FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended DECEMBER 31, 1996 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ________________ to ________________
Commission File Number 0-12516
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DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-3389871
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(State of Incorporation) (IRS E.I.N.)
101 SOUTHHALL LANE, SUITE 210, MAITLAND, FLORIDA 32751
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(Address of principal executive offices) (ZIP Code)
(407) 875-9991
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates, based on
the average bid and asked prices as of March 10, 1997, was $89,346,402. A total
of 11,528,568 shares of the Company's common stock were held by persons and
entities believed to be non-affiliated on March 10, 1997, and the closing bids
and ask prices of the Company's common stock on this date were $7.625 and
$7.875, respectively.
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As of March 10, 1997, there were 17,034,253 shares outstanding of the issuer's
only class of common stock.
This report consists of fifty-six (56) pages.
The index to exhibits appears on page nineteen (19).
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive proxy statement for the Company's 1997
Annual Meeting of Shareholders, to be filed within 120 days of the
end of the Company's fiscal year covered by this report, pursuant to
General Instruction G(3) to Form 10-K.
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FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART I
ITEM 1. BUSINESS
GENERAL
Dynamic Healthcare Technologies, Inc. ("Dynamic" or 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, and video and audio
recordings. The Company's current product lines include clinical information
systems for use in laboratory, radiology, anatomic pathology and anesthesiology
applications and imaging and electronic health record solutions. The Company
provides support for all of its systems and provides integration and other
consulting services.
The Company currently serves over 550 customers the majority of which are
located in the United States. Key customers include the UCLA Medical Center,
Methodist Hospital of Memphis, Orlando Regional Health System, Ohio State
University Hospital, University of Pittsburgh, Temple University Hospital,
University of Illinois at Chicago Medical Center, Memorial Sloan-Kettering
Cancer Center, Advocate Health Care, Greater Dayton Area Hospital Association,
The Mayo Clinic and UniHealth.
Utilizing the Company's healthcare information experience, imaging technologies
and customer input, the Company is focusing on a product strategy for electronic
health records. The Company's electronic health record product, DYNAMICVISION,
provides connectivity and enabling technologies that integrate clinical and
imaging information systems to create an open architecture, multi-media clinical
workstation. DYNAMICVISION provides prompt and simultaneous on-line access to
information stored in various systems and data repositories located at multiple
sites. This information can include documents, medical images such as X-rays,
MRIs and CAT scans, and video and audio recordings.
The Company was originally incorporated in California in 1977, reincorporated in
Nebraska in 1982 and subsequently reincorporated in Florida in 1996. The
Company's executive offices are located at 101 Southhall Lane, Suite 210,
Maitland, Florida 32751, its telephone number is (407) 875-9991 and its World
Wide Web address is http://www.dht.com.
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INDUSTRY
The healthcare information industry is undergoing rapid and significant change.
Cost containment pressures, industry consolidation, the movement toward managed
care and rising standards of healthcare quality represent fundamental trends in
today's healthcare operating environment. Increasingly, the key to effective
cost control and quality management lies in the collection, availability and
analysis of medical records in order to assess treatment patterns, resource
utilization and outcomes. As a result, the information demands in the healthcare
industry are rapidly increasing for caregivers, managers and third party payors.
Total healthcare information technology spending in the United States was
estimated to be $8.5 billion in 1994, and is projected to reach $13.0 billion by
1997 and $20.0 billion by 2000.
Cost containment and quality management efforts in the healthcare industry have
historically been hampered by a lack of integrated clinical and financial
information and the fact that a large amount of healthcare information exists on
paper and is not accessible by computer. The paper based storage of patient
information creates costly information management problems including: (i) delays
in accessing information; (ii) space and personnel costs to store paper-based
records; (iii) lost and misfiled documents; (iv) single user access to relevant
data; and (v) errors in entering and reading information. As reimbursement is
shifting more toward risk sharing and capitation, providers and payors need to
better manage risk by controlling costs, demonstrating quality, measuring
outcomes and influencing utilization.
Healthcare providers have recently begun to view information systems technology
as a viable avenue for increasing productivity and efficiency, measuring and
managing costs, and improving the quality of services delivered. The 1996 Annual
Healthcare Information Management and Systems Society ("HIMSS")/Hewlett Packard
Leadership Survey showed that 63% of its respondents indicated that their
healthcare information systems budgets will increase by 20% or more over the
next two years and 24% indicated budget growth of over 50% during the next two
years.
As the need for readily accessible information throughout the healthcare
enterprise continues to grow, hospitals, providers and payors of all sizes are
faced with the challenge of implementing healthcare information management
systems that are scaleable, capable of working with existing multiple legacy
information systems and flexible to adapt to changes in the healthcare
marketplace. Also, such systems must be patient-centered, integrating all
aspects of managing the healthcare process, such as clinical care, financial
management and administrative decision support.
Industry changes are resulting in fewer but larger healthcare entities and the
emerging organizational model is the integrated delivery network ("IDN"). An IDN
is a network of healthcare organizations that assumes and manages healthcare
risk, provides coordinated care and is held financially and clinically
accountable for the health of the population it serves. The 1996 HIMSS/Hewlett
Packard Leadership Survey indicated that 83% of the respondents are now or will
soon be part of an IDN.
IDN's require innovative information systems infrastructure to support their
multi-entity, multi-state environments. Their information systems must
contribute to making the delivery of healthcare services more efficient and
effective across the continuum of care. They must deliver tangible cost
reductions and measurable productivity and quality improvements, making the
availability of complete, timely and cost-effective patient-centered information
essential.
The Company believes that one of the most significant changes in healthcare
information needs will be the development and implementation of the electronic
health record. Electronically capturing, storing, indexing, archiving and
disseminating information enables physicians, health information managers,
clinicians, claims processors and others across an entire healthcare enterprise
to share centralized comprehensive patient information. The Company believes
that the electronic health record will be an essential part of information
systems that support IDN's.
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PRODUCTS AND SERVICES
The Company has a broad offering of products and services that are based upon a
strategic mix of applications and technologies that support the restructuring of
healthcare delivery information systems backed by implementation and support
services. The Company's products are organized into two areas: electronic health
record and imaging solutions, and clinical information systems.
<TABLE>
<CAPTION>
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PRODUCTS GENERALLY AVAILABLE TYPE OF SOLUTION DESCRIPTION
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ELECTRONIC HEALTH RECORD AND IMAGING SOLUTIONS
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<S> <C> <C>
DYNAMICVISION................... Electronic Health Record An enterprise-wide multi-media electronic health records
Systems clinical workstation and system
MEDICAL RECORDSPLUS............. Enterprise-wide Document Based on IBM's ImagePlus/400 image processing system,
Imaging System enables authorized caregivers to access centralized
repositories of document images
PROFESSIONAL ACCESS FACILITY(1). (OS/2.based Enables authorized caregivers to review and complete charts
Workstation
MAXIVIEW........................ Diagnostic Image Graphics An advanced imaging and graphic workstation that enables
Workstation two- and three-dimensional image processing
PACSPLUS+....................... Diagnostic.Image Enables physicians and caregivers to access and review
Management and images from local and remote locations
Distribution System
CLINICAL INFORMATION SYSTEMS
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COPATH ......................... Anatomic Pathology System Manages clerical and administrative functions of
cytology/pathology department
MAXIFILE........................ Radiology Information Manages clerical and administrative functions of radiology
System department including patient scheduling and film tracking
OPTIMA (3)...................... Radiology Mammography Manages clerical and administrative functions for
Manager mammography services
LABPRO 2000..................... Laboratory Manages clerical and administrative functions in the
Information System laboratory including monitoring and controlling specimens,
ordering, tracking, and results reporting
TRANSFUSION SERVICE MANAGER(2).. Blood Bank System Manages specialized result entry, blood storage, patient
history storage, and product inventory
ANSIRS.......................... Anatomic Pathology System Manages clerical and administrative functions of
cytology/pathology department
MEDSPEAK/RADIOLOGY.............. Continuous Speech An IBM speech recognition solution that enables
Recognition radiologists to create their own diagnostic reports
PHYSICIAN'S WORKSTATION......... Point of care patient record A Wang product that facilitates real time capture of patient
system information
HEALTHPOINT ACS................. Point of care patient record A Healthpoint product that is a clinical information system
system for physicians in both office and hospital ambulatory
settings
NRIDENTITY...................... Fingerprint recognition A National Registry product allowing physicians and other
system authorized users to log-on to systems via fingerprint
recognition
<FN>
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(1) PROFESSIONAL ACCESS FACILITY is an add-on component which may be used only
in conjunction with MEDICAL RECORDSPLUS.
(2) TRANSFUSION SERVICE MANAGER is an add-on component which may be used only
in conjunction with LABPRO 2000.
(3) OPTIMA is an add-on component which may be used only in conjunction with
MAXIFILE.
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</FN>
</TABLE>
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ELECTRONIC HEALTH RECORD AND IMAGING SOLUTIONS
DYNAMICVISION is the Company's electronic health record solution, is a
universal, clinical workstation which provides enterprisewide connectivity
through a master patient index to systems and data repositories existing in the
healthcare environment, giving physicians, caregivers and other authorized
individuals prompt and simultaneous access to both current and historical health
information. DYNAMICVISION enables physicians, clinicians and other technical
professionals to: (i) view records, report results and worklist assignments;
(ii) display and manipulate document and diagnostic images; (iii) handle the
analysis and assignment of chart deficiencies and electronically sign records;
(iv) play video and audio recordings; and (v) participate in video
consultations. DYNAMICVISION provides business process and workflow automation
that streamlines the flow of tasks and information throughout an enterprise. In
addition, system administration capabilities include security profiling and
specific permissions for the enterprise. DYNAMICVISION provides the connectivity
and enabling technologies that integrate Dynamic's imaging and clinical
information systems, as well as those from other companies, into a virtual
healthcare information systems environment.
MEDICAL RECORDSPLUS is an industry leading, enterprise-wide document imaging
solution based on IBM's ImagePlus/400 image processing system. MEDICAL
RECORDSPLUS gathers information from scanned or faxed paper documents or
directly from existing provider systems which enables physicians, medical
records personnel and other authorized individuals to access centralized
electronic health record information operating on IBM AS/400.
PROFESSIONAL ACCESS FACILITY is an OS/2 based clinical workstation which is used
with MEDICAL RECORDSPLUS to enable physicians, clinicians and other technical
professionals to view records and worklist assignments, display and manipulate
document images, handle the analysis and assignment of record deficiencies and
electronically sign records.
MAXIVIEW is an advanced imaging and graphics workstation which accommodates two-
and three-dimensional image processing and is compatible with imaging equipment
from all major manufacturers. It enables a physician to observe
interrelationships of soft tissue and bone, precisely locate lesions and tumors
and perform a variety of measurements. See "Government Regulation."
PACSPLUS+ is an enterprise-wide, diagnostic image management and distribution
system. It provides physicians and caregivers local and remote access to review
quality or diagnostic quality images from cost effective, standard workstations.
PACSPLUS+ provides remote access to diagnostic images across a network already
functioning at the customer's location.
CLINICAL INFORMATION SYSTEMS
COPATH(/registered trademark/) Anatomic Pathology Information System provides
pathology departments with a complete clinical solution that incorporates text,
voice, images, and multi-media capabilities by integrating a Microsoft Windows
GUI with a Sybase relational database. Unique system tools enable users to
customize their report formats as well as specimen data entry windows. A library
of management reports tracks daily workflow requirements, monthly statistics,
CLIA compliance, and billing. Diagnosis coding follows either SNOMED
International or SNOMED II. Reports can be signed out electronically and
automatically faxed to multiple locations within the enterprise. CoPath
Client/Server configurations are available on IBM RS/6000, Intel NT, or DEC
Alpha NT servers, with Microsoft Windows 95 or Windows NT clients.
MAXIFILE is a radiology information system that computerizes the clerical and
administrative functions of the radiology department. Modular in design,
MAXIFILE applications include patient scheduling and tracking, film management,
statistical reporting, quality control and patient billing. MAXIFILE schedules
patient appointments and automatically generates documents which are available
when the patient arrives. The system monitors the patient throughout the
radiology process and offers time and status reports. Film management tracks
film movement among departments, film libraries, clinics and off-site locations.
Diagnostic reports can be approved electronically and then printed, communicated
via a network or automatically faxed through MAXIFILE'S AutoFAX capability.
Primary markets include hospitals, clinics and independent diagnostic imaging
centers.
OPTIMA is a radiology mammography manager which performs clerical and
administrative functions for mammography services, including American College of
Radiology ("ACR") compliance. OPTIMA may be used only in conjunction with
MAXIFILE. OPTIMA includes an on-line patient history, including breast diagrams,
and supports ACR standards of compliance.
LABPRO 2000 is a clerical and administrative laboratory information system that
allows the laboratory to monitor and control the flow of specimens through the
department. It computerizes the process of ordering, tracking and reporting
results of procedures performed by the clinical laboratory. Patient and
management reporting capabilities provide support for diagnostic and therapeutic
decision making. Multiple LABPRO 2000 laboratory systems may be linked,
providing economies of scale through specialized testing stations.
