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 June 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.)
101 Southhall Lane, Suite 210, Maitland, Florid 32751
(Address of principal executive offices) (ZIP Code)
(407) 875-9991
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of July 14, 1998, there were 18,157,158 shares outstanding,
par value $.01 per share, of the issuer's only class of common
stock.
This report consists of twenty-nine (29) 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 June
30, 1998, the related condensed consolidated statements of
operations for the three and six months periods ended June 30,
1997 and 1998, and condensed consolidated statements of cash
flows for the six-month periods ended June 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 that 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
July 31, 1998
3
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
December 31, 1997 June 30, 1998
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,465,685 $ 1,219,001
Accounts receivable, net 6,066,305 6,233,383
Unbilled receivables 2,900,702 2,403,842
Contracts receivable - current 1,409,571 1,254,693
Prepaid expenses 738,773 891,757
Other current assets 53,265 68,865
Total current assets 17,634,301 12,071,541
Property and equipment, net 3,699,761 3,727,267
Capitalized software development costs, net 7,830,349 8,816,248
Goodwill, net 2,070,581 1,866,809
Contracts receivable - non-current 1,682,780 781,981
Other assets 59,258 60,846
$ 32,977,030 $ 27,324,692
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,023,349 $ 3,314,971
Deferred revenue 6,456,120 5,632,036
Advance billings 1,259,876 1,229,078
Other 361,107 151,002
Total current liabilities 11,100,452 10,327,087
Other 453,788 369,606
Total liabilities 11,554,240 10,696,693
Shareholders' equity:
Common stock ($.01 par value; authorized
40,000,000 shares; issued and outstanding
18,008,210 and 18,156,558 shares as of
December 31, 1997 and June 30, 1998,
respectively). 180,082 181,566
Additional paid-in capital 44,300,707 44,622,717
Accumulated deficit (23,057,999) (28,176,284)
Total shareholders' equity 21,422,790 16,627,999
$ 32,977,030 $ 27,324,692
</TABLE>
See notes to condensed consolidated financial statements.
4
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Operating revenues:
Computer system
equipment sales and
support $ 1,561,284 $ 727,616 $ 2,307,384 $ 1,411,775
Application software
licenses 1,712,912 1,117,011 7,222,652 2,094,566
Software support 2,682,690 2,950,826 5,241,801 5,921,329
Services and other 1,589,661 1,531,258 3,522,746 2,932,843
Total operating revenues 7,546,547 6,326,711 18,294,583 12,360,513
Costs and expenses:
Cost of products sold 1,610,147 793,692 2,401,885 1,425,648
Client services expense 2,978,917 2,723,395 5,743,790 5,662,742
Software development costs 1,565,006 1,350,367 2,923,346 3,085,979
Sales and marketing 2,278,297 2,574,091 4,023,227 5,271,835
General and administrative 1,045,556 1,137,253 2,329,572 2,180,995
Total costs and expenses 9,477,923 8,578,798 17,421,820 17,627,199
Operating income (loss) (1,931,376) (2,252,087) 872,763 (5,266,686)
Other income (expense):
Interest expense and
financing costs (16,710) (11,722) (35,239) (24,796)
Interest income and other 182,060 64,733 371,206 173,197
Total other income (expense) 165,350 53,011 335,967 148,401
Earnings (loss) before income
taxes (1,766,026) (2,199,076) 1,208,730 (5,118,285)
Income taxes - - - -
Net earnings (loss) $(1,766,026)$(2,199,076) $ 1,208,730 $(5,118,285)
Net earnings (loss) available
for common shareholders $(1,766,026)$(2,199,076) $ 1,208,730 $(5,118,285)
Earnings (loss) per common
share Basic and diluted $ (0.10)$ (0.12) $ 0.07 $ (0.28)
Weighted average number of
common shares outstanding 17,328,473 18,035,604 17,286,218 18,032,232
</TABLE>
See notes to condensed consolidated financial statements.
5
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Six Months Ended June 30,
1997 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $1,208,730 $(5,118,285)
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization 1,511,708 1,574,441
Noncash issuance of common stock pursuant
to employee benefit plan - 189,123
Book value of disposed property - 31,789
Changes in assets and liabilities:
Accounts receivable (792,173) (167,078)
Unbilled receivables (226,505) 496,860
Contracts receivable (1,667,766) 1,055,677
Other (13,393) (327,708)
Accounts payable and accrued expenses 261,712 291,622
Deferred revenue (361,451) (824,084)
Advance billings (1,289,998) (30,798)
Net cash provided (used) by operating
activities (1,369,136) (2,828,441)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (1,798,832) (1,786,913)
Purchases of property and equipment (1,126,604) ( 627,948)
Restricted cash released/(deposited) 60,000 -
Net cash used in investing activities (2,865,436) (2,414,861)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 459,012 134,371
Borrowings/(repayments) on long-term debt and
capital lease obligations - ( 123,710)
Other ( 377,718) ( 14,043)
Net cash provided (used) by financing
activities 81,294 ( 3,382)
Net (decrease) in cash and cash equivalents (4,153,278) (5,246,684)
Cash and cash equivalents, beginning of period 11,450,436 6,465,685
Cash and cash equivalents, end of period $ 7,297,158 $ 1,219,001
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 11,722 $ 24,796
Income taxes paid/(received) $ - $ -
</TABLE>
See notes to condensed consolidated financial statements.
