SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1998
Commission File Number 0-12516
Dynamic Healthcare Technologies, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-3389871
(State of Incorporation) (IRS E.I.N.)
615 Crescent Executive Court, Lake Mary, Florida 32746
(Address of principal executive offices) (ZIP Code)
(407) 333-5300
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of October 31, 1998, there were 18,217,280 shares
outstanding, par value $.01 per share, of the issuer's only
class of common stock.
This report consists of twenty-one (21) pages.
The index to exhibits appears on page nineteen (19).
1
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
See attached statements following this item number.
2
Independent Auditors' Review Report
Board of Directors
Dynamic Healthcare Technologies, Inc. and subsidiary:
We have reviewed the condensed consolidated balance sheet of
Dynamic Healthcare Technologies, Inc. and subsidiary as of
September 30, 1998, the related condensed consolidated
statements of operations for the three and nine months periods
ended September 30, 1997 and 1998, and condensed consolidated
statements of cash flows for the nine month periods ended
September 30, 1997 and 1998. These condensed consolidated
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
Dynamic Healthcare Technologies, Inc. and subsidiary as of
December 31, 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year
then ended (not presented herein); and in our report dated
February 27, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1997, is fairly stated, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
/S/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Orlando, Florida
November 4, 1998
3
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
December 31, 1997 September 30, 1998
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 6,465,685 $ 1,656,740
Accounts receivable, net 6,066,305 7,371,481
Unbilled receivables 2,900,702 3,338,522
Contracts receivable - current 1,409,571 1,178,647
Prepaid expenses 738,773 804,950
Other current assets 53,265 204,728
Total current assets 17,634,301 14,555,068
Property and equipment, net 3,699,761 4,173,402
Capitalized software development costs, net 7,830,349 9,129,712
Goodwill, net 2,070,581 1,764,923
Contracts receivable - non-current 1,682,780 648,197
Other assets 59,258 60,345
$ 32,977,030 $ 30,331,647
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,023,349 $ 3,638,495
Deferred revenue 6,456,120 6,312,652
Advance billings 1,259,876 974,264
Other 361,107 260,857
Total current liabilities 11,100,452 11,186,268
Other 453,788 735,394
Total liabilities 11,554,240 11,921,662
Shareholders' equity:
Series C redeemable convertible preferred
stock, ($0.01 par value; authorized 1,000,000
shares; issued and outstanding 1,000,000
shares as of September 30, 1998; liquidation
preference of $2,000,000 plus accumulated
dividends) -- 1,811,327
Common stock ($.01 par value; authorized
40,000,000 shares; issued and outstanding
18,008,210 and 18,217,280 shares as of December
31, 1997 and September 30, 1998, respectively). 180,082 182,173
Warrants -- 3,000
Additional paid-in capital 44,300,707 44,690,125
Accumulated deficit (23,057,999) (28,276,640)
Total shareholders' equity 21,422,790 18,409,985
$ 32,977,030 $ 30,331,647
</TABLE>
See notes to condensed consolidated financial statements.
4
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Operating revenues
Computer system equipment
sales and support $ 1,959,491 $ 731,630 $ 4,266,875 $ 2,143,405
Application software licenses 3,595,986 2,763,124 10,818,638 4,857,690
Software support 2,776,688 2,921,019 8,018,489 8,842,348
Services and other 2,221,989 1,903,570 5,744,735 4,836,413
Total operating revenues 10,554,154 8,319,343 28,848,737 20,679,856
Operating expenses:
Cost of products sold 1,933,687 972,501 4,335,572 2,398,149
Client services expense 2,904,124 2,686,527 8,647,914 8,349,269
Software development costs 1,549,313 1,534,654 4,472,659 4,620,633
Sales and marketing 2,353,645 2,135,101 6,376,872 7,406,936
General and administrative 1,130,245 999,547 3,459,817 3,163,097
Total operating expenses 9,871,014 8,328,330 27,292,834 25,938,084
Operating income (loss) 683,140 (8,987) 1,555,903 (5,258,228)
Other income (expense):
Interest expense and financing
costs (7,449) (21,928) (42,688) (46,724)
Interest income and other 210,562 57,979 581,768 231,176
Loss on disposal of fixed assets -- (127,420) -- (144,865)
Total other income (expense) 203,113 (91,369) 539,080 39,587
Earnings (loss) before income taxes 886,253 (100,356) 2,094,983 (5,218,641)
Income tax -- -- -- --
Net earnings (loss) $ 886,253 $(100,356) $2,094,983 $(5,218,641)
Net earnings (loss) available for
common shareholders $ 886,253 $(127,911) $2,094,983 $(5,246,196)
Earnings (loss) per common share:
Basic $ 0.05 $ (0.01) $ 0.12 $ (0.29)
Diluted $ 0.05 $ (0.01) $ 0.11 $ (0.29)
Weighted average number of common
shares outstanding:
Basic 17,949,920 18,190,530 17,884,477 18,085,578
Diluted 18,418,948 18,190,530 18,570,731 18,085,578
</TABLE>
See notes to condensed consolidated financial statements.