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TRANSFUSION SERVICES MANAGER is a blood bank system which manages specialized
blood test result entries, blood product inventory, blood storage and patient
transfusion histories. TRANSFUSION SERVICE MANAGER may be used only in
conjunction with LABPRO 2000. In addition, management reports enable the
department to evaluate the effectiveness of transfusion services provided.
TRANSFUSION SERVICE MANAGER is an FDA regulated product for which approval is
pending. See "Government Regulation."
ANSIRS is an anatomic pathology system that functions independently, or
interfaced with LABPRO 2000, to manage clerical and administrative functions
within cytology/pathology departments. ANSIRS provides on-line workstation
access for cytologists/histologists, medical secretaries and pathologists. Major
functional areas include report transcription and word processing, quality
assurance, regulatory requirements and on-line access to patient history.
MEDSPEAK/RADIOLOGY, IBM's MedSpeak/Radiology Continuous Voice Recognition
Solution in conjunction with our suite of radiology products lets the
radiologist speak continuously and at a natural pace, with the text appearing
instantaneously on the screen. With little or no special training on the system,
radiologists can dramatically reduce the time and cost of radiology report
generation.
PHYSICIAN'S WORKSTATION, a Wang product, is a scaleable, point-of-care patient
record application designed by physicians and intended to be incorporated into
the Company's systems solutions. It communicates with existing information
systems to provide for the real-time capture of clinical and administrative
information and build a comprehensive patient health record. Information can be
scanned, received by fax or updated by the physician during the delivery of
care.
HEALTHPOINT ACS is a Windows-based clinical information systems for physicians
in both office and hospital ambulatory settings. HealthPoint ACS is designed to
help caregivers enhance the quality of patient care and reduce healthcare costs.
The software is used at the point of care to document the patient visit, improve
workflow, and provide physicians with an effective tool to analyze their medical
practice, enabling them to improve the quality and cost of care by better
understanding their patient population and measuring the impact of interventions
on diseases.
NRIDENTITY, NRI's finger imaging technology enables an authorized individual to
log on to DYNAMICVISION with the touch of a finger. This action compares the
finger image to a previously recorded and stored "finger print", bringing
systems security to a new level.
CONSULTING, SYSTEMS INTEGRATION AND OTHER SERVICES
The Company provides a full range of professional consulting services including
project management, implementation planning, training and education. The
Company's technical services includes network design, implementation and
support, custom software development, interfaces and modifications and systems
integration. The Company also provides support services including 24 hour
telephone support, and software maintenance and enhancements.
RESEARCH AND DEVELOPMENT
The Company's research and development program is designed to extend the
capabilities of existing products and develop new healthcare application
solutions. The Company believes that a substantial and sustained commitment to
product development is important to the long term success of its business. As of
March 15, 1997, 61 professional employees were engaged in research and
development activities. During the years ended December 31, 1994, 1995 and 1996,
the Company spent $2,068,000, $1,862,000 and $2,860,000 respectively, on
research and development. The Company's research and development is influenced
by customer input and user group forums. Currently, the Company's research and
development efforts are primarily focused on the DYNAMICVISION, OPEN IMAGE
SERVER, MAXIFILE C/S, COPATH C/S, PACSPLUS+ and MONITRAX product lines.
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MAJOR CLIENTS
The Company does not have a dependence on any single customer the loss of which
would have a material adverse effect. The Company does generate revenue almost
exclusively through sales to the healthcare industry located in the United
States. Due to this concentration, substantially all receivables of the Company
are from healthcare institutions which may be similarly affected by changes in
economic, regulatory or other industry related conditions. The Company currently
has approximately 550 customers. The majority of these customers are located
within the United States.
BACKLOG
The Company had contracts which it believed to be firm for the delivery of
systems and services ("backlog"), totaling approximately $8.7 million on March
20, 1997, compared to $2.6 million on March 22, 1996. In addition, the Company
as of March 10, 1997 has contracts for the delivery of software support services
billable at an annual rate of $11 million, compared to $4 million as of March
22, 1996.
STRATEGIC RELATIONSHIPS
The Company has entered into strategic relationships with several leading
technology developers, to gain access to certain technologies that are
integrated into the Company's systems. In addition, through these strategic
relationships the Company is able to cross-market its internally developed or
acquired technologies to customers of its business partners.
IBM - The Company has a non-exclusive agreement with IBM to market, support and
enhance MEDICAL RECORDSPLUS. The Company is responsible for providing
maintenance, support, product shipment and product enhancements and offers
customers a wide range of additional services including telephone and remote
diagnostic assistance, problem resolution, implementation, training and
consulting services. A fee based on IBM's then current list price, less certain
allowances, is paid by the Company for licenses sold by the Company. IBM has
retained the right to market the product and, pursuant to the terms of the
agreement, pays a license fee to the Company for sales of the product by IBM.
The Company is also a IBM re-marketer.
WANG - The Company has non-exclusive agreements with Wang. This relationship
provides open systems, core imaging technology and business process automation
capabilities to the Company through Wang's suite of OPEN/software products which
includes OPEN/image, OPEN/workflow, and OPEN/COLDPLUS. In addition, PHYSICIAN'S
WORKSTATION provides the Company with a scaleable, point-of-care patient record
application which facilitates the real-time capture of clinical and
administrative information and the construction of a comprehensive patient
health record.
DICTAPHONE - The Company has a multi-media technology sharing and marketing
alliance with Dictaphone Corporation of Stratford, CT, enabling it to
incorporate Dictaphone's Integrated Voice and Data Management ("IVDM")
technologies into the Company's suite of healthcare information systems. The
integration of IVDM capabilities into DynamicVision creates a comprehensive
voice, text, data and imaging workstation.
THE NATIONAL REGISTRY - The Company has a marketing agreement with The National
Registry, Inc. ("NRI") of St. Petersburg, FL, which brings "The Power of
Positive Identification(/trademark/)" to DynamicVision. NRI's finger imaging
technology enables an authorized individual to log on to DYNAMICVISION with the
touch of a finger. This action compares the finger image to a previously
recorded and stored "finger print", bringing systems security to a new level.
IBM MED/SPEAK RADIOLOGY - The Company has integrated IBM(/registered trademark/)
Med/Speak Radiology(/trademark/) solution into its Maxifile(/registered
trademark/) radiology information system. This expands the Maxifile(/registered
trademark/) RIS products functionality to provide continuous speech recognition
for direct dictation of radiology results into a database, bypassing the need
for transcription of diagnostic reports. Continuous speech recognition allows
radiologists to dictate at normal rates of speech for instantaneous report
production, with little or no time lapse between the spoken and typed word.
HEALTHPOINT - The Company is authorized to sell, implement, train and support
HealthPoint ACS(/trademark/), an advanced clinical system for the office-based
physician in the ambulatory setting. HealthPoint ACS(/trademark/) is used in the
physicians' offices at the point of care to document the patient visit, improve
workflow and facilitate practice analysis.
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DIGITAL EQUIPMENT CORPORATION - The Company is an Association of Software and
Application Partner ("ASAP") with Digital Equipment Corporation.
MICROSOFT - The Company is a Microsoft Solution Provider ("MSP"). Through this
program Microsoft works with the Company to provide information, tools, and
business development assistance in implementing the successful use of Microsoft
Solutions Platform products such as Windows 95 and NT.
POWERSOFT - The Company is a Commerical Application Partner ("CAP") with
Powersoft Corporation. CAPs are in the business of developing, marketing and
licensing computer application programs to end-user customers.
SYBASE - The Company is an Open Solutions(TM) Partner with Sybase Corporation.
This partnership enables Dynamic and Sybase to deliver enterprise client/server
solutions.
SALES AND MARKETING
As of March 15, 1997, the Company had twenty four sales representatives
reporting to four regional sales managers whom report to the Vice President of
Sales. The compensation of the Company's sales employees is substantially
dependent on the achievement of individual sales targets. In addition, a ten
person sales support group provides telemarketing, proposal development,
demonstration coordination and administrative support. The Company's marketing
department consists of thirteen individuals who develop product competitive
analyses, sales collateral, audio and video products and coordinate trade shows,
advertising and public relations activities.
The Company's sales cycle is typically six to eighteen months and includes
several steps: (i) initial contact and qualification; (ii) development of
proposal in response to request for a proposal or direct sales lead; (iii)
business problem requirements definition; (iv) product demonstrations; (v) site
visits; and (vi) contract preparation and negotiations. Members of the Company's
professional services, product management and sales support departments, and
members of executive management assist the sales force in completing the
proposal, conducting demonstrations and analyzing the requirements. In support
of the sales efforts, the Company advertises in trade journals, participates in
trade shows, publishes articles and provides speakers for industry shows and
conferences. In addition, the Company receives qualified leads as well as
support in proposal development, demonstrations and site visits from its
strategic business partners, which include IBM, Wang, Dictaphone, HealthPoint,
NRI and other.
CUSTOMERS
The Company currently supports over 550 customers the majority of which are
located in the United States. The Company generates revenues almost exclusively
through sales to the healthcare industry located in the United States. Due to
this concentration, substantially all receivables of the Company are from
healthcare institutions which may be similarly affected by changes in economic,
regulatory or other industry related conditions. Key customers include the UCLA
Medical Center, Methodist Hospital of Memphis, Orlando Regional Health System,
Ohio State University Hospital, University of Pittsburgh, Temple University
Hospital, University of Illinois at Chicago Medical Center, Memorial
Sloan-Kettering Cancer Center, Advocate Health Care, Greater Dayton Area
Hospital Association, The Mayo Clinic and UniHealth.
COMPETITION
The market for information technology in the healthcare industry is intensely
competitive. Many of the Company's competitors have significantly greater
financial, research and development, technical and marketing resources than the
Company. Competitors vary in size and in the scope and breadth of the products
and services they offer. The Company's systems compete both with other
technologies and with similar systems developed by other companies. Other major
information management companies, including the companies with whom the Company
has strategic relationships, may enter the markets in which the Company
competes. Competitive pressures and other factors, such as new system
introductions by the Company's competitors, may result in significant pricing
pressures that could have a material adverse effect on the Company. In addition,
in the professional and technical consulting segment, the Company competes with
the consulting divisions of national accounting firms as well as national and
regional healthcare specialty consulting firms. The Company does not have a
dependence on any single customer the loss of which would have a material
adverse effect.
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GOVERNMENT REGULATION
The United States Food and Drug Administration ("FDA") has issued a draft
guidance document addressing the regulation of certain computer products as
devices under the Federal Food, Drug and Cosmetic Act ("FFDCA"). To the extent
that computer software is classified as a device under applicable regulations,
the manufacturers of such products could be required, depending upon the
product, to: (i) register and list their products with the FDA, (ii) notify the
FDA and demonstrate substantial equivalence to other products on the market
before marketing such products or (iii) obtain FDA clearance by filing a
pre-market application that establishes the safety and effectiveness of the
product. The Company has two products considered devices under the FFDCA:
MAXIVIEW and TRANSFUSION SERVICE MANAGER. As a result of the characterization of
certain of the Company's products as devices, the Company's manufacturing
facilities are registered with the FDA and its manufacturing operations
regarding devices are required to be in compliance with the FDA's rules and
regulations. The FDA conducted on-site inspections at the Maitland facility in
May 1996 and at the Minnetonka facility in June 1996. Both inspections were
concluded without incident. There can be no assurance that the Company will
ultimately be able to obtain or maintain required FDA approvals to market its
products. Of the Company's two regulated products, MAXIVIEW cleared as
substantially equivalent to a predicate device by the FDA in December 1995 and
the submission pursuant to Code of Federal Regulations Section 510(k) to
demonstrate substantial equivalence for the Transfusion Service Manager was
submitted to the FDA in March 1996 and is pending.
INTELLECTUAL PROPERTY
The Company primarily relies upon trade secrets, copyright laws and
confidentiality agreements with employees and customers to protect its rights in
its software technology. The Company does not hold any patents nor has it filed
copyrights with respect to any of its software technology. Due to the rapid pace
of innovation within the software industry, the Company believes that patent,
trade secret and copyright protection are less significant than the Company's
ability to further develop, enhance and modify its current products and other
clinical information systems through the technology and creative skills of its
personnel. To minimize the possibility of third parties imitating the Company's
systems, the Company only licenses object code and does not license or otherwise
distribute source code.
The Company's employees are required to enter into confidentiality agreements
which prohibit the disclosure of confidential information and require employees
to report and assign to the Company all concepts, developments, discoveries and
inventions conceived during their employment.
The Company has federal trademark registration for MAXIFILE(registered
trademark/) and COPATH(/registered trademark/), and has applied for federal
trademark registration for DYNAMICVISION, MONITRAX, PACSPLUS+, ASAP, OPTIMA and
MAXIVIEW.
There can be no assurance that the legal protections and precautions taken by
the Company will be adequate to prevent misappropriation of the Company's
technology. In addition, these protections do not prevent independent
third-party development of functionally equivalent or superior technologies or
services. The Company does not believe that its operations or products infringe
on the intellectual property rights of others. There can be no assurance that
others will not assert infringement or trade secret claims against the Company
with respect to its current or future products or that the Company will be
successful in defending any such claim.
EMPLOYEES
As of March 15, 1997, the Company had 251 full time employees, of which 61 were
employed in research and development, 119 in client services, 31 in general and
administrative and 40 in sales and marketing. None of the Company's employees is
represented by a labor union or subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and believes that its employee
relations are good.
