000 in proceeds from the exercise of
employee options and warrants.
The Company intends to continue to enhance its product and
service offerings and to seek market expansion opportunities
beyond the general release of DynamicVision in November 1996,
the 1996 acquisitions of CoMed and DMI, the general release of
CoPath C/S, Maxifile C/S and PACsPlus+, and the most recent
acquisition of Dynacor.
Management believes that existing cash and cash equivalents
together with funds generated by operations will be sufficient
to meet operating requirements for at least the next twelve
months.
Inflation and Changing Prices
The Company believes inflation has not had a material effect on
the Company's operations or its financial condition. Changing
prices within the marketplace could have a material effect upon
the cost of materials sold and the related price of software and
hardware sales.
Forward-Looking Statements
This report contains certain forward-looking statements, which
are qualified by the risks and uncertainties described from time
to time in the Company's reports filed with the Securities and
Exchange Commission, including the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
Page 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
The information required by this item is incorporated by
reference to Footnote (D) of the Condensed Consolidated
Financial Statements included in Part 1 herein.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11: Statement regarding computation of per
share earnings.
(b) Reports on Form 8-K:
The registrant filed a Form 8-K dated July 16, 1997 with the
Commission reporting the financial statements of the business
acquired pursuant to Item 7(a) and (b) of the Registrant's Form
8-K dated May 22, 1997. Dynacor, Inc.'s Balance Sheets as of
June 30, 1996 and March 31, 1997, and Statements of Operations,
Shareholders' Equity and Cash Flows for the years ended June 30,
1996 and the nine months ended March 31, 1996 and 1997, were
reported therein.
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
(Registrant)
Date: October 27, 1997 /S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, CEO
Date: October 27, 1997 /S/PAUL S. GLOVER
Paul S. Glover
Vice President of Finance, CFO
and Secretary
Page 17
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Index to Exhibits
Description of Exhibit Page Number
Exhibit 11: Statement regarding computation of per share earnings 19
Page 18
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Exhibit 11
Computation of Weighted Average Number of Shares
Outstanding and Per Share Earnings
Three Months Ended Nine Months Ended
September 30, (Unaudited) September 30,(Unaudited)
1996 1997 1996 1997
Net earnings (loss) $ (565,331) $ 886,253 $(1,052,376) $ 2,094,983
Dividends on preferred
stock (81,163) -- (251,038) --
Earnings (loss) available
for common shareholders $ (646,494) $ 886,253 $(1,303,414) $ 2,094,983
Weighted average number of
common shares outstanding
and earnings per share:
Primary:
Weighted average number
of common shares
outstanding 7,138,153 17,949,920 6,959,498 17,884,477
Dilutive effect of options
and warrants using treasury
stock method -- 469,029 -- 469,029
Weighted average number of
common and common equivalent
shares outstanding 7,138,153 18,418,949 6,959,498 18,353,506
Earnings (loss) per
share - primary $ (0.09) $ 0.05 $ (0.19) $ 0.11
Fully diluted:
Weighted average number
of common shares
outstanding 7,138,153 17,949,920 6,959,498 17,884,477
Dilutive effect of
options and warrants
using treasury stock
method -- 540,872 -- 540,872
Weighted average number of
common and common equivalent
shares outstanding assuming
full dilution 7,138,153 18,490,792 6,959,498 18,425,349
Earnings (loss) per
share - fully diluted $ (0.09) $ 0.05 $ (0.19) $ 0.11
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,974,320
<SECURITIES> 0
<RECEIVABLES> 7,490,683
<ALLOWANCES> 307,495
<INVENTORY> 0
<CURRENT-ASSETS> 17,300,389
<PP&E> 6,820,645
<DEPRECIATION> 3,227,608
<TOTAL-ASSETS> 34,792,768
<CURRENT-LIABILITIES> 12,266,567
<BONDS> 177,929
<COMMON> 179,643
0
0
<OTHER-SE> 22,169,629
<TOTAL-LIABILITY-AND-EQUITY> 34,793,768
<SALES> 4,266,875
<TOTAL-REVENUES> 28,848,737
<CGS> 4,335,572
<TOTAL-COSTS> 27,292,834
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,688
<INCOME-PRETAX> 2,094,983
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,094,983
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,094,983
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