5
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Nine Months Ended
September 30,
1997 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 2,094,983 $(5,218,641)
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 2,270,540 2,365,490
Noncash issuance of common stock pursuant to
employee benefit plan -- 283,593
Loss on disposal of fixed assets -- 144,865
Changes in assets and liabilities:
Accounts receivable (1,556,979) (1,305,176)
Unbilled receivable (662,920) (437,820)
Contracts receivable (5,462,249) 1,265,507
Other 77,514 (248,805)
Accounts payable and accrued expenses 735,823 544,127
Deferred revenues 1,548,726 (143,468)
Advance billings (1,286,364) (285,612)
Net cash provided (used) by operating
activitivies (2,240,926) (3,035,940)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (2,811,838) (2,520,541)
Purchases of property and equipment (1,472,907) (987,754)
Proceeds from disposal of property and equipment -- 24,593
Restricted cash released/(deposited) 60,000 --
Other -- (44,968)
Net cash used by investing activities (4,224,745) (3,528,670)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 483,383 135,471
Borrowings/(repayments) on long-term debt (493,828) (166,578)
Proceeds from issuance of Series C Preferred
Stock and Warrants -- 1,814,327
Preferred stock dividends paid -- (27,555)
Net cash flows provided (used) by financing
activities (10,445) 1,755,665
Net (decrease) in cash and cash equivalents (6,476,116) (4,808,945)
Cash and cash equivalents, beginning of period 11,450,436 6,465,685
Cash and cash equivalents, end of period $ 4,974,320 $ 1,656,740
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 42,688 $ 46,724
Income taxes paid/(received) $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITY:
Furniture and fixtures acquired under capital
lease obligations $ -- $ 492,495
</TABLE>
See notes to condensed consolidated financial statements.
6
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998
(A) Unaudited Financial Statements:
The accompanying consolidated financial statements have been
prepared by management in conformity with generally accepted
accounting principles for interim financial statements and with
instructions to Form 10-Q and Regulation S-X. Accordingly, they
do not include all the disclosures required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments and
accruals considered necessary for fair presentation of financial
information have been included and are of a normal recurring
nature. Quarterly results of operations are not necessarily
indicative of annual results. These statements should be read
in conjunction with the consolidated financial statements and
the notes thereto included in the Dynamic Healthcare
Technologies, Inc. 1997 Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(B) Line of Credit:
On July 24, 1998 the Company entered into a $5,000,000 Revolving
Line of Credit with Silicon Valley Bank, a commercial bank
("Bank"). The Revolving Line of Credit is secured by all
existing Company assets and matures on July 23, 1999. Interest
thereon is payable monthly in arrears at the Bank's prime rate
plus one percent, and borrowing thereunder will be based on
advance ratios tied to receivables. The availability of
borrowing is contingent on the Company's compliance with a
minimum quick ratio (as defined) of 1.25 to 1, returning to
profitability during the fourth quarter of 1998, and maintaining
profitable operations in excess of any increase in the carrying
value of capitalized software development costs in 1999. As of
September 30, 1998 no amounts were borrowed against this line of
credit.
(C) Series C Preferred Stock
On July 29, 1998 the Company issued 1,000,000 shares of Series C
Redeemable Convertible Preferred Stock ("Series C Preferred
Stock") together with detachable Warrants to purchase an
aggregate of 300,000 Common Shares of the Company in a private
placement transaction, which resulted in net proceeds to the
Company of $1,814,000. The issue was solely subscribed to by
executive officers and directors of the Company on terms
negotiated by non-participating directors and executive officers
with the Company's investment banker. The Series C Preferred
Stock is convertible on a share for share basis to Common Stock,
is non-voting, carries a $.16 per share cumulative annual
dividend payable calendar quarterly in arrears, has a
liquidation preference of $2.00 per share, may be automatically
converted upon the Company's Common Stock sustaining sufficient
trading at or above $4.00, and is redeemable by the Company on
or after July 29, 2000 at a price of $2.00 per share. The
Warrants are exercisable at $2.25 per Common Share at any time
on or before July 29, 2003. On September 29, 1998 Common Stock underlying
the Series C Preferred Stock and Warrants ("Securities") was registered
under the Securities Act of 1933, as amended. On September 30,
1998 all of the then accrued Series C Preferred Stock dividends
aggregating $27,555 were declared and paid.
(D) 401(k) Plan Matching Contributions
During the three and nine month periods ended September 30,
1998, the Company contributed 59,622 and 130,956 shares,
respectively, of common stock with average aggregate market
values of $94,470 and $283,593, respectively, as matching
contributions for the Company's 401(k) Plan.
7
Lease Obligations
On September 1, 1998, the Company relocated its corporate
headquarters to Lake Mary, Florida.