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FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This report, and other reports, proxy statements and other communications to
stockholders, as well as oral statements made by representatives of the Company,
may contain forward-looking statements and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission, that
are subject to risks and uncertainties, including, but not limited to, the
impact of competitive products and pricing product demand and market acceptance,
new product development, reliance on key strategic alliances, availability of
products procured from third party vendors, the healthcare regulatory
environment, fluctuations in operating results and with respect to, among other
things the Company's future revenues, operating income and earnings per share,
as well as plans and objectives of management. The following are some, but not
necessarily all, of the factors that may cause the Company's actual results to
vary materially from those which are the subject of any such forward-looking
statements.
An important element of the Company's business strategy has been and will
continue to be expansion through acquisitions, both to extend its customer base
and to acquire strategic technology. The Company's ability to expand
successfully through acquisitions depends on many factors including the
identification of appropriate acquisition opportunities, negotiation of suitable
terms and management's ability to effectively integrate and operate the acquired
businesses. The Company competes for acquisitions with other companies, certain
of which have significantly greater financial and management resources. The
Company's financial performance will be subject to the risks of the performance
of the acquired businesses as well as the financial effects associated with
integration of such businesses.
The healthcare industry is subject to changing political, economic and
regulatory influences, many of which relate to control of healthcare costs. Such
changes may affect operational aspects of the healthcare industry, including
procurement practices and the availability and/or allocation of capital funds,
which could result in greater selectivity, thus adversely impacting the
Company's ability to sell its products. The Company cannot predict with any
certainty what impact, if any, future regulation or healthcare reform might have
on its results of operations, financial condition or business.
While the Company maintains insurance protecting against certain asserted
claims, there can be no assurance that its insurance coverage would adequately
cover any such claims asserted against the Company.
Competition in the Company's industry is subject to continual change in not only
the products and services offered but also in the manner in which vendors are
selected by customers. Accordingly, the Company's continued success will be
dependent on its ability to develop new products and services on a timely basis
and at competitive prices.
The Company must anticipate and adapt to evolving industry standards and new
technological developments. The market for the Company's products is
characterized by continued and rapid technological advances. The Company's
future success will depend in part on its ability to be responsive to these
technological developments and challenges, which could also lower the cost of
products and services or otherwise result in competitive pricing pressures.
The Company relies on a combination of trade secret, copyright and trademark
laws, together with nondisclosure, other contractual provisions and technical
measures to protect its proprietary rights in its products. There can be no
assurance that these protections will be adequate or that the Company
competitors will not independently develop technologies that are equivalent or
superior to the Company's technology. Although the Company believes that its
products and other proprietary rights do not infringe upon the proprietary
rights of third parties, there can be no assurance that third parties will not
assert infringement claims against the Company in the future.
The stock market has, from time to time, experienced extreme price and volume
fluctuations, particularly in the high technology sector, which have often been
unrelated to the operating performance of particular companies. The Company
experiences fluctuations in its stock price related to these general market
swings as well as announcements of technological innovations, new product
introductions by the Company or its competitors, market conditions in the
computer software or hardware industries and healthcare reform measures. These
fluctuations may adversely effect the Company's ability to make acquisitions
utilizing its stock.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 101 Southhall Lane, Suite
210, in Maitland, Florida 32751. The Maitland location consists of approximately
23,600 square feet of office space under a lease which expires March 31, 1999.
The Company also maintains an office at 10901 Bren Road East, Minnetonka,
Minnesota 55343 (the former Dimensional Medicine, Inc. facility) as the
Company's radiology technology center. The Minnetonka location consist of
approximately 13,000 square feet under lease which expires on July 31, 1999. In
addition, the Company also maintains an office at Two University Office Park, 51
Sawyer Road, Waltham, Massachusetts, 02154 (the former Collaborative Medical
Systems, Inc. facility) as the Company's clinical solutions center. The Waltham
location consist of approximately 30,000 square feet under lease which expires
on November 30, 1999. The Company considers its existing facilities to be
adequate for its foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
In February 1996, the Company instituted an action against James A. Terrano
("Terrano"), the Company's former President and Chief Executive Officer, in the
District Court of Lancaster County, Nebraska, alleging that Terrano (i) made
fraudulent and negligent representations to the Company's Board of Directors,
which resulted in the Company's acceptance of a handwritten memorandum modifying
Terrano's employment agreement, (ii) breached his fiduciary duty to the Company
and (iii) breached his obligations under his employment agreement with the
Company. The Company is seeking to recover damages in the amount of at least
$50,000 in addition to the declaratory judgment determining that no severance
pay is due Mr. Terrano and that the handwritten memorandum is invalid and
unenforceable and does not modify the employment agreement. Mr. Terrano has
counter-claimed that he has been defamed by the Company. The Company is a
defendant in an action in which Mr. Terrano has a demand for $280,000 in
severance pay together with two years worth of benefits unquantified to include
the use of an automobile, club dues and insurance policies. The Company is
vigorously contesting this case.
The Company is a defendant in an action filed by a former Vice-President in
March, 1995 in the District Court of Lancaster County, Nebraska, alleging that
the Company did not lawfully terminate her for cause, and, therefore, breached
her employment agreement. The former employee is seeking severance payment. The
Company is vigorously contesting this case.
The above cases are in the early stages of discovery and it is not possible to
evaluate the likelihood of a favorable or unfavorable outcome of either case at
this time. As of the date hereof, there are no other material legal proceedings
pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 1996.
12
<PAGE>
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The information called for by this item is incorporated herein by
reference from page fifty-five (55) of Exhibit 13 to this Form 10-K.
(b) As of March 10, 1997, there were approximately 4,950 shareholders of the
Company's Common Stock.
(c) The Company has declared no cash dividends on its common stock since its
inception and plans to continue to invest all earnings back into the
Company in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference from
page 25 of Exhibit 13 to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference from
page 26 through page 33 of Exhibit 13 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference from
page 34 through page 56 of Exhibit 13 to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item is incorporated by reference to the
February 14, 1995 Form 8-KA filed by the Company. There have been no changes in
and/or disagreements with accountants on accounting and/or financial disclosures
since February 14, 1995.
13
<PAGE>
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
14
<PAGE>
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS
-Independent Auditors' Report on the financial statements.
-Balance Sheets as of December 31, 1995 and 1996.
-Statements of Operations for the years ended December 31, 1994, 199
and 1996.
-Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996.
-Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996.
-Notes to Financial Statements.
The Financial Statements listed above are all incorporated by reference to pages
34 through 56 of Exhibit 13 to this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
INDEX SCHEDULE NO. PAGE NO.
Independent Auditors' Report on Financial
Statement Schedule --- 16
Valuation and Qualifying Accounts II 17
All other schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes
thereto.
3. EXHIBITS
Exhibit 11: Statement regarding computation of per share earnings.
Exhibit 13: 1996 Annual Report to Security Holders.
Exhibit 27: Financial Data Schedule
(b) The following report on Form 8-K was filed by the Registrant during the
quarter ended December 31, 1996:
ITEM REPORTED DATE OF REPORT
------------- --------------
Acquisition of Collaborative Medical
Systems, Inc. December 17, 1996
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Dynamic Healthcare Technologies, Inc.:
Under date of March 17, 1997, we reported on the consolidated balance sheets of
Dynamic Healthcare Technologies, Inc. as of December 31, 1995 and 1996 and the
related statements of operations, shareholders' equity and cash flows for the
years ended December 31, 1994, 1995 and 1996, as contained in the annual report
on Form 10-K for the year 1996. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related 1994, 1995 and 1996 information in the consolidated financial statement
schedule as listed in the accompanying index. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the 1994, 1995 and 1996 information
in this consolidated financial statement schedule based on our audits.
In our opinion, such 1994, 1995 and 1996 information in the consolidated
financial statement schedule, when considered in relation to the basic 1994,
1995 and 1996 consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/KPMG PEAT MARWICK LLP
------------------------
KPMG PEAT MARWICK LLP
Orlando, Florida
March 17, 1997
16
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SCHEDULE II
BALANCE AT CHARGED TO WRITE-OFFS, BALANCE AT
BEGINNING COSTS AND RETIREMENTS END OF
DESCRIPTION OF YEAR EXPENSES & COLLECTIONS YEAR
----------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Allowance for Doubtful Accounts
Receivable $ 189,672 $ 179,409 $119,081 $ 250,000
Accumulated Amortization of Capitalized
Software Development Costs $ 843,537 $ 505,613 $ 76,055 $1,273,095
YEAR ENDED DECEMBER 31, 1995:
Allowance for Doubtful Accounts
Receivable $ 250,000 $(12,498) $ 96,665 $ 140,837
Accumulated Amortization of Capitalized
Software Development Costs $1,273,095 $ 562,606 $ -- $1,835,701
YEAR ENDED DECEMBER 31, 1996:
Allowance for Doubtful Accounts
Receivable $ 140,837 $ 222,902 $ 37,637 $ 326,102
Accumulated Amortization of Capitalized $1,835,701 $ 883,675 $ -- $2,719,376
Software Development Costs
</TABLE>
17
<PAGE>
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Commission File No. 0-12516
IRS E.I.N. 59-3389871
By /s/PAUL S. GLOVER Date MARCH 25, 1997
----------------- --------------
Paul S. Glover, Vice President of Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/DAVID M. POMERANCE Chairman of the Board MARCH 25, 1997
- -----------------------
David M. Pomerance
/s/MITCHEL J. LASKEY President, CEO, Treasurer & MARCH 25, 1997
- ----------------------- Director
Mitchel J. Laskey
/s/PAUL S. GLOVER Vice President of Finance, CFO MARCH 25, 1997
- ------------------------
Paul S. Glover
/s/JERRY L. CARSON Director MARCH 25, 1997
- ------------------------
Jerry L. Carson
/s/THOMAS J. MARTINSON Director MARCH 25, 1997
- ------------------------
Thomas J. Martinson
/s/BRET R. MAXWELL Director MARCH 25, 1997
- ------------------------
Bret R. Maxwell
/s/DANIEL RAYNOR Director MARCH 25, 1997
- ------------------------
Daniel Raynor
/s/RICHARD W. TRUELICK Director MARCH 25, 1997
- ------------------------
Richard W. Truelick
18
<PAGE>
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
PAGE
DESCRIPTION OF EXHIBITS NUMBER
Exhibit 11 Statement regarding computation of per share
earnings. 20
Exhibit 13 Annual Report to Shareholders of Dynamic Healthcare
Technologies, Inc. for the fiscal year ended
December 31, 1996. 22
Exhibit 27 Financial Data Schedule
19
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
EXHIBIT 11
STATEMENT REGARDING
COMPUTATION OF
PER SHARE EARNINGS
20
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
COMPUTATION OF WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
AND
EARNINGS PER SHARE FOR THE YEARS ENDED
DECEMBER 31, 1994, 1995 AND 1996
YEARS ENDED DECEMBER 31,
1994 1995 1996
----------- ---------- ------------
<S> <C> <C> <C>
Earnings (loss) available for common shareholders:
Net earnings (loss) $(4,307,500) $ (512,623) $(15,151,342)
Preferred stock dividends -- (24,844) (251,037)
----------- ---------- ------------
Earnings (loss) available for common shareholders $(4,307,500) $ (537,467) $(15,402,379)
=========== ========== ============
Weighted average common and common equivalent
shares outstanding:
Primary: 5,536,202 6,443,294 8,974,775
Weighted average number of common shares
outstanding
Dilutive effect of options and warrants
using average market price -- -- --
----------- ---------- ------------
Weighted average common and common
equivalent shares outstanding 5,536,202 6,443,294 8,974,775
=========== ========== ============
Fully diluted:
Weighted average number of common shares
outstanding 5,536,202 6,443,294 8,974,775
Dilutive effect of options and warrants
using the greater of average market
price or period end market price -- -- --
----------- ---------- ------------
Weighted average common and common equivalent
shares outstanding assuming full dilution 5,536,202 6,443,294 8,974,775
=========== ========== ============
Earnings (loss) per share primary and fully diluted: $ (0.78) $ (0.08) $ (1.72)
=========== ========== ============
</TABLE>
21
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
OF DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
22
<PAGE>
OUTSIDE FRONT COVER
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
1996 ANNUAL REPORT
23
<PAGE>
INSIDE FRONT COVER
Dynamic Healthcare Technologies, Inc. develops, markets, installs and supports
clinical information systems, document image solutions and
DYNAMICVISION(/trademark/), an enterprise-wide, multi-media software and
services solution that integrates health-related data from many sources into a
comprehensive electronic health record.
CONTENTS
Selected Financial Data ................................................
To Our Shareholders ....................................................
Dynamics of the Healthcare Industry ....................................
Management's Discussion and Analysis ...................................
Financial Statements and Notes .........................................
Independent Auditors' Report ...........................................
Board of Directors and Officers ........................................
Shareholders Information ...............................................