Capital Leases
In connection with the Company's relocation of its corporate
headquarters, the Company entered into a lease agreement for the
purchase of furniture and fixtures. Future minimum lease
payments under this non-cancelable lease having a three-year
term, are included in other liabilities, and are as follows:
Year ended September 30:
1999 $ 175,124
2000 191,044
2001 191,044
2002 15,920
Total future minimum lease payments 573,132
Less amount representing interest 80,637
Present value of minimum lease payments 492,495
Less current portion 122,218
Long term capital lease obligation $ 370,277
Included in fixed assets are the following:
December 31, 1997 September 30, 1998
Capital lease property $ 77,836 $ 570,331
Less accumulated depreciation (53,816) (86,110)
$ 24,020 $ 484,221
Operating Leases
The lease for the new corporate headquarters expires on March 1,
2005. Total rent expense under all noncancelable operating
lease agreements for office space was $309,000 and $350,000 for
the three months ended September 30, 1997 and 1998, respectively
and $910,000 and $978,000 for the nine months ended September
30, 1997 and 1998, respectively. The Company's minimum future
lease payments under noncancelable operating leases are as
follows:
Year ended September 30:
1999 $1,441,000
2000 1,113,000
2001 1,041,000
2002 1,060,000
2003 1,078,000
Thereafter 1,555,000
$7,288,000
Included in the above lease agreements are leases on office
space in Apple Valley, MN which was vacated on June 30, 1998 and
for which a liability was accrued for estimated lease
termination fees. The unamortized balance of this reserve for
losses was $82,000 as of September 30, 1998.
(F) New Accounting Pronouncements:
The Company adopted Statement of Position ("SOP") 97-2 for
software transactions entered into beginning January 1, 1998.
The impact of SOP 97-2 does not materially alter the Company's
revenue recognition methods.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (Statement
133). Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
Statement 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is currently
reviewing Statement 133 to see what impact, if any, it will have
on the Company.
8
Item 2. Management's discussion and analysis of financial
condition and results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company provides enterprise-wide, patient-centered
healthcare information systems. These systems enable hospitals,
physician practice groups and integrated delivery networks to
capture, store, archive and retrieve clinical, financial and
administrative patient information. The Company's products
enhance productivity, reduce costs and improve the quality of
patient care by providing on-line access to patient information
previously maintained on a variety of media, including paper,
X-ray film, magnetic disk, video and audio. The Company's
current product lines include clinical information systems for
use in laboratory, anatomic pathology, radiology and
anesthesiology applications as well as imaging and electronic
health record solutions. The Company provides support for all
of its systems and provides systems integration and other
consulting services to over 600 customers. Key customers include
the University of California at Los Angeles Medical Center,
University of Illinois at Chicago Medical Center, Methodist
Hospital of Memphis, Memorial Sloan-Kettering Cancer Center,
Ohio State University Hospital, Columbia/HCA, Greater Dayton
Area Hospital Association, Advocate Health Care, Temple
University Hospital, UniHealth and Orlando Regional Health
System.
The Company's revenues are derived from the licensing and sale
of systems comprised of internally developed software and third
party software and hardware, professional services, maintenance
and support services. The Company's services include
implementation and training, product management and customer
software development. Revenues from professional services and
maintenance and support services typically increase as the
number of installed systems increases. Computer system
equipment sales revenues are generally recognized when hardware
is shipped. Computer system equipment sales and support
revenues include hardware support contracts for a specific
period from which revenue is recognized ratably over the
corresponding contract period. Application software license
revenues are recognized when application software is delivered
to the customer. Installation and training service revenues,
included with application software licenses, are recognized as
the services are performed. Software support revenues
principally include contracts for remote dial-up problem
diagnosis, maintenance and corrective support services, each of
which covers a specified period for which revenue is recognized
ratably over the corresponding contract period. Services and
other revenues include custom programming services,
post-contract support obligations and other services, which are
provided under separate contract and are recognized as services
are performed.
Cost of products sold includes the cost of hardware sold, costs
of third party software licenses and hardware support
subcontracts. Client service expense includes the direct and
indirect costs associated with implementation and support
personnel. Software development costs include the direct and
indirect salaries and wages of software research and development
personnel, direct research and development expenses, and
software amortization expense, reduced by capitalized software
development costs. Software development is 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 costs
and travel and entertainment expenses related to the sale and
marketing of the Company's products and services. General and
administrative expenses include salaries and expenses for
corporate administration, financial, legal and human resources.
The sales cycle for the Company's systems is typically six to
eighteen months from initial contact to contract signing. The
product delivery cycle is variable. When application software
licenses are provided by modem, product delivery is immediate.
In other instances, product delivery is over two or more years,
particularly with enterprise-wide electronic healthcare record
solutions involving significant and continuing customer service
requirements. Accordingly, the product delivery cycle depends
upon the combination of products purchased and the
implementation plan defined by the customer in the master sales
agreement. Each customer contract is separately negotiated.
The installation schedule for a clinical information systems, or
departmental electronic healthcare record implementations,
typically require six to twelve months. Under its standard
master sales agreement, the Company generally receives a partial
payment upon execution of the agreement, a hardware installment
payment upon delivery of hardware, installation progress
payments upon the completion of defined milestones and final
payment upon system acceptance.
9
On January 7, 1998 the Company announced the appointment of
Scott E. Waldrop to the newly created position of Senior Vice
President and Chief Operating Officer. Waldrop joined the
Company from Columbia/HCA Healthcare Corporation ("Columbia") of
Nashville, TN. As Vice President, Information Systems
Development for Columbia, he led a team of more than 450 people
in establishing information strategies, product development or
selection, and product support for all facilities and business
lines.
On February 18, 1998 the Company announced five key appointments
with responsibility for implementing corporate and product
initiatives. Four of these appointments augment Dynamic's
management team: Brian Paige, Vice President of Development; Jim
Busby, Director of Sales for the Electronic Health Record Group;
Curt Thornton, Director of Consultant Relations; and Cynthia
Sucher, Director of Corporate Communications. The fifth, George
Naxera, has been named Program Director for the AutoCyte Image
Management System ("AIMS"), which provides imaging capabilities
for Dynamic's CoPath anatomic pathology solution.
On March 18, 1998 the Company reported that Mr. Nikhil Bhatt,
Senior Vice President and Chief Technical Officer had
voluntarily resigned from the Company. Mr. Bhatt transitioned
his responsibilities effective May 31, 1998.
On June 29, 1998 the Company entered into a joint marketing
agreement with MediHealth Outsourcing, Inc. of King of Prussia,
Pennsylvania. MediHealth is an industry leader in providing
total health information management department and cancer
registry outsourcing as well as professional coding services to
healthcare providers. MediHealth will utilize Dynamic's
document imaging system to allow electronic access to medical
records so personnel can code information from remote locations.
Under terms of the agreement, the two companies will market
enterprise-wide solutions.
On July 24, 1998 the Company entered into a $5,000,000 Revolving
Line of Credit with Silicon Valley Bank, a commercial bank
("Bank"). The Revolving Line of Credit is secured by all
existing Company assets and matures on July 23, 1999.
On July 29, 1998 the Company issued 1,000,000 shares of Series C
Preferred Stock together with detachable Warrants to purchase an
aggregate of 300,000 Common Shares of the Company in a private
placement transaction, which resulted in net proceeds to the
Company of $1,814,000.
During the first quarter of 1998 the Company began a functional
reorganization and cost reduction program. As previously
reported, the Company focused on evaluating, reorganizing and
reducing costs in the operations and development groups. As a
result, the number of full time staff at September 30, 1998 was
235 as compared to 325 at the beginning of the fiscal year, or a
workforce reduction of 28%.
10
The following table sets forth, for the three and nine month
periods ended September 30, 1997 and 1998, certain items in the
Company's statements of operations as a percentage of total
operating revenues:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1998 1997 1998
Operating revenues:
Computer system equipment sales and support 18.5% 8.8% 14.8% 10.4%
Application software licenses 34.1% 33.2% 37.5% 23.5%
Software support 26.3% 35.1% 27.8% 42.7%
Services and other 21.1% 22.9% 19.9% 23.4%
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of products sold 18.3% 11.7% 15.0% 11.6%
Client services expense 27.5% 32.3% 30.0% 40.4%
Software development costs 14.7% 18.4% 15.5% 22.3%
Sales and marketing costs 22.3% 25.7% 22.1% 35.8%
General and administrative expense 10.7% 12.0% 12.0% 15.3%
Total operating expenses 93.5% 100.1% 94.6% 125.4%
Operating income (loss) 6.5% (0.1)% 5.4% (25.4)%
Other income (expense) 1.9% (1.1)% 1.9% 0.2%
Net earnings (loss) 8.4% (1.2)% 7.3% (25.2)%
</TABLE>
Results of Operations
During 1997, the Company released for general availability
client server versions of CoPath (March 1997), and Maxifile
(December 1997), and new releases of PACSPlus (October 1997),
and DynamicVision (October 1997). Sales cycles initiated prior
to the new product releases were disrupted both by the evolution
of the new client server products, and transitioning the
products of the recent acquisitions, Maxifile, CoPath, and
Premier Series products, under the new DynamicVision suite of
products. The Company's sales cycles are complex and industry
experts generally indicate that initial sales cycles extend for
between six to eighteen months. Although the Company
experienced increased momentum at the end of the second quarter
of 1998, third quarter 1998 new system bookings slowed to $3.3
million. Particularly, the electronic health record market has
been very slow to develop. Management believes that sales
cycles for the electronic health record have been elongated by
year 2000 concerns and continued advancements in managed care in
addition to the product enhancements released in 1997. As a
result, the Company has experienced mixed results following the
release of the four new products in 1997.
(Three months ended September 30, 1998 compared to three months
ended September 30, 1997)
Revenues. During the quarter ended September 30, 1998, the
Company reported revenues of $8,319,000, a decrease of
$2,235,000 from revenues reported for the same period 1997. A
total of $2,979,000 of revenue was recognized during the third
quarter of 1997 from a significant multi-site radiology sale,
which occurred early in the third quarter of 1997. There was no
such similar sale in the third quarter of 1998. Absent the
effect of the multi-site radiology sale in the third quarter of
1997, quarterly revenues for the third quarter of 1998 increased
by $744,000 as compared to revenues for the third quarter of
1997, principally as a result of deliveries from the record
backlog reported at the end of the second quarter. Although
electronic health record revenues declined by $1,278,000,
pathology information systems, radiology systems, and laboratory
systems revenues increased by $820,000, $674,000 and $594,000,
respectively,
Computer system equipment and support revenues for the third
quarter of 1998 compared to the third quarter of 1997, decreased
by $1,228,000. The multi-site radiology system sale realized
$1,074,000 of computer system equipment and support revenues in
the third quarter of 1997. In addition, other increases of
$186,000, $147,000, and $7,000 in computer system equipment and
support revenues for the third quarter of 1998 from pathology
information systems, other radiology systems, and laboratory
systems, respectively, offset a decline of $494,000 in similar
electronic health record revenues.