24
<PAGE>
SELECTED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS EXCEPT PER SHARE DATA AND CURRENT RATIO)
The following selected financial data for the five years ended December 31,
1996, were derived from the financial statements of Dynamic Healthcare
Technologies, Inc. And subsidiary. These data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
1992 1993 1994 (1) 1995 (1) 1996 (1)(2)
---- ---- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 8,411 $9,688 $ 6,987 $ 8,886 $16,570
Loss from Discontinuance of
Product Line 2,000 - - - -
Restructuring Charge - - 686 - -
Net Earnings (Loss) from (2,118) 246 (4,308) (513) (15,151)
Continuing Operations
Net Earnings (Loss) Per Common Share (0.40) 0.05 (0.78) (0.08) (1.72)
Working Capital 1,215 918 (2,871) 2,776 9,684
Current Ratio 1.45 1.27 .50 1.98 1.94
Total Assets 5,940 6,803 7,000 9,659 30,007
Long-Term Liabilities - - 723 2,770 223
Shareholders' Equity 3,210 3,462 502 4,064 19,486
<FN>
- --------------------------
The Company has declared no cash dividends on common stock since its inception.
(1) Includes the operating results and related financial information since the
acquisition of Dynamic Technical Resources, Inc., accounted for as a
purchase business combination, which occurred on August 23, 1994.
(2) Includes the operating results and related financial information since the
acquisitions of Dimensional Medicine, Inc. ("DMI"), on May 1, 1996 and
Collaborative Medical Systems, Inc. ("CMSI"), on December 17, 1996,
including the non-recurring write off of in-process research and
development of $15,057,569 in connection with the CMSI acquisition. Both
of these acquisitions were accounted for as purchase business
combinations.
</FN>
</TABLE>
25
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's electronic health record product, DYNAMICVISION, provides
connectivity and enabling technologies that integrate clinical and imaging
information systems to create an open architecture, multi-media clinical
workstation. In February 1996, the Company demonstrated DYNAMICVISION at a major
industry trade show. As a direct result of that demonstration, the Company
signed a beta-site agreement with an existing customer. The beta-site
installation commenced in July 1996.
In May 1996, the Company completed the acquisition of Dimensional Medicine, Inc.
("DMI") in order to strategically expand its customer base as well as the
Company's clinical information systems product offerings. The DMI office in
Minnetonka, Minnesota was subsequently converted into the Company's radiology
technology center.
On June 10, 1996, the Company announced the appointment of Nikhil A. Bhatt as
Senior Vice President and Chief Technical Officer. In addition, David M.
Pomerance was named Chairman of the Board and Mitchel J. Laskey was named Chief
Executive Officer in addition to retaining his position as President and
Treasurer.
During the third quarter 1996, the Company's attention was centered on
completing the DMI transition and the combining of the businesses' research and
development, operations, sales, marketing and administrative functions. The
Company also continued the activity begun in the first quarter of 1996 of
significantly intensifying development and the strategic expansion of the sales
and marketing expenses required to launch the new DYNAMICVISION and PACsPlus+
product lines. In July 1996, the Company began beta site installation of
DYNAMICVISION and PACsPlus+ product lines. The Company was pleased to also
announce during the third quarter of 1996 the first enterprise-wide
DYNAMICVISION system sale in the amount of $1,700,000.
On September 27, 1996 the Company's registration of a common stock offering, and
concurrent registration of common stock underlying conversion of the Series A
and Series B preferred stock, were declared effective. On October 2, 1996 the
Company received proceeds of $20,942,000 from the issuance of 3,892,500 shares
of common stock, and exercised the mandatory conversion privilege available to
the Company converting all of the previously outstanding preferred stock to
common stock.
In addition, on October 30, 1996 the underwriters exercised their options to
cover over-allotments made in connection with the common stock offering. Upon
exercise, the Company received additional proceeds of $2,377,960 from the
issuance of 442,000 shares of common stock.
On December 17, 1996 the Company issued 1,000,000 common shares and 6,000 Series
CM Preferred shares to acquire Collaborative Medical Systems, Inc. ("CMSI").
This acquisition provides the Company with the ability to expand its clinical
information systems product offerings, including the CoPath Pathology
Information Systems. In connection with the CMSI acquisition, the Company took a
non-recurring charge of $15,058,000 for in-process research and development.
This acquisition increases the Company's customer base to over 550 customers and
increases annualized recurring support revenues to in excess of $11 million.
26
<PAGE>
OVERVIEW
The Company's revenues are derived from (i) computer equipment sales and
support, (ii) application software licenses, (iii) software support and (iv)
services and other revenues. The Company generally recognizes revenues from
computer equipment sales at the time the products are 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 and 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 project management, training, consulting, custom programming
services, post-contract support obligations and others services, which are
provided under separate contract and are recognized as services are performed.
Revenue from professional services and maintenance and support services
typically increase as the number of installed systems increases.
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 expensed
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
cost 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. Based on the customer's implementation plan, product delivery may take
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 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 agreement, a hardware
installment payment upon delivery of hardware, installation progress payments
upon the completion of defined milestones and final payment, which may vary with
each contract.
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for each of the periods indicated, certain
selected statement of operations data expressed as a percentage of revenue:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Operating revenues:
Computer system equipment sales and support..... 26.8% 12.4% 21.9%
Application software licenses................... 26.5 27.3 30.8
Software support................................ 36.5 42.0 31.4
Service and other............................... 10.2 18.3 15.9
----- ----- -----
Total operating revenues............... 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of products sold........................... 22.1 9.9 19.8
Client services expenses........................ 37.2 31.8 31.1
Software development costs...................... 25.4 18.5 14.2
Sales and marketing............................. 24.6 21.7 22.3
General and administrative...................... 31.8 19.9 13.4
In-process research and development............. -- -- 90.9
Restructuring costs............................. 9.8 -- --
----- ----- -----
Total costs and expenses................ 150.9 101.8 191.7
----- ----- -----
Operating income (loss)........................... (50.9) (1.8) (91.7)
Other income (expense)............................ (10.7) 4.0) .3
------ ----- -----
Net earnings (loss)............................... (61.6)% (5.8)% (91.4)%
====== ===== =====
</TABLE>
28
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUES. The Company's total consolidated operating revenues were
$16,570,000 for the year ended December 31, 1996, as compared to $8,886,000 for
the corresponding period in 1995, representing an increase of $7,684,000 or
86.5%. This revenue increase was attributable to the inclusion of $5,182,000 in
revenues from radiology systems sales resulting from the May 1996 acquisition of
Dimensional Medicine, Inc. ("DMI"), and $871,000 in revenues from anatomic
pathology system sales resulting from the December 1996 acquisition of
Collaborative Medical Systems, Inc. The balance of this increase was principally
attributable to $3,645,000 in revenues from imaging system sales resulting from
the introduction in 1996 of the Company's new DYNAMICVISION product line, which
more than offset the $2,414,000 decline in revenues from laboratory information
system ("LIS") sales.
Computer system equipment sales and support revenues were $3,629,000 during
the year ended December 31, 1996 as compared to $1,101,000 for the same period
in 1995, representing an increase of $2,528,000 or 230%. This increase was
primarily attributed to growth from imaging, radiology and pathology system
sales. The Company anticipates a continued higher involvement in the delivery of
computer hardware to customers in connection with the DYNAMICVISION, pathology,
and radiology product lines due to the relative complexities associated with the
installation process as well as the Company's strategy of offering a sole source
solution to its customers.
Application software license revenues were $5,099,000 for 1996, as compared
to $2,429,000 for 1995, representing an increase of $2,670,000 or 110%. The
Company had no new LabPro 2000 systems sales during 1996. LabPro 2000
installations during 1996 consisted solely of migrations converting from the
prime computer platform to the IBM AS/400 platform, for which the Company did
not charge any application license fees. As a result, LIS application software
license revenues declined by approximately $1,591,000. However, during 1996,
$2,360,000 of radiology system application license revenues were recognized,
$1,361,000 of imaging software revenues were recognized, and $597,000 of
pathology software revenues were recognized, with no such corresponding revenues
recognized in 1995.
Software support revenues were $5,205,000 for 1996, as compared to $3,731,000
for 1995, representing an increase of $1,474,000 or 39.5%. This increase was
primarily due to radiology systems support revenues of $992,000 resulting from
the acquisition of DMI. Continued successful clinical system installations also
increased software support revenues.
Services and other revenues for 1996 were $2,637,000, as compared to
$1,625,000 for 1995, representing an increase of $1,012,000 or 62.3%. This
increase was primarily attributable to a shift of resources to billable
professional services from non-billable customer support stabilization
undertaken as part of the Restructuring Plan in 1995, as well as additional
revenues from professional services efforts related to complex systems
integrations and implementations.
COST OF PRODUCTS SOLD. The cost of products sold was $3,281,000 for 1996, as
compared to $881,000 for 1995, representing an increase of $2,400,000 or 272.4%.
This increase was primarily attributable to a higher percentage of hardware
revenues in 1996, the payment of approximately $381,000 of licensing fees to IBM
in connection with imaging software application revenues and the inclusion of
third party software products in radiology and pathology system sales.
CLIENT SERVICES EXPENSES. Client services expenses were $5,154,000 in 1996 as
compared to $2,825,000 in 1995, an increase of $2,329,000 or 82.4%. This
increase was primarily the result of client services expenses attributable to
the radiology product line acquired in 1996, and increased professional staffing
in anticipation of professional services requirements associated with the
related consolidation of DMI and Collaborative Medical Systems Corp. ("CoMed"),
and the general availability of DYNAMICVISION and PACsPlus+.
29
<PAGE>
SOFTWARE DEVELOPMENT. Software development costs were $2,355,000 for 1996, as
compared to $1,643,000 for 1995, representing an increase of $712,000 or 43.3%.
During 1996 $1,389,000 of software development costs were capitalized, as
compared to $796,000 in 1995, representing an increase of $593,000 principally
due to intensified activity on DYNAMICVISION and PACsPlus+. However, the
consolidation of the DMI development personnel and amortization of $229,000 in
1996 attributable to the acquisition of the radiology product line resulted in
the increased software development costs.
SALES AND MARKETING EXPENSES. The Company's sales and marketing expenses were
$3,706,000 for 1996, as compared to $1,931,000 for 1995, representing an
increase of $1,775,000 or 91.9%. This increase was primarily attributable to
additional sales and marketing personnel hired or employed in anticipation of
the general availability of DYNAMICVISION, PACsPlus+, and inclusion of similar
costs acquired with DMI.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$2,218,000 for 1996, as compared to $1,768,000 for 1995, representing an
increase of $450,000 or 25.5%. Goodwill resulting from the CMSI acquisition
increased amortization by $40,000. The remaining $410,000 increase was incurred
to support the Company's growth including the consolidation of DMI and CoMed.
IN-PROCESS RESEARCH AND DEVELOPMENT. During 1996 a non-recurring charge of
$15,058,000 was taken in connection with the acquisition of CMSI.
OTHER INCOME (EXPENSE). Net other income for 1996 was $50,000, as compared to
a net other expense of ($351,000) for 1995, an improvement of $401,000. Interest
expense and financing costs decreased by $86,000 and interest income increased
by $325,000 primarily as a result of $22,605,000 of net proceeds from a
secondary offering of 4,334,500 shares of common stock received during October
1996.
30
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
OPERATING REVENUES. The Company's total operating revenues for 1995 were
$8,886,000, as compared to $6,987,000 for 1994, representing an increase of
$1,899,000 or 27.2%. Computer system equipment sales and support revenues for
1995 were $1,101,000, as compared to $1,873,000 for 1994, representing a
decrease of $772,00 or 41.2%. Application software licenses revenues for 1995
were $2,429,000, as compared to $1,849,000 for 1994, representing an increase of
$580,000 or 31.4%. Although the Company had fewer system placements of its
laboratory product line during 1995, these variances were primarily the result
of an increased focus on installing software sales contracted for in 1994 which
were completed during 1995. Software support revenues for 1995 were $3,731,000,
as compared to $2,550,000 for 1994, representing an increase of $1,180,000 or
46.3%. The increase was principally attributed to increased laboratory system
installations, the acquisition in August 1994 of Dynamic Technical Resources,
Inc. ("DTR") and revenues associated with a contract with IBM for support of
MEDICAL RECORDSPLUS software installations. Services and other revenues for 1995
were $1,625,000, as compared to $715,000 for 1994, representing an increase of
$910,000 or 127.3%. This increase was primarily attributable to the acquisition
of DTR, which expanded the Company's custom programming, technical consulting
and other professional services revenues.
COST OF PRODUCTS SOLD. The cost of product sold during 1995 was $881,000, as
compared to $1,547,000 during 1994, representing a decrease of $666,000 or
43.1%. This decrease was primarily attributable to a decrease in hardware sales.
CLIENT SERVICES EXPENSES. Client services expenses for 1995 were $2,825,000,
as compared to $2,601,000 for 1994, representing an increase of $224,000 or
8.6%. This increase was primarily attributable to the inclusion of a full year
of related client services expenses for 1995 following the acquisition of DTR in
August 1994.
SOFTWARE DEVELOPMENT COSTS. Software Development costs for 1995 were
$1,643,000, as compared to $1,775,000 for 1994, representing an decrease of
$132,000 or 7.4%. This decrease was principally attributable the effects of
restructuring and the reassignment of the Company's technical personnel to
product delivery and support installation activities. Capitalized software
development activities initially slowed during the restructuring process in
early 1995, but increased at the end of 1995 as a result of development work on
LABPRO 2000, MONITRAX and DYNAMICVISION. Capitalized software expenses were
$796,000 for 1995, as compared to $854,000 for 1994. Software amortization
expenses were $563,000 for 1995, as compared to $506,000 for 1994, reflecting
the inclusion of DTR for the full year.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $1,931,000
for 1995, as compared to $1,717,000 for 1994, representing an increase of
$214,000 or 12.5%. This increase was primarily attributable to an increase in
sales and marketing personnel and associated costs. This increase began in the
fourth quarter of 1995 as a result of the Company's new product introductions.