11
Application software license revenues for the third quarter of
1998 compared to the third quarter of 1997, decreased by
$833,000. The multi-site radiology system sale realized
$1,436,000 of application software license revenues in the third
quarter of 1997. Other increases of $298,000, $397,000, and
$550,000 in application software license revenues for the third
quarter of 1998 from pathology information systems, other
radiology systems, and laboratory systems, respectively, more
than offset a decline of $642,000 in similar electronic health
record revenues.
Software support revenues for the third quarter of 1998 compared
to similar revenues for the third quarter of 1997 increased by
$144,000. Successful installations continue to result in a
growing customer support base. However, during the third
quarter of 1998 the Company established a plan to discontinue
support to laboratory customers still operating on the prime
computer platform, and various decision support applications
upon expiration of existing contracts. This represents
approximately $358,000 of annual support base. In addition,
renewal of the master support agreement covering the pathology
information system installation at 58 military treatment
facilities was reduced by approximately $186,000 from amounts
previously expected. As of September 30, 1998, recurring
annualized billable support base was $12.1 million, and an
additional $1.6 million of annualized software support base is
anticipated to be generated from delivery of the Company's
existing new systems backlog.
Services and other revenues for the third quarter of 1998
declined by $318,000 compared to the third quarter of 1997.
This was principally attributable to $469,000 of services
revenue from the multi-site radiology system sale recognized in
the third quarter of 1997. A decline of $137,000 in electronic
health record service revenues was more than offset by increases
of $216,000, $6,000, and $86,000 in pathology information
systems, other radiology systems, and laboratory systems service
revenues, respectively.
Cost of Products Sold. Cost of products sold as a percentage
of total revenues for the third quarter of 1998 decreased from
18.3% to 11.7% compared to the third quarter of 1997. This
decrease is substantially attributed to the decline in computer
system equipment revenues during the third quarter of 1998
compared to the third quarter of 1997. However, cost of
products sold for the third quarter of 1998 includes
approximately $69,000 of product delivery costs associated with
improving installations hosting customer site visits for which
there was no corresponding incremental revenue. In addition,
cost of products sold also includes third party software costs
of approximately 5.0% of total revenues during the third quarter
of 1998, compared to 3.9% of total revenues during the third
quarter of 1997. This resulted principally from reduced
application software license revenues associated with
establishing initial show sites for the new product releases.
Client Services Expense. Client services expense for the third
quarter 1998 decreased $217,000 to $2,687,000 from $2,904,000
for the third quarter 1997, increasing as a percentage of sales
from 27.5% to 32.3%. The unanticipated elongation of initial
product sales cycles for the Company's new products resulted in
a significant decline in quarterly revenues and a
disproportionate burden in client services expenses. However,
during the second quarter of 1998 the Company announced a
functional restructuring and cost streamlining plan, which
provided a modest reduction in client services expense.
Software development costs. Software development costs for the
third quarter 1998 increased to 18.4% of total operating
revenues from 14.7% incurred during the third quarter 1997, but
declined by $14,000 to $1,535,000 from $1,549,000. The Company
also capitalized less during the third quarter of 1998. During
the third quarter of 1998 the Company capitalized $734,000 or
39.7% of total software development costs, while during the
third quarter 1997 the Company capitalized $1,013,000 or 45.6%
of total software development costs, a decrease of $279,000.
Together the $293,000 reduction in aggregate software
development costs reflects the impact of re-deploying personnel
from development activities to installation of systems
consistent with the release of new products for general
availability. The Company does however intend to continue to
invest in new development efforts as part of the Company's
overall growth strategy.
Sales and Marketing. Sales and marketing costs for the third
quarter 1998 as a percentage of total revenues, increased to
25.7% from 22.3% for the third quarter of 1997, principally as a
result of the decline in revenues. The Company did however
reduce third quarter 1998 sales and marketing expenses by
$219,000 compared to the third quarter of 1997.
General and Administrative Expenses. General and administrative
expenses for the third quarter of 1998 decreased by $131,000,
and increased to 12.0% of total revenues from 10.7% incurred
during the third quarter of 1997. Although the Company recorded
its first bad debt expense in over three years, an $83,000
charge resulting from a bankrupt customer during the third
quarter of 1998, and incurred approximately $72,000 for
consultants engaged in team building exercises, reductions in
corporate insurance of $41,000, a reduction of $135,000 in
expenses accrued under the Company's Management Incentive
Compensation Plan ("MIC Plan"), and $110,000 in other general
expense reductions more than offset such increases.
12
Other Income (Expense). Net other expense of $91,000 resulted
for the third quarter of 1998 as compared to approximately
$203,000 of net other income for the third quarter of 1997, a
decline in performance of $294,000. Net interest income
decreased by $167,000 during the third quarter of 1998
principally due to the cash used by operating and investing
activities. In addition, the Company incurred a $127,000
aggregate loss on sale of fixed assets in connection with the
office consolidation activities completed during the third
quarter of 1998.
(Nine months ended September 30, 1998 compared to nine months
ended September 30, 1997)
Revenues. During the nine months ended September 30, 1998 the
Company reported revenues of $20,680,000 a decrease of
$8,169,000 from revenues for the nine months ended September 30,
1997. During the first nine months of 1997, the Company
recognized initial pathology application software license
revenue of $2,777,000 under the value added re-marketing
agreement with Sunquest (the "Sunquest Agreement"), and
approximately $3,925,000 of revenue from pathology deliveries to
the United States Department of Defense ("DOD"), hospitals under
a sub-contract to the United States Defense Supply Service.
During the first nine months of 1998, only $150,000 of revenue
was recognized under the Sunquest Agreement. This represents
$75,000 of revenue from licenses sold by Sunquest and $75,000
from software support to Sunquest. In addition, government
revenue of only $1,299,000 was recognized during the first nine
months of 1998. The Company is however, a subcontractor under a
Teaming Agreement with a prime contractor who was awarded a
multi-year contract in April 1998 for services to the Office of
the Assistant Secretary of Defense for Health Affairs. The
Prime Contractor on this project has not yet awarded any firm
subcontract to the Company.
Computer system equipment sales and support revenues decreased
to 10.4% of total revenues for the first nine months of 1998,
compared to 14.8% for the first nine months of 1997, a decline
of $2,123,000. Neither the Sunquest Agreement nor deliveries to
the Department of Defense hospitals had any associated hardware
revenue. Management does expect a higher involvement in the
delivery of computer hardware to customers in connection with
the DynamicVision, pathology and radiology product lines due to
the Company's increasing emphasis of offering a sole source
solution to customers.
Application software license revenue during the first nine
months of 1998, decreased by $5,961,000 over the same period a
year ago, from $10,819,000 to $4,858,000. The Company
recognized initial pathology application software license
revenue of $2,777,000 under the Sunquest Agreement during the
first nine months of 1997, and only $75,000 of application
software license revenue thereunder during the first nine months
of 1998. Also, during the first nine months of 1998, the
Company recognized only $27,000 of pathology application
software license revenue from government customers. This
represents a $1,792,000 decrease from the $1,819,000 of
application software license revenue recognized during the first
nine months of 1997 through deliveries under a completed U.S.
Government sub-contract agreement. In addition, other pathology
application software license revenue decreased by $101,000
principally due to the timing of sales cycles following the
introduction of the CoPath Client Server product in March 1997.
As a result, pathology application software license revenue
decreased by $4,595,000. Laboratory software application
license revenue for the nine months ended September 30, 1998
increased by $415,000. The Premier Series laboratory
information system was acquired in May 1997 with the acquisition
of Dynacor, Inc. accounted for as a pooling of interests.
Initial new laboratory sales cycles were disrupted by the
consolidation process and integration with the Company's LabPro
2000 laboratory information system and the DynamicVision suite
of products. The increase in laboratory system application
revenues during the first nine months of 1998 has principally
resulted from successful customer migrations. Radiology
software application license revenues for the nine months ended
September 30, 1998 declined by $1,170,000 compared to the first
nine months of 1997. This primarily resulted from the
introduction of the new Maxifile client server version released
for general availability in December 1997 disrupting sales cycle
for the older technology. In addition, a multi-site radiology
information system sale resulted in $1,436,000 of application
software license revenue during the third quarter of 1997.
There was no multi-site radiology revenue during the first nine
months of 1998. Electronic health record application software
license revenues declined by $583,000 due to lengthening sales
cycles caused by market impacts related to year 2000 concerns,
the growing influence of managed care, and new product releases.
Software support revenues increased $824,000 to $8,842,000 for
the first nine months of 1998, compared to $8,018,000 for the
same period one year ago. This increase is principally
attributable to successful implementations of new systems. As
of September 30, 1998, the recurring annualized billable support
base is $12.1 million, with an additional $1.6 million of
annualized software support revenue anticipated to be generated
from delivery of the Company's existing new systems backlog.
Service and other revenues decreased by $909,000 to $4,836,000
from $5,745,000. This decrease principally results from the
training and implementation services in connection with system
installations to the DOD hospitals completed in 1997. There was
no such corresponding revenue during the first nine months of
1998.
13
Cost of Products Sold. Cost of products sold as a percent of
total revenues for the first nine months of 1998 decreased to
11.6% from 15.0% for the same period 1997. Hardware revenues
during the first quarter 1998 similarly decreased to 10.4% from
14.8% of total revenues for the first nine months of 1997, due
to the significant decrease in application software license
revenues and the absence of hardware deliverables to either
Sunquest or the DOD hospitals.
Client Services Expense. Client services expense for the first
nine months of 1998 decreased $299,000 to $8,349,000 from
$8,648,000 for the first nine months of 1997, increasing as a
percentage of sales from 30.0% to 40.4%. The Company previously
reported increased staffing in connection with the 1996
acquisitions of DMI and CoMed, the introduction of the
DynamicVision product line in November 1996, and new product
releases in 1997. During 1997, the Company released for general
availability client server versions of CoPath (March 1997), and
Maxifile (December 1997), and new releases of PACSPlus (October
1997), and DynamicVision (October 1997). The unanticipated
elongation of initial product sales cycles for these new
products resulted in a significant decline in quarterly revenues
and a disproportionate burden in client services expense.
However, the Company decreased client services expenses while
introducing these new products.
Software Development Costs. Software development costs for the
first nine months of 1998 increased to 22.3% of total operating
revenues from 15.5% incurred during the first nine months of
1997. Development efforts continued as part of the Company's
overall growth strategy. As such, the Company capitalized
$2,521,000 or 42.6% of total software development costs during
the first nine months of 1998 compared to $2,720,000 or 44.7% of
total software development costs for the same period of 1997.