In addition, during 1995, the Company changed its corporate name and incurred
expenses in developing sales and marketing materials involving its new corporate
image.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
1995 were $1,768,000, as compared to $2,219,000 for 1994, representing a
decrease of $451,000 or 20.3%. This decrease resulted from the centralization of
administrative functions after the DTR merger and a reduction in executive and
administrative salaries and personnel expenses. Amortization of goodwill
increased from $55,000 in 1994 to $155,000 in 1995 in direct proportion to the
periods of amortization occurring each year. As a percentage of total revenues,
general and administrative expenses were 19.9% for 1995, as compared to 31.7%
for 1994.
31
<PAGE>
RESTRUCTURING COSTS. During 1994, $686,000 of restructuring costs were
incurred, as compared to no restructuring costs in 1995. These expenses resulted
from consolidation of sales, marketing, accounting, administration and national
support functions to Orlando, Florida, from Lincoln, Nebraska, as well as the
re-engineering of the laboratory product line. These expenses were recognized in
order to write down assets to net realizable value and to record costs
associated with the Company's Restructuring Plan.
OTHER INCOME (EXPENSE). The Company's total other expense for 1995 was
$351,000, as compared to $748,000 for 1994, representing a decrease of $397,000
or 53.1%. The decrease was attributable to a $610,000 charge to operations in
1994 as a result of the issuance of an additional 610,000 shares of Common
Stock, with a market value of $1.00 per share, as an adjustment to the
consideration paid to former DTR shareholders pursuant to the DTR merger which
the Company's Board of Directors determined was required due to breaches by the
Company of representations and warranties (the "Acquisition Contingency").
Notwithstanding this decrease, interest expense and financing charges for 1995
were $378,000, as compared to $143,000 for 1994, representing an increase of
$235,000 or 164.3%. This increase was primarily attributable to debt financing
required to fund the restructuring plan undertaken in 1995.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $44,000 for 1996. The Company
continues to improve communication between accounting and project management
involved in the billing and collection process. As communication links between
departments has become more real time, unbilled receivables have typically
decreased. The increase in unbilled receivables as of December 31, 1996 is
principally due to the inclusion, for the first time, of radiology system and
pathology system related unbilled receivables, resulting from the 1996
acquisitions of DMI and CMSI, of $1,337,000, and $155,000, respectively.
Additionally, since the CMSI acquisition occurred on December 17, 1996, near the
Company's fiscal year end of December 31, 1996, centralizing the Company's
billing and collection system contributed to a non-acquisition related increase
in unbilled receivables of $1,281,000 and a non-acquisition related reduction in
accounts receivable of $756,000.
Although advance billings increased by $276,000, and $3,352,000 directly as a
result of the acquisition of DMI and CMSI, respectively, operationally advance
billings decreased by $962,000. This principally resulted from the delivery of
pathology systems during the fourth quarter of 1996 that were previously billed
in advance.
Net cash used in investing activities was $10,348,000 for 1996, principally as a
result of the acquisitions of DMI and CMSI. Net cash required by the purchase of
DMI and CMSI were $1,349,000 and $6,591,000, respectively. In addition, the
Company refurbished the DMI facility and continues to purchase office equipment
as personnel increases for sales, marketing, research and development. The
Company also capitalized costs in connection with the continued development of
DYNAMICVISION, PACsPlus+, Monitrax and other projects totaling $1,389,000.
Net cash provided by financing activities for 1996 was $19,345,000 resulting
principally from the secondary stock issuance completed in the fourth quarter,
which generated net proceeds of $22,605,000. The Company paid $276,000 of
preferred dividends during 1996 and $2,800,000 to retire the bank note payable.
As of December 31, 1996 the Company had net operating loss carryforwards for
federal income tax purpose of approximately $10.2 million, which can be used to
offset taxable income in future years. Future equity offerings combined with
sales of the Company's equity during the preceding years may cause changes in
ownership under Section 382 of the Internal Revenue Code of 1986, as amended,
which will limit the use of the Company's net operating loss carryforward
existing as of the date of the ownership change. In the event the Company has
taxable income in the future, a change of ownership under Section 382 may result
in the application of such limitations and could have a material adverse effect
on the Company.
As of December 31, 1996 the Company has cash equivalents of $11,333,000 and
working capital of $9,684,000. The Company intends to continue to enhance its
product and services offerings and to seek market expansion opportunities beyond
the launch of DYNAMICVISION, PACsPlus+, imaging products, Monitrax, Wang,
HealthPoint, Dictaphone, The National Registry, Inc and Sunquest agreements, and
the acquisitions of DMI and CMSI. The Company believes that its cash and cash
equivalents together with cash generated by operations and additional sources of
liquidity, including possible further debt or equity financings, will be
sufficient to fund anticipated cash requirements.
INFLATION AND CHANGING PRICES
The Company believes that the general state of the economy and inflationary
trends have only a limited effect on its business. Historically, inflation has
not had a material effect on the Company. Changing prices of computer hardware
could have a material effect on the cost of materials sold and the related
selling price of software and hardware sales.
33
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,290,366 $11,332,526
Restricted cash (Note B) 50,000 60,000
Accounts receivable, net of allowance for doubtful
accounts of $140,837 and $326,102 in 1995 and
1996, respectively 2,811,711 5,272,754
Unbilled receivables 307,693 1,924,297
Other current assets 141,569 1,391,855
---------- -----------
Total current assets 5,601,339 19,981,432
Property and equipment, net (Note C) 1,119,278 2,582,147
Capitalized software development costs, net of accumulated
amortization of $1,835,701 and $2,719,376 in 1995
and 1996, respectively (Note A) 2,040,727 4,544,963
Goodwill, net of accumulated amortization of $209,479 and
$374,734 at December 31, 1995 and 1996,
respectively (Note A) 873,358 2,478,103
Other assets 24,408 420,400
---------- -----------
$9,659,110 $30,007,045
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note A) 852,515 2,597,141
Deferred revenue 1,818,871 4,543,596
Advance billings 80,260 2,746,474
Bank note payable - current maturities (Note D) 73,285 --
Other -- 410,687
---------- -----------
Total current liabilities 2,824,931 10,297,898
Bank note payable (Note D) 2,726,715 --
Other 43,053 222,682
---------- -----------
Total liabilities 5,594,699 10,520,580
---------- -----------
Shareholders' equity (Note F):
Series A preferred stock, $0.01 par value; authorized
1,055,938 shares; issued and outstanding
968,750 shares as of December 31, 1995 and 0
shares as of December 31, 1996 9,688 --
Series B preferred stock, $0.01 par value, authorized
4,384,375 shares; issued and outstanding
3,750,000 shares as of December 31, 1995 and
0 shares as of December 31, 1996 37,500 --
Series CM preferred stock, $.01 par value; authorized
6,000 shares; issued and outstanding 6,000
shares as of December 31, 1996 -- 60
Common stock, $0.01 par value, authorized 20,000,000 shares;
issued and outstanding 6,611,646 and 16,757,153 shares
in 1995 and 1996, respectively 66,116 167,572
Additional paid-in capital 12,900,738 43,419,806
Accumulated deficit (8,949,631) (24,100,973)
---------- -----------
Total shareholders' equity 4,064,411 19,486,465
---------- -----------
$9,659,110 $30,007,045
========== ===========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
----------- ---------- ------------
<S> <C> <C> <C>
Operating revenues (Note A):
Computer system equipment sales and support $ 1,873,393 $1,101,017 $ 3,629,396
Application software licenses 1,848,522 2,428,928 5,098,538
Software support 2,549,761 3,731,149 5,204,992
Services and other 715,466 1,625,242 2,637,282
----------- ---------- ------------
Total operating revenues 6,987,142 8,886,336 16,570,208
Costs and expenses:
Cost of equipment sold 1,547,453 880,639 3,280,558
Client services expense 2,600,913 2,824,987 5,154,367
Software development costs 1,774,897 1,642,825 2,354,578
Sales and marketing 1,717,973 1,931,178 3,706,176
General and administrative 2,218,807 1,768,005 2,217,987
In-process research and development (Note G) -- -- 15,057,869
Restructuring costs (Note H) 686,439 -- --
----------- ---------- ------------
Total costs and expenses 10,546,482 9,047,634 31,771,535
----------- ---------- ------------
Operating income (loss) (3,559,340) (161,298) (15,201,327)
----------- ---------- ------------
Other income (expense):
Acquisition contingency (Note I) (610,000) -- --
Interest expense and financing costs (143,412) (378,043) (291,786)
Interest income and other 5,252 26,718 341,771
----------- ---------- ------------
Total other income (expense) (748,160) (351,325) 49,985
----------- ---------- ------------
Earnings (loss) before income taxes (4,307,500) (512,623) (15,151,342)
Income taxes (Note J) -- -- --
----------- ---------- ------------
Net earnings (loss) $(4,307,500) $ (512,623) $(15,151,342)
=========== ========== ============
Net earning (loss) available for common shareholders $(4,307,500) $ (537,467) $(15,402,379)
=========== ========== ============
Earnings (loss) per common share
Primary and fully diluted $ (0.78) $ (0.08) $ (1.72)
=========== ========== ============
Weighted average number of common shares outstanding 5,536,202 6,443,294 8,974,775
=========== ========== ============
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
ADDITIONAL
SERIES A SERIES B SERIES CM COMMON PAID-IN
PREFERRED PREFERRED PREFERRED STOCK CAPITAL DEFICIT
--------- ---------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ -- $ -- $ -- $ 52,778 $ 7,539,052 $ (4,129,508)
Common stock issued to effect merger -- -- -- 6,000 1,194,000 --
Exercise of stock options -- -- -- 822 135,142 --
Employee stock purchase plan -- -- -- 78 11,102 --
Net loss -- -- -- -- -- (4,307,500)
------- -------- ------- -------- ----------- ------------
Balance, December 31, 1994 -- -- -- 59,678 8,879,296 (8,437,008)
Common stock issued to resolve
acquisition contingency -- -- -- 6,100 603,900 --
Conversion of Subordinated
Convertible Notes 9,688 -- -- -- 760,062 --
Issuance of Series B Preferred Stock -- 37,500 -- -- 2,601,005 --
Issuance of Warrants -- -- -- -- 25,000 --
Exercise of Stock Options -- -- -- 50 4,950 --
Employee Stock Purchase Plan -- -- -- 288 26,525 --
Net Loss -- -- -- -- -- (512,623)
------- -------- ------- -------- ----------- ------------
Balance, December 31, 1995 $ 9,688 $ 37,500 $ -- $ 66,116 $12,900,738 $ (8,949,631)
Conversion of Series A Preferred Stock (9,688) -- -- 9,688 -- --
Conversion of Series B Preferred Stock -- (37,500) -- 37,500 -- --
Preferred Stock Dividends -- -- -- -- (275,881) --
Issuance of Common Stock -- -- -- 43,345 22,561,419 --
Exercise of Stock Options -- -- -- 609 142,434 --
Employee Stock Purchase Plan -- -- -- 314 101,156 --
Common Stock issued to effect
CMSI acquisition -- -- -- 10,000 4,990,000 --
Issuance of Series CM Preferred Stock
in connection with the CMSI acquisition -- -- 60 -- 2,999,940 --
Net loss -- -- -- -- -- (15,151,342)
------- -------- ------ -------- ----------- ------------
Balance, December 31, 1996 $ -- $ -- $ 60 $167,572 $43,419,806 $(24,100,973)
======= ======== ====== ======== =========== ============
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(4,307,500) $ (512,623) $(15,151,342)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) activities
operating activities:
Depreciation and amortization 1,036,740 1,081,694 1,601,871
Book value of disposed property -- -- 64,875
Acquisition contingency 610,000 -- --
Purchased in-process research and development -- -- 15,057,869
Changes in assets and liabilities
Accounts receivable (1,096,151) (644,898) 755,560
Unbilled receivables 1,949,552 220,679 (1,280,616)
Other (17,844) 65,845 (91,724)
Accounts payable and accrued expenses (95,206) (329,935) (82,447)
Deferred revenue 99,940 365,976 132,056
Advance billings (45,236) (271,575) (961,800)
----------- ----------- ------------
Net cash provided by (used in) operating activities (1,865,705) (24,837) 44,302
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Dynamic Technical Resources 286,586 -- --
Purchase of net assets of Dimensional Medicine Inc. -- -- (1,349,389)
Purchase of Collaborative Medical Systems, Inc. -- -- (6,591,075)
Capitalized software development costs (796,024) (781,416) (1,389,389)
Purchases of property and equipment (445,065) (270,705) (1,017,712)
Restricted cash deposit -- (50,000) --
----------- ----------- ------------
Net cash used in investing activities (954,503) (1,102,121) (10,347,565)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit, net 1,874,401 (2,788,401) --
Borrowings (repayments) under bank note payable -- 2,800,000 (2,800,000)
Proceeds from issuance of common stock 147,144 31,813 22,849,277
Other 20,084 (5,250) --
Proceeds from issuance of Subordinated Convertible Notes -- 775,000 --
Proceeds from issuance of Series B Preferred Stock -- 2,638,505 --
Proceeds from issuance of warrants -- 25,000 --
Payment of preferred stock dividends -- -- (275,881)
Principal payments on long-term debt and capital lease obligations (311,390) (69,516) (427,973)
----------- ----------- ------------
Net cash provided by financing activities 1,730,239 3,407,151 19,345,423
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (1,089,969) 2,280,193 9,042,160
Cash and cash equivalents, beginning of year 1,100,142 10,173 2,290,366
----------- ----------- ------------
Cash and cash equivalents, end of year $ 10,173 $ 2,290,366 $ 11,332,526
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 102,354 375,434 $ 311,619
=========== =========== ============
Income taxes paid (received) $ 0 $ 0 $ 0
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Dynamic Healthcare Technologies, Inc. develops, markets and supports
clinical information systems and electronic health record solutions in the
healthcare industry. the specific market segments in which the Company
participates include Clinical Workstations, Document Imaging, Diagnostic
Imaging, Laboratory Information Systems, Radiology Information Systems, and
Perioperative (Anesthesiology) Information Systems. All of the Company's
products are complementary to and contribute to the creation and maintenance of
the electronic health record.