The development effort during the first nine months of 1998
resulted in image enabling the Company's client server product
releases for radiology and pathology, significantly advancing
the perioperative product SurgiPlus and has provided more
uniformity within the Company's product line.
Sales and Marketing. Sales and marketing costs for the first
nine months of 1998 as a percentage of total revenues, increased
to 35.8% from 22.1% for the same period of 1997. During 1997,
the Company expanded and trained a national sales and marketing
force in connection with the Company's external growth plans, in
preparation for the launch of the Company's latest product
releases. This resulted in an increase in sales and marketing
costs incurred during the first nine months of 1998 of
$1,030,000 as compared to similar costs for the first nine
months of 1997.
General and Administrative Expenses. General and administrative
expenses for the first nine months of 1998 decreased by
$297,000, but increased to 15.3% of total revenues from 12.0%
incurred during the first nine months of 1997. Net cost savings
of $253,00 realized from the Company's functional reorganization
and cost reduction program, a $267,000 reduction in amounts
accrued under the Company's Management Incentive Compensation
Plan, which more than offset the non-recurring charges
associated with closing the Apple Valley office of $98,000, the
$125,000 charge to settle the litigation with the former
president and CEO.
Other Income (Expense). Net other income for the first nine
months of 1998 decreased by $499,000 to $40,000, as compared to
approximately $539,000 for the same period 1997. The Company
incurred approximately $145,000 in aggregate losses on sale of
fixed assets in connection with the office consolidation
activities completed during the third quarter of 1998. In
addition, net interest income decreased by $354,000 during the
first nine months of 1998 principally due to the cash used by
operating and investing activities.
Liquidity and Capital Resources
As of September 30, 1998 the Company had cash equivalents of
$1,657,000, working capital of $3,638,000, and a working capital
ratio of 1.30 to 1.
Accounts receivable as of September 30, 1998 increased by
$1,305,000 to $7,371,000 from $6,066,000 as of December 31,
1997. The annual support renewal for the 59 military treatment
facilities of $1,235,000 was billed during the third quarter of
1998, but received on October 2, 1998.
Contracts receivable as of September 30, 1998 decreased
$1,265,000 to $1,827,000 as compared to the balance of
$3,092,000 on December 31, 1997. The Company collected the
second of three $1,000,000 installments due under the Sunquest
Agreement. The remaining installment is due no later than
February 7, 1999. As of September 30, 1998 the Sunquest
Agreement had a carrying value of approximately $973,000. The
remaining change in contracts receivable results from scheduled
collections on monthly installment receivables from radiology
information system customers. As of September 30, 1998, all
contracts receivables were current with applicable payment terms.
14
During the first nine months of 1998 the Company capitalized
$2,521,000 of software development costs and acquired $1,480,000
of additional property and equipment. Development efforts
during the first nine months of 1998 resulted in image enabling
the Company's client server product releases for radiology and
pathology, significant advances in SurgiPlus the Company's
perioperative management system, and has provided more
uniformity within the Company's product line. The Company also
continued to develop enhancements to DynamicVision and
PACSPlus+. Property purchases were made primarily to
accommodate the consolidation of the Company. The Company
acquired a new trade show booth to adequately display the entire
suite of products, equipped the sales force with laptop
computers for product demonstration, purchased new software for
pipeline management, purchased a sales database, and furnished
and equipped the new corporate headquarters in Lake Mary,
Florida. The Company expects to continue to invest in
software development.
Accounts payable and accrued expenses increased $615,000 to
$3,638,000 as of September 30, 1998 from $3,023,000 as of
December 31, 1997. Payroll related taxes and benefits increased
by $283,000 solely due to the timing of the related payment
activities.
On July 24, 1998 the Company signed a $5,000,000 Revolving Line
of Credit with Silicon Valley Bank. The Revolving Line of
Credit matures on July 23, 1999 and is secured by all existing
Company assets. Interest thereon is payable monthly in arrears
at the bank's prime rate plus one percent, and borrowing
thereunder will be based on advance formulas tied to
receivables.
On July 29, 1998 the Company issued 1,000,000 shares of Series C
Convertible Preferred Stock ("Series C Stock"), and warrants to
purchase an aggregate of 300,000 shares of the Company's common
stock at a strike price of $2.25 exercisable through July 30,
2003 for an aggregate of $2,000,000, and net proceeds of
$1,814,000. The Series C Convertible Preferred Stock accrues an
aggregate quarterly cash dividend of $40,000 payable in arrears
on September 30, December 31, March 31, and June 30 while
outstanding, is non-voting, is convertible on a share for share
basis to common stock of the Company, is mandatorily convertible
when the Company's common stock trades at or above $4.00 while
maintaining a weekly trading volume of 250,000 shares, and has
an aggregate liquidation preference of $2,000,000. After July
28, 2000 the Company may redeem outstanding shares of Series C
Stock for $2.00 per share plus accrued but unpaid dividends. On
September 30, 1998 all of the then accrued Series C Stock
dividends aggregating $27,555 were declared and paid.
In September 1998 the Company financed $492,000 of equipment and
furnishings in connection with relocating the corporate
headquarters to Lake Mary, Florida under an installment lease
obligation payable in 36 monthly installments of $15,920
beginning November 1, 1998.
During the first nine months of 1998 the Company received
$135,471 in proceeds from the exercise of director and employee
options resulting in the issuance of 78,114 shares of common
stock. In addition, the Company continues to fund the employer
portion of the 401(k) plan contributions in common stock.
During the nine months ended September 30, 1998 the Company
contributed 130,956 common shares to satisfy $283,593 of such
contributions.
The Company intends to continue to enhance its product and
service offerings and to seek market expansion opportunities
beyond the recent product releases. The availability of future
working capital, including access to the line of
credit, are dependent on the Company's ability to restore and
maintain profitable operations or to obtain suitable additional
financing.
Inflation and Changing Prices
The Company believes inflation has not had a material effect on
the Company's operations or its financial condition. Changing
prices within the marketplace could have a material effect upon
the cost of materials sold and the related price of software and
hardware sales.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's software programs,
whether sold as products of the Company or used internally, may
recognize a date using "00" as the year 1900 rather that the
year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal
business activities.
15
Based on a current assessment, the Company believes that most of
the current releases of its products are year 2000 compliant,
and with respect to those that are not, the Company anticipates
releasing year 2000 compliant versions by December 31, 1998.
The Company believes that the costs incurred to make these
products year 2000 compliant will be less than $50,000. The
Company plans to have all clients converted to year 2000
compliant versions of its products by the first quarter of 1999.
Pursuant to contract terms, clients are obligated to cooperate
with the company in the installation of system enhancements,
including the current year 2000 compliant versions.
In addition, the Company has determined that only a small
portion of software programs developed by other vendors and
utilized internally will require upgrades to new versions to
properly utilize dates beyond December 31, 1999. After
reviewing the plans of these vendors, the Company believes that
the upgrades to such software programs will be completed by the
end of the first quarter of 1999. The cost of year 2000
compliant software related to systems developed by other vendors
and used internally is included in maintenance agreements. The
Company believes that consulting costs incurred in accomplishing
the installation of year 2000 compliant software will be less
than $10,000.
Forward-Looking Statements
This report contains certain forward-looking statements, which
are qualified by the risks and uncertainties described from time
to time in the Company's reports filed with the Securities and
Exchange Commission, including the Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
The information required by this item is incorporated by
reference to Footnotes (C) and (D) of the condensed consolidated
financial statements included in Part I herein.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11: Statement regarding computation of per share
earnings
Exhibit 15: Letter regarding unaudited interim financial
information
(b) Reports on Form 8-K:
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
(Registrant)
Date: November 6, 1998 /S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, CEO and Treasurer
Date: November 6, 1998 /S/PAUL S. GLOVER
Paul S. Glover
Vice President of Finance, CFO and Secretary
18
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Index to Exhibits
Description of Exhibit Page Number
Exhibit 11: Statement regarding computation of per share earnings 19
Exhibit 15: Letter regarding unaudited interim financial information 20
19
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Exhibit 11
Computation of Weighted Average Number of Shares Outstanding and
Per Share Earnings
<TABLE>
Three Months Ended Nine Months Ended
September 30,(Unaudited) September 30,(Unaudited)
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net earnings (loss) $ 886,253 $(100,356) $2,094,983 $(5,218,641)
Dividends on preferred stock -- (27,555) -- (27,555)
Earnings (loss) available for
common shareholders $ 886,253 $(127,911) $2,094,983 $(5,246,196)
Common and common equivalent shares outstanding
Basic:
Weighted average number of
common shares outstanding 17,949,920 18,190,530 17,884,477 18,085,578
Diluted:
Weighted average number of
common shares outstanding 17,949,920 18,190,530 17,884,477 18,085,578
Dilutive effect of options
and warrants using average
market price 469,028 -- 686,254 --
Weighted average number of
common and common equivalent
shares outstanding assuming
full dilution 18,418,948 18,190,530 18,570,731 18,085,578
Earnings (loss) per share
basic $ 0.05 $ (0.01) $ 0.12 $ (0.29)
Earnings (loss) per share
diluted $ 0.05 $ (0.01) $ 0.11 $ (0.29)
20
Board of Directors
Dynamic Healthcare Technologies, Inc.
Re: Registration Statement No. 333-57713
With respect to the subject registration statement on Form S-8,
we acknowledge our awareness of the incorporation by reference
of our report dated November 4, 1998, related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered part of a registration statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of sections 7 and
11 of the Act.
/S/KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Orlando, Florida
November 4, 1998
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,656,740
<SECURITIES> 0
<RECEIVABLES> 7,667,261
<ALLOWANCES> 295,780
<INVENTORY> 0
<CURRENT-ASSETS> 14,555,068
<PP&E> 8,375,186
<DEPRECIATION> 4,201,784
<TOTAL-ASSETS> 30,331,647
<CURRENT-LIABILITIES> 11,186,268
<BONDS> 735,394
0
10,000
<COMMON> 182,173
<OTHER-SE> 18,217,812
<TOTAL-LIABILITY-AND-EQUITY> 18,409,985
<SALES> 2,143,405
<TOTAL-REVENUES> 20,679,856
<CGS> 2,398,149
<TOTAL-COSTS> 25,938,084
<OTHER-EXPENSES> 144,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,724
<INCOME-PRETAX> (5,218,641)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,218,641)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,218,641)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