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of Dynamic Healthcare Technologies, Inc. and its wholly-owned
subsidiary, Collaborative Medical Systems Corp. which was incorporated on
november 27, 1996 (collectively the "Company" or the "Registrant"). All
significant intercompany transactions and accounts have been eliminated in
consolidation.
REINCORPORATION - On July 29, 1996 the registrant merged with and into a newly
formed DHT Florida, Inc., a Florida corporation, then a wholly owned subsidiary
of the Registrant. In connection with the merger DHT Florida, Inc. changed its
name to Dynamic Healthcare Technologies, Inc. Each outstanding share of the
Registrant's Common Stock, and each share of Series a and Series b Preferred
Stock outstanding immediately prior to the merger was converted into one share
of fully paid and non-assessable similar stock in the surviving corporation with
identical terms and conditions. The purpose of the merger was to effect a
reincorporation in the State of Florida for the Registrant as authorized by
shareholders at the Company's Annual Shareholders' Meeting on May 21, 1996.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation and amortization. The cost of property and equipment is
depreciated and amortized over the estimated useful lives of the related assets,
ranging from five to ten years, using the straight-line method.
SOFTWARE DEVELOPMENT COSTS - Costs incurred to establish the technological
feasibility of computer software products are research and development costs and
are charged to expense as incurred. Costs of producing product masters
subsequent to establishing technological feasibility, including coding and
testing, are capitalized. Capitalization of computer software costs ceases when
the product is available for general release to customers. Amortization of
capitalized software development costs for the years ended December 31, 1994,
1995 and 1996 were $505,613, $562,606 and $883,675, respectively, and write
downs to net realizable value were $121,535, $0 and $0, respectively.
Capitalized software development costs are amortized using either the
straight-line method over the estimated economic life of the product (currently
five years) or the ratio of current revenues to current and anticipated revenues
for the product, whichever results in the greater amount of amortization.
Unamortized capitalized costs of a computer software product in excess of its
estimated net realizable value of that asset are expensed.
GOODWILL - Goodwill is stated at cost less accumulated amortization. Goodwill is
amortized using the straight line method over a period of seven years. The
Company assesses the recoverability of goodwill based upon projected operations
over a period which represents the approximate remaining life of goodwill. the
company evaluates the recoverability of goodwill based on this forecast of
future cash from operations and income, and using a discount rate that reflects
the Company's average cost of funds.
38
<PAGE>
REVENUES - Revenues are derived from the sale of computer hardware, licensing
and sub-licensing of software, professional and technical consulting services,
and maintenance and support services. Each customer contract is negotiated
separately. Application software licenses and computer system equipment revenues
are recorded when hardware and application software are delivered. Installation
and training revenues, which are included with application software licenses
revenues in the statements of operations are recognized as the services are
performed. Software support revenues principally include contracts for
continuing support services which cover a specific period, and from which
revenue is recognized ratably over the period of the contract. Also included in
software support revenue are revenues from other significant continuing
obligations and post contract support obligations, which are typically under
separate contract and are recognized as the services are performed. Services
revenues are recognized as the services are performed.
EMPLOYEE BENEFIT PLAN - The Company has a 401(k) savings plan covering all
full-time employees. Eligible employees may elect to defer 20% of their
compensation up to the maximum allowed by the Internal Revenue Code. Company
contributions are made at the discretion of the Board of Directors and amounted
to $75,545, $63,390 and $123,752 in 1994, 1995 and 1996, respectively.
STOCK-BASED EMPLOYEE COMPENSATION PLANS - The Company's employee stock option
plans are accounted for under APB Opinion 25, Accounting for stock issued to
employees, and related interpretations.
INCOME TAXES - Deferred income taxes are provided on items that are recognized
in different reporting periods for financial accounting and income tax purposes
using the then enacted tax rates.
EARNINGS PER SHARE - Earnings per share is computed on the basis of the weighted
average number of shares outstanding plus the common stock equivalents which
would arise from the exercise of stock options and warrants if dilutive. Fully
diluted earnings per share do not differ significantly from primary earnings per
share.
CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
39
<PAGE>
CONCENTRATION OF CREDIT RISK - The Company generates revenue primarily through
sales to the healthcare industry located throughout the United States. Due to
this concentration, substantially all receivables at December 31, 1995 and 1996,
are from healthcare institutions which may be similarly affected by changes in
economic, regulatory or other conditions. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and such losses have been
within management's expectations.
The Company invests its excess cash in deposits with major financial
institutions, in U.S. government agency securities and in commercial paper of
companies with strong credit ratings.Generally, the investments mature within
90 days and, therefore, are subject to little risk. The Company has not
experienced losses related to these investments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments: the fair value of cash and cash equivalents
approximates its carrying amounts because of the short maturity of those
instruments. The fair value of bank note payable is estimated based on the
current rates available to the Company for debt of the same remaining maturities
and approximates its carrying amount.
RECLASSIFICATIONS - Certain prior year balances have been reclassified to
conform to the 1996 presentation.
40
<PAGE>
ACQUISITION OF DIMENSIONAL MEDICINE, INC.:
on May 1, 1996, Dimensional Medicine, Inc. ("DMI") was purchased by and merged
into DMI Acquisition Corporation ("DMIAC"), a newly formed wholly owned
subsidiary of the registrant. The transaction was consummated by purchasing all
of the outstanding common stock, and retiring and assuming certain debt
obligations of DMI. The funds used for purchase of DMI were obtained from then
available cash and cash equivalents of the Registrant. Components of the payment
for the purchase of DMI on May 1, 1996 were:
Purchase of common stock $ 550,200
Satisfaction of DMI debt obligations 879,636
-----------
Cash paid 1,429,836
Less: cash acquired (30,447)
-----------
Purchase of DMI, net of cash acquired $ 1,399,389
===========
The acquisition has been accounted for using the purchase method. The purchase
price was allocated to assets and liabilities presented in the accompanying
consolidated balance sheet based upon their estimated fair values. A summary of
these allocations on May 1, 1996 is as follows:
Accounts receivable $ 570,836
Unbilled receivables 198,665
Lease receivables current 205,981
Other current assets 502,911
----------
Total current assets 1,478,393
Property and equipment 223,729
Capitalized software development costs 1,628,522
Lease receivables 285,118
Other assets 3,760
----------
Total assets acquired 3,619,522
----------
Accounts payable & accrued expenses (919,905)
Deferred revenue (89,159)
Advanced billings (275,878)
Notes payable - current maturities (390,934)
----------
Total current liabilities (1,675,876)
Notes payable (242,317)
Other liabilities (301,940)
----------
Total liabilities assumed (2,220,133)
----------
Purchase of DMI, net of cash acquired $1,399,389
==========
On September 2, 1996, DMIAC was merged with and into the Company.
41
<PAGE>
ACQUISITION OF COLLABORATIVE MEDICAL SYSTEMS, INC.
On December 17, 1996, Collaborative Medical Systems, Inc. ("CMSI") was purchased
by and merged into Collaborative Medical Systems Corp. ("CoMed"), a newly formed
wholly owned subsidiary of the Registrant. The transaction was consummated by
purchasing all of the outstanding stock of CMSI using both available cash, and
common and preferred stock of the Company. Components of the consideration paid
for the purchase of CMSI on December 17, 1996 were:
Common stock issued $ 5,000,000
Series CM preferred stock issued 3,000,000
Cash paid to shareholders 8,500,000
Acquisition expenses paid 123,784
Less: cash acquired (2,032,709)
-----------
Purchase of CMSI, net of cash acquired $14,591,075
===========
The acquisition has been accounted for using the purchase method. The purchase
price was allocated to assets and liabilities presented in the accompanying
consolidated balance sheet based upon their estimated fair values. A summary of
these allocations on December 17, 1996 is as follows:
Restricted cash $ 60,000
Accounts receivable 2,645,767
Unbilled receivables 137,323
In-process research and development 15,057,869
Other current assets 567,922
-----------
Total current assets 18,468,881
Property and equipment 809,586
Capitalized software development costs 370,000
Goodwill 1,770,000
Tradename 10,000
Other assets 8,520
-----------
Total assets acquired 21,436,987
-----------
Accounts payable & accrued expenses (907,168)
Deferred revenue (2,503,510)
Advanced billings (3,352,136)
Deferred rent (83,098)
-----------
Total liabilities assumed (6,845,912)
-----------
Purchase of CMSI, net of cash acquired $14,591,075
===========
Upon consummation of the transaction the Company wrote off the acquired
in-process research and development of $15,057,869.
42
<PAGE>
B. RESTRICTED CASH
As of December 31, 1995 restricted cash of $50,000 represents an escrow deposit
required pursuant to a Letter of Intent dated December 8, 1995 to acquire the
outstanding shares of Dimensional Medicine, Inc. (See also note A).
As of December 31, 1996 restricted cash of $60,000 represents a certificate of
deposit required to secure a standby letter of credit. The letter of credit is
required by the former health insurance provider of Collaborative Medical
Systems Inc. and expired on March 10, 1997.
C. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
1995 1996
---------- ----------
Furniture and fixtures $ 208,434 $ 554,212
Equipment 2,696,946 4,237,846
Leasehold improvements 48,559 142,772
---------- ----------
2,953,939 4,934,830
Less accumulated depreciation and amortization 1,834,661 2,352,683
---------- ----------
$1,119,278 $2,582,147
========== ==========
D. BANK NOTE PAYABLE
On December 8, 1995 the Company entered into a $2,800,000 promissory note
payable to a bank in fixed monthly payments of principal and interest of $29,911
beginning January 1, 1996, and a balloon payment equal to the remaining unpaid
principal balance and accrued interest on March 31, 1998. The principal amount
of $2,800,000 was paid in full during the year ended December 31, 1996 and the
bank has released its security interest in all assets of the Company.
E. LEASES
The Company leases certain equipment and office space under noncancelable
operating leases. The leases call for monthly payments over terms of three to
five years and include renewal options. With respect to the equipment leases,
the Company is liable for all taxes, repairs and insurance. Total rent expense
on all operating leases was $208,000, $162,000 and $375,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
The future minimum rental payments under operating leases as of December 31,
1996 are as follows:
YEAR ENDING DECEMBER 31,
1997 $1,045,965
1998 1,076,456
1999 723,496
----------
Total $2,845,917
==========
43
<PAGE>
F. CAPITAL STOCK, WARRANTS AND OPTIONS
During 1993, the shareholders approved and the Company adopted a stock warrant
and option plan for directors and management employees (the "D&M Plan"), whereby
250,000 shares of common stock are reserved for issuance. Under the D&M Plan
directors' and management employee warrants are five year warrants which vest
under varying terms and are issued at an exercise price equal to the market
price of the Company's common stock on the date of grant. During 1995, the
shareholders approved an amendment to the D&M Plan to conform the terms of
vesting to 40% upon grant plus 20% per year for each of three years thereafter,
and to provide for early vesting upon death or employment termination without
cause for all future options granted under the D&M Plan. Additionally, annual
warrants are issued to certain outside directors at the beginning of that
director's third consecutive term in office. Each annual warrant is for 5,000
shares of the Company's Common Stock, has a five year term, has an exercise
price equal to the average of the closing bid and ask prices of the Company's
Common Stock on the date of issuance and is fully vested upon issuance. At
December 31, 1996 the Company had Board stock warrants and options outstanding
to purchase shares of its common stock under the D&M Plan as follows:
NUMBER PRESENTLY PRICE YEAR EXPIRATION
OF SHARES EXERCISABLE PER SHARE GRANTED DATE
--------- ----------- --------- ------- ----------
Directors'
Warrants: 5,000 5,000 $2.25 1993 June 1998
25,500 25,500 $2.06 1993 Jan 1998
15,000 15,000 $1.93 1994 June 1999
5,000 5,000 $2.25 1994 June 1999
15,000 15,000 $1.00 1995 June 2000
15,000 15,000 $1.97 1996 Mar 2001
76,500 30,600 $6.06 1996 May 2001
Management
Employees'
Options: 32,000 12,800 $4.75 1996 Dec 2001
------- -------
189,000 123,900
======= =======
The Company adopted an incentive stock option plan in 1983 for key employees
whereby 400,000 shares of common stock were reserved for issuance under the
Plan. Options granted vest 40%, 30% and 30% on the first, second and third
anniversaries of their issuance, respectively and expire ten years after the
date of grant. At December 31, 1996, the Company had granted options of 355,040
shares, of which options for 118,240 shares had been exercised, 231,800 expired
unexercised and options for 5,000 shares were exercisable at a weighted average
exercise price of $1.81 per share and a weighted average remaining contractual
life of 2.9 years. No new options will be granted or were granted after 12/31/92
under the terms of this Plan.
During 1993, the shareholders approved and the Company adopted a new ten year
incentive stock option plan for employees whereby 100,000 shares of common stock
were reserved for issuance under the Plan. The terms of this 1993 ISO Plan are
similar to the 1983 Plan. During 1995, the shareholders approved increasing
shares reserved for issuance pursuant to the 1993 ISO Plan to 600,000. At
December 31, 1996, the Company had granted options of 635,250 shares, 21,410
options had been exercised, 42,000 options were terminated and options for
52,813 shares were exercisable at a weighted average exercise price of $1.07 and
a weighted average remaining contractual life of 8.8 years. As of December 31,
1996 options for 571,840 shares were outstanding with a weighted average
exercise price of $3.12 per share and a weighted average contractual life of 9.3
years. Under both the 1983 Plan and the 1993 Plan, the exercise price for stock
options may not be less than the market price of the Company's common stock at
date of grant.
As of January 1, 1996 and December 31, 1996, the weighted average exercise
prices of options outstanding under the ISO Plans were $1.21 and $3.11,
respectively. Additionally, during 1996 the weighted average exercise prices of
options exercised, granted and canceled under the ISO Plans were $1.83, $3.66
and $1.24, respectively.
44
<PAGE>
Incentive stock option activity under the 1983 and 1993 Plans and price
information follows:
STOCK OPTION
SHARES PRICE RANGE
--------- -------------
Balance at December 31, 1993 371,050 $1.00 - $3.06
Exercised (56,750) $1.00 - $2.25
Granted 34,575 $1.9375
Canceled (246,125) $1.00 - $3.06
--------
Balance at December 31, 1994 102,750 $1.00 - $2.25
Exercised (5,000) $1.00
Granted 153,000 $1.00 - $1.125
Canceled (57,700) $1.00 - $2.25
--------
Balance at December 31, 1995 193,050 $1.00 - $2.25
Exercised (35,410) $1.00 - $2.25
Granted 447,500 $1.97 - $5.38
Canceled (28,300) $1.00 - $1.97
--------
Balance at December 31, 1996 576,840 $1.00 - $5.38
========
During 1993 the shareholders approved and the Company adopted an Employee Stock
Purchase Plan effective for a five year period beginning January 1, 1994. The
Company reserved 200,000 shares of common stock for issuance under the Plan. The
Plan operates in one or more phases of six months each and is open for
enrollment by employees working at least 20 hours per week and who have
completed at least five months of service. A summary of plan activity is as
follows:
PHASE # PHASE ENDING DATE SHARES ISSUED PRICE
------- ----------------- ------------- ------
1 June 30, 1994 5,274 $1.650
2 December 31, 1994 2,535 $ .980
3 June 30, 1995 6,256 $ .930
4 December 31, 1995 22,575 $ .930
5 June 30, 1996 14,026 $2.045
6 December 31, 1996 17,321 $4.202
------
67,987
======
On July 6, 1994, the Company's Board of Directors, in connection with an
employment agreement, granted options to Mr. David Pomerance, the Company's then
CEO (now Chairman of the Board), for 250,000 shares of common stock. The options
are exercisable for five years from the date of grant in accordance with a
vesting schedule of 40% upon grant plus 20% per year for each of three years
thereafter at an exercise price equal to the fair market value on the date of
the grant of $1.875 per share. On August 23, 1994, the Company's Board of
Directors, in connection with an employment agreement, granted options to
Mitchel J. Laskey, the Company's President and then COO (now CEO), for 250,000
shares of common stock under similar terms at an exercise price equal to the
fair market value on the date of the grant of $1.6875. On September 13, 1995,
the Company's Board of Directors reduced the exercise price on Mr. Laskey's and
Mr. Pomerance's employment options to $1.00 per share. On May 16, 1996, the
Company's Board of Directors, in connection with an employment agreement,
granted options to Mr. Nikhil Bhatt, the Company's Senior Vice President and
Chief Technical Officer, for 150,000 shares of common stock under similar terms
at an exercise price of $4.8125 which was the average bid and ask price on the
date of grant. On December 17, 1996 the Company's Board of Directors, in
connection with various other employment agreements, granted options covering
96,000 shares of common stock under similar terms at an exercise price equal to
fair market value on the date of the grant of $5.00. All of these employment
option agreements provide for early vesting upon death or employment termination
without cause and were issued at exercise prices no less than the fair market
value of the shares on the date of grant. As such, in accordance with APB 25 no
corresponding compensation expense was recognized.
45
<PAGE>
The Articles of Incorporation authorize 10,000,000 shares of $.01 par value
preferred stock, in such series and variations in the relative rights and
preferences, including voting rights, if any, between series as the Board of
Directors shall determine.
On July 31, 1995 the Company completed a Private Placement Offering issuing
$775,000 of Subordinated Convertible Notes, bearing simple interest at 9% per
annum, together with detachable warrants to purchase 155,000 shares of the
Company's common stock, ("debt warrants"). The warrants are exercisable at $1.00
per common share, and are exercisable for five years from the date of issuance
(70,000 in June 1995 and 85,000 in July 1995). On November 28,1995 all of the
Subordinated Convertible Notes were converted into 968,750 shares of Series A
Preferred Stock. As of December 31, 1996, none of the debt warrants were
exercised.
On December 5, 1995 the Company issued 3,375,000 shares of Series B Preferred
Stock for $2.7 million, and on December 29, 1995 issued 375,000 shares of Series
B Preferred Stock for an additional $300,000 in Private Placement transactions.
In connection with the Private Placement of the shares of Series B Preferred
Stock, the Board of Directors of the Company authorized the issuance on December
8,1995 of warrants to purchase 210,000 shares of the Company's common stock for
$1.00 per share to a financial consultant ("Series B warrants") for $25,000.
These warrants are exercisable for five years from the date of issuance. As of
December 31, 1996, none of the Series B warrants were exercised.
As of December 31, 1996 dividends declared and paid on Series A and Series B
Preferred Stock were $57,931 and $217,950, respectively. The Company's
registration of the common stock underlying conversion of the Series A and
Series B Preferred Stock was declared effective on September 27, 1996. As such
on September 27, 1996, 968,750 shares of Series A and 3,750,000 shares of Series
B Preferred Stock were converted on a share for share basis to common stock.
On October 2, 1996 the Company received proceeds of $20,941,650 in a common
stock offering from the issuance of 3,892,500 shares of common stock at $5.75
per share net of underwriting commissions of $1,440,225. Stock issuance costs
incurred amounted to $714,846. Pursuant to the terms of the offering a portion
of the proceeds were immediately used to repay the subordinated notes payable of
$1,000,000 (see also Note K), the bank note payable of $2,743,882, and related
accrued interest.
On October 30, 1996 the underwriters exercised their options to cover
over-allotments made in connection with the common stock offering. Upon
exercise, the Company received additional proceeds of $2,377,960 from the
issuance of 442,000 shares of common stock at $5.75 per share net of
underwriting commissions of $163,540.
On December 17, 1996, in connection with the acquisition of CMSI (see also Note
A), the Company issued 1,000,000 common shares and 6,000 shares of Series CM
Preferred Stock, $.01 par value, to the former shareholders of CMSI. The Series
CM Preferred Stock shall be automatically convertible into shares of the
Registrant's common stock at the close of business on August 29, 1997
("Contingent Shares"), pursuant to a formula based upon the average closing bid
and ask price of the Registrants common stock as quoted on the National Market
for the five (5) trading day period ending August 29, 1997 (the "CSAVG"). If the
CSAVG is greater than or equal to $8.00, an aggregate of 100 shares of the
Registrant's common will be issued as Contingent Shares: if the CSAVG is less
than or equal to $5.00, then an aggregate of 600,000 shares of the Registrant's
common stock will be issued as Contingent Shares: and if the CSAVG is greater
than $5.00 but less than $8.00, then the number of shares of the Registrant's
common stock to be issued as Contingent Shares will be pro-rated accordingly.
46
<PAGE>
G. IN-PROCESS RESEARCH AND DEVELOPMENT
In-process research and development ("IPR&D"), costs identified with the
purchase of CMSI on December 17, 1996 (see also Note A), principally development
efforts in connections with the CoPath client server product and client server
development tool-kit, totaling $15,057,869, were expensed immediately following
the acquisition. The fair value of the acquired IPR&D was determined by
independent appraisers under the income approach. The income approach attempts
to measure the income-producing capability of the acquired in-process activities
and calculates the present value of the future economic benefits expected to be
derived by successful completion of the IPR&D, net of allocable expenses and
discounted to account for the level of risk associated with the purchased
research.
H. RESTRUCTURING
On November 15, 1994, the Company adopted a plan to restructure certain of its
operations and to re-evaluate certain other activities. The Company's plan
included reduction in the workforce, restructuring of the sales compensation
program, relocation of the corporate office and the closing of the Lincoln,
Nebraska operation. Accordingly, the Company provided or incurred $686,439
during the year ended December 31, 1994 to write down assets to the net
realizable value and to cover the costs associated with the restructuring. The
costs associated with this action have been identified as "Restructuring Costs"
in the Statement of Operations for the year ended December 31, 1994, and are
summarized as follows:
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
NOVEMBER 15, PAID OR ACCRUAL DECEMBER 31,
1994 INCURRED ADJUSTMENTS 1994
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Excess costs attributable to exit activities $254,430 $(213,930) $ 0 $ 40,500
Noncancelable lease termination costs 206,357 (28,738) 0 177,619
Involuntary employee termination 95,060 (68,215) 0 26,845
Employee costs after operations cease 130,592 (54,592) 0 76,000
-------- --------- ------- --------
$686,439 $(365,475) $ 0 $320,964
======== ========= ======= ========
</TABLE>
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
NOVEMBER 15, PAID OR ACCRUAL DECEMBER 31,
1994 INCURRED ADJUSTMENTS 1994
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Excess costs attributable to exit activities $ 40,500 $ 0 $(40,500) $ 0
Noncancelable lease termination costs 177,619 (187,375) 9,756 0
Involuntary employee termination benefits 26,845 (23,235) (3,610) 0
Employee costs after operations cease 76,000 (110,354) 34,354 0
-------- --------- -------- --------
$320,964 $(320,964) $ 0 $ 0
======== ========= ======== ========
</TABLE>
The Company completed the plan of restructure during the second quarter of 1995,
and all employee groups were restructured. As of December 31, 1995 actual
involuntary termination benefits of $91,450 were paid to 31 terminated
employees.
47
<PAGE>
I. ACQUISITION CONTINGENCY/RESTATEMENT
In connection with the acquisition of Dynamic Technical Resources, Inc. (DTR) in
August 1994, due principally to breaches in the representations and warranties
contained in the applicable merger agreement, the Company's Board of Directors
determined that an adjustment to the consideration given to the former DTR
shareholders was required. On March 5, 1995, the Board of Directors agreed to
issue an aggregate of 610,000 additional shares of common stock of the Company
to be distributed among the former shareholders of DTR on a pro-rata basis, with
the same rights, privileges and restrictions as the original consideration
received by such shareholders in connection with the acquisition. Such former
DTR shareholders, in turn, agreed to release the Company from any claims they
may have against the Company, its current officers and directors and to
cooperate and assist the Company in the event the Company elects to file a civil
lawsuit against any professional or other third parties for damages resulting
from the events and matters that led to the Company's restated financial
statements. The additional shares were issued on March 27, 1995. A charge to
operations for the year ended December 31, 1994 in the amount of $610,000 was
recorded representing market value of the additional shares at the date of
issuance. As a result of review by and consultation with the staff of the
Securities and Exchange Commission, the Company restated its 1994 consolidated
financial statements to reflect an accrual for this acquisition settlement in
the amount of $610,000. The amount of $610,000 represents the market value of
the additional shares at the date of their issuance. The recorded cost of the
acquired enterprise was not affected by the issuance of these additional shares.
J. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Current income tax expense (benefit)
before operating loss carry forward $(1,523,000) $ (281,000) $(161,000)
Tax effects of temporary differences 44,000 76,000 123,000
Non-recognition of benefits of
operating loss carry forward 1,479,000 205,000 38,000
Benefits of operating loss carry
forward -- -- --
----------- ---------- ---------
$ -- $ -- $ --
=========== ========== =========
</TABLE>
48
<PAGE>
Deferred income taxes reflect the net tax effects of operating loss and tax
credit carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The tax effects of significant items comprising the
Company's net deferred tax as of December 31, 1996, are as follows:
1995 1996
----------- -----------
Deferred tax asset:
Operating loss carryforwards $ 3,920,000 $ 4,080,000
Tax credit carryforwards 704,000 717,000
Other 57,000 216,000
----------- -----------
4,694,000 5,000,000
Deferred tax liabilities:
Capitalized software development costs (816,000) (108,000)
Other -- --
----------- -----------
Net deferred tax asset 3,878,000 4,892,000
Valuation allowance (3,878,000) (4,892,000)
----------- -----------
Net deferred tax $ -- $ --
=========== ===========
The net deferred tax asset is reduced by a valuation allowance due to the
uncertainty associated with the realization of the net deferred tax asset. The
valuation allowance increased $1,014,000 from the allowance of $3,878,000 at
January 1, 1996.
The provisions for Federal income taxes differs from the amount computed by
applying the statutory rate to net earnings (loss) before income taxes for each
of the three years in the period ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
AMOUNT OF TAX
---------------------------------------
1994 1995 1996
----------- --------- -----------
<S> <C> <C> <C>
Computed expected tax expense (benefit) $(1,465,000) $(174,000) $(5,152,000)
State taxes, net of federal benefit (222,000) (31,000) (6,000)
Acquisition consideration not deductible for tax 208,000 -- --
In-Process Research & Development
not deductible for tax -- -- 5,120,000
Non-recognition of benefits of operating
loss carryforward 1,479,000 205,000 38,000
Benefits of operating loss carryforward -- -- --
----------- --------- -----------
$ -- $ -- $ --
=========== ========= ===========
</TABLE>
At December 31, 1996, the Company had unused operating loss carryforwards for
tax and alternative minimum tax purposes of approximately $10,201,000 and
$9,735,000, respectively, and unused tax credits of approximately $704,000.
These operating loss carryforwards and tax credits expire in varying amounts
during 1997 through 2009.
49
<PAGE>
K. RELATED PARTY TRANSACTIONS
In connection with the private placement offering of subordinated convertible
notes in June 1995 three of the Company's directors, David Pomerance, Mitchel
Laskey and Thomas Martinson, purchased notes in the principal amount of
$100,000, $100,000 and $50,000, respectively, and received warrants to purchase
20,000, 20,000 and 10,000 shares of Common Stock, respectively. See "Description
of Securities - Warrants." These notes were converted into Series A Preferred
Stock on November 28, 1995 at $0.80 per share.
In December 1995, in connection with the private placement of Series B Preferred
Stock, The Argentum Group was paid a financial consulting fee of $175,000 and
purchased warrants to purchase 210,000 shares of Common Stock for $25,000. Mr.
Daniel Raynor, a director of the Company, is the President of a general partner
of The Argentum Group.
On August 16, 1996, Messrs. Pomerance, Laskey, Maxwell and certain other
shareholders of the Company made unsecured loans to the Company in an aggregate
amount of $1,000,000, pursuant to which the Company executed unsecured notes.
The unsecured notes provided for payment, in full, at the earlier of the
completion of a Common Stock offering or November 14, 1996, together with
interest at a rate of 13% per annum. The unsecured notes were retired on October
2, 1996 upon settlement of the sale of the Company's stock (see Note F)
The Company expensed $164,612 for consulting and advisory fees paid to MMRI,
Inc. which is majority owned by its Chairman of the Board, David Pomerance.
L. LITIGATION
In February 1996, the Company instituted an action against James A. Terrano
("Terrano"), the Company's former President and Chief Executive Officer, in the
District Court of Lancaster County, Nebraska, alleging that Terrano (i) made
fraudulent and negligent representations to the Company's Board of Directors,
which resulted in the Company's acceptance of a handwritten memorandum modifying
Terrano's employment agreement, (ii) breached his fiduciary duty to the Company
and (iii) breached his obligations under his employment agreement with the
Company. The Company is seeking to recover damages in the amount of at least
$50,000 in addition to the declaratory judgment determining that no severance
pay is due Mr. Terrano and that the handwritten memorandum is invalid and
unenforceable and does not modify the employment agreement. Mr. Terrano has
counter-claimed that he has been defamed by the Company. The Company is a
defendant in an action in which Mr. Terrano has a demand for $280,000 in
severance pay together with two years worth of benefits unquantified to include
the use of an automobile, club dues and insurance policies. The Company is
vigorously contesting this case.
The Company is a defendant in an action filed by a former Vice-President in
March, 1995 in the District Court of Lancaster County, Nebraska, alleging that
the Company did not lawfully terminate her for cause, and, therefore, breached
her employment agreement. The former employee is seeking severance payment. The
Company is vigorously contesting this case.
The above cases are in the early stages of discovery and it is not possible to
evaluate the likelihood of a favorable or unfavorable outcome of either case at
this time. As of the date hereof, there are no other material legal proceedings
pending against the Company. In the opinion of management, the legal proceedings
in which the Company is involved will not have a material effect on the
Company's consolidated financial statements.
50
<PAGE>
M. SFAS 123 PRO FORMA
Options granted to the Company's directors and employees under the 1983 and 1993
Incentive Stock Option Plans, various employment agreements, and the D&M Stock
Option Plan (hereafter, the "Plans"), are accounted for under APB Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations. The
exercise price of each option granted under these Plans is at least equal to the
market price of the Company's stock on the date of grant. Accordingly, no
compensation has been recognized for directors and employees under these Plans.
Had compensation cost for the Plans been determined based on the fair value of
the options at the grant dates consistent with the method of Statement of
Financial Accounting Standards 123, Accounting for Stock-Based Compensation
(SFAS 123), the Company's net earnings (loss) and net earnings (loss) per share
would have been reduced to the pro forma amounts indicated below.
1995 1996
----------- ------------
Net earnings (loss) As reported $ (512,623) $(15,151,342)
Pro forma $ (629,521) $(15,759,807)
Net earnings (loss) available
to common shareholders As reported $ (537,467) $(15,402,379)
Pro forma $ (654,365) $(16,010,844)
Primary and fully diluted
earnings (loss) per share As reported $ (0.08) $ (1.72)
Pro forma $ (0.10) $ (1.78)
The fair value of each option grant under SFAS 123 is estimated on the date of
grant using the Black-Scholes option-pricing model. Volatility was computed
based on the daily common stock high, low and close information provided by
NASDAQ for the twenty days prior to the close of trading on the date of each
option grant, and range from 58%-122% for options granted during 1995, and
33%-165%for options granted during 1996. Risk free rates of 6.5% for options
granted with a ten year exercise period, and 6% for options granted with a three
to five year exercise period were used. The forfeiture rate under the 1993 ISO
Plan was assumed to be 30%, under the D&M Plan 15%, and range between 0% and 15%
for options granted in connection with continuing employment agreements. In
addition, valuation of 1993 ISO Plan options were reduced by 20%, and the
valuation of Non-ISO Plan options were reduced by 35%, to reflect the respective
transfer restrictions. The weighted average grant date fair value of options
granted during 1995 and 1996, were $0.28 and $2.04, respectively.
N. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The pro forma combined financial information, for the twelve months ended
December 31, 1995 and 1996, presented below (in thousands, except for per share
information), gives effect to the acquisitions of Dimensional Medicine, Inc.,
and Collaborative Medical Systems, Inc., as though they were effective at the
beginning of those periods. The pro forma information may not be indicative of
the results that would have occurred if the acquisition had been effective on
these dates, or of results that may be obtained in the future.
TWELVE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
1995 1996
------- --------
Total operating revenues $23,086 $ 26,209
Operating income (loss) (354) (16,422)
Net earnings (loss) (603) (16,230)
Net earnings (loss) available for
common shareholders (628) (16,481)
Net earnings (loss) per common share (.08) (1.66)
51
<PAGE>
O. SUBSEQUENT EVENT
On March 17, 1997 the Company signed a Letter of Intent agreeing in principle to
acquire all of the outstanding common shares of Dynacor, Inc. ("Dynacor"), of
Apple Valley, Minnesota, in exchange for 250,000 shares of the Company's common
stock. The transaction is expected to be accounted for as a pooling of interest
and is subject to definitive agreements and approvals of the Dynacor
shareholders and the Boards of both companies.
P. UNAUDITED QUARTERLY INFORMATION
Quarterly operating results are summarized as follows (in thousands, except per
share data):
THREE MONTHS ENDED
(UNAUDITED)
1995 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- --------
Total Operating Revenues $2,234 $2,267 $2,213 $ 2,172
Operating Income (Loss) (366) (136) 252 89
Net Earnings (Loss) (443) (262) 148 44
Net Earnings (Loss) Per Share (.07) (.04) .02 .01
Shareholders' Equity 674 417 566 4,064
THREE MONTHS ENDED
(UNAUDITED)
(1) (1) (1)(2)
1996 March 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- --------
Total Operating Revenues $2,310 $4,008 $4,220 $ 6,032
Operating Income (Loss) (324) (93) (140) (14,644)
Net Earnings (Loss) (367) (155) (244) (14,385)
Net Earnings (Loss) Per Share (.06) (.02) (0.05) (1.59)
Shareholders' Equity 3,673 3,597 12,310 19,486
(1) Results include acquisition of Dimensional Medicine, Inc. on May 1, 1996.
(2) Results include acquisition of Collaborative Medical Systems, Inc. on
December 17, 1996, and a non-recurring write off of in process research
and development of $15,058,000.
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dynamic Healthcare Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Dynamic
Healthcare Technologies, Inc. as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dynamic Healthcare
Technologies, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
Orlando, Florida
March 17, 1997
53
<PAGE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION
BOARD OF DIRECTORS
<S> <C> <C>
DAVID M. POMERANCE MITCHEL J. LASKEY, C.P.A.
Chairman President and Chief Executive Officer
Dynamic Healthcare Technologies, Inc. Dynamic Healthcare Technologies, Inc.
JERRY L. CARSON THOMAS J. MARTINSON
Executive Vice President and President
Chief Financial Officer Martinson & Company, Ltd.
Evans Enterprises
BRET R. MAXWELL DANIEL RAYNOR
Managing Director Managing Partner
First Analysis The Argentum Group
RICHARD W. TRUELICK
President
Truelick Associates
OFFICERS
DAVID M. POMERANCE MITCHEL J. LASKEY, C.P.A.
Chairman of the Board President and Chief Executive Officer
Secretary Treasurer
NIKHIL A. BHATT PAUL S. GLOVER
Senior Vice President Vice President of Finance
Chief Technical Officer Chief Financial Officer
STEVEN J. AKERSON PHILIP R. KNEELAND
Vice President Vice President
Operations Advanced Technology
MARY LU LANDER MATTHEW P. LAWTON
Vice President Vice President
Marketing Sales
LINDA A. MOLINE, R.R.A.
Vice President
Professional Services
TRANSFER AGENT INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A. KPMG Peat Marwick, LLP
161 North Concord Exchange 111 North Orange Avenue, Suite 1600
St. Paul, Minnesota 55075 Orlando, Florida 32801
(612)450-4064 (407)423-3426
LEGAL COUNSEL
Cohen, Berke, Bernstein, Brodie & Kondell, P.A.
2601 S. Bayshore Drive
Miami, Florida 33133-5460
(305)854-5900
</TABLE>
54
<PAGE>
STOCK TRADING INFORMATION
The Common Stock of Dynamic Healthcare Technologies, Inc. is traded on the
NASDAQ National Market System under the NASDAQ symbol DHTI.
COMMON STOCK INFORMATION
The number of stockholders of record of the Company's Common Stock on March 10,
1997, was approximately 4,950. High and low bid quotations for the Common Stock
for the last eight quarters are presented below:
1995 1996
QUARTER ENDED HIGH LOW HIGH LOW
March 31 $ 1.3750 $.8750 $2.625 $1.750
June 30 1.0000 .8750 7.625 2.250
September 30 1.0000 .6250 7.625 3.750
December 31 2.3125 .8750 6.125 3.875
The foregoing quotations reflect inter-dealer prices without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
ANNUAL REPORT ON FORM 10-K, WITHOUT EXHIBITS
Dynamic Healthcare Technologies, Inc.'s annual filing with the Securities and
Exchange Commission (Form 10-K) is available upon request without charge to
shareholders by writing to:
Gail E. Carter
Investor Services Department
Dynamic Healthcare Technologies, Inc.
101 Southhall Lane, Suite 210
Maitland, Florida 32751
(407) 875-9991
ANNUAL MEETING
The Annual Meeting of Shareholders of Dynamic Healthcare Technologies, Inc. will
be held on June 3, 1997, in Maitland, Florida.
55
<PAGE>
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Dynamic Healthcare Technologies, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-72684 and 33-72764) on Form S-8 of Dynamic Healthcare Technologies, Inc. of
our reports dated March 17, 1997, related to the consolidated balance sheets of
Dynamic Healthcare Technologies, Inc. as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended, and related schedule, which reports are
incorporated by reference in the December 31, 1996 annual report on Form 10-K
of Dynamic Healthcare Technologies, Inc.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
Orlando, Florida
March 25, 1997
56
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,332,526
<SECURITIES> 0
<RECEIVABLES> 5,598,856
<ALLOWANCES> 326,102
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<CURRENT-ASSETS> 19,981,432
<PP&E> 4,934,830
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<BONDS> 222,682
0
60
<COMMON> 167,572
<OTHER-SE> 19,318,833
<TOTAL-LIABILITY-AND-EQUITY> 30,007,045
<SALES> 3,629,396
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