6
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 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) Litigation:
In June 1998, the Company's action against the Company's former
president and chief executive officer, in the District Court of
Lancaster County, Nebraska, alleging fraud, negligence and
breach of fiduciary duty, as well as the defendant's counter
claim for defamation seeking $280,000 in severance pay in
addition to two years worth of benefits, were simultaneously
resolved. The Company agreed to pay $82,000 in severance pay
and $43,000 in defendant's legal expenses in the stipulation.
As of June 30, 1998 the Company accrued the $125,000 settlement
and the related expense has been included in general and
administrative expenses reported for the quarter ended June 30,
1998.
(C) Subsequent Events:
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.
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 $1,825,000. 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. The Series C Preferred Stock and
Warrants ("Securities"), were not registered under the
Securities Act of 1933, as amended, and may not be offered or
sold in the United States absent registration or an applicable
exemption from such registration. However, the Company has
agreed to use its best efforts to cause the common stock
underlying the Securities to be registered.
(D) 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.
7
Item 2. Management's discussion and analysis of financial
condition and results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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.
8
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 $1,825,000.
9
The following table sets forth, for the three and six month
periods ended June 30, 1997 and 1998, certain items in the
Company's statements of operations as a percentage of total
operating revenues:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Operating revenues:
Computer system equipment sales
and support 20.7% 11.5% 12.6% 11.4%
Application software licenses 22.7% 17.7% 39.5% 17.0%
Software support 35.5% 46.6% 28.7% 47.9%
Services and other 21.1% 24.2% 19.2% 23.7%
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of products sold 21.3 % 12.5 % 13.1% 11.5 %
Client services expense 39.5 % 43.0 % 31.4% 45.8 %
Software development costs 20.7 % 21.3 % 16.0% 25.0 %
Sales and marketing costs 30.2 % 40.7 % 22.0% 42.7 %
General and administrative expense 13.9 % 18.0 % 12.7% 17.6 %
Total operating expenses 125.6 % 135.5 % 95.2% 142.6 %
Operating income (loss) (25.6)% (35.5)% 4.8% (42.6)%
Other income (expense) 2.2 % 0.8 % 1.8% 1.2 %
Net earnings (loss) (23.4)% (34.7)% 6.6% (41.4)%
</TABLE>
Results of Operations
(Three months ended June 30, 1998 compared to three months ended
June 30, 1997)
Revenues. During the quarter ended June 30, 1998 the Company
reported revenues of $6,327,000, a decrease of $1,220,000 from
revenues reported for the same period 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. Previous sales cycles 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. Computer system equipment and support
revenues and application software license revenues decreased by
$834,000 and $596,000, respectively, which is a direct result of
the decrease in new system sales. However, during late second
quarter of 1998 sales contract momentum increased significantly.
This resulted in the Company reporting its highest ever quarter
ending new systems backlog of $11.2 million as of June 30, 1998.
Computer system equipment sales and support revenue during the
second quarter of 1998, declined to 11.5% from 20.7% of total
revenues for the second quarter of 1997 due to the disruption in
sales cycles caused by transitioning recently acquired products
to the DynamicVision suite of products. Laboratory computer
system equipment revenues declined by $492,000. The Premier
Series laboratory information system product acquired with
Dynacor, Inc. in late May 1997, has been enhanced with features
of the LabPro 2000 product and the DynamicVision product suite.
The uncertainty of this transition impacted laboratory
information system initial sales cycles. Although laboratory
system contracts for the second quarter 1998 increased to
approximately $1.8 million, an increase of $1.4 million over
similar contracts for the second quarter 1997, these contracts
were entered into too late in the quarter to impact 1998 second
quarter operating results. In addition, computer system
equipment sales
10
and support revenues of non-clinical departments
declined by $366,000 as sales attention was redeployed to the
Company's new clinical products. Hardware revenues can cause
significant fluctuations in top line performance, but
traditionally have had nominal impact on earnings due to the
relatively low margins compared with other sources of Company
revenue.
Application software license revenues during the second quarter
of 1998, declined to 17.7% from 22.7% of total revenues for the
second quarter of 1997 due to the disruption in sales cycles
caused by the new product introductions in 1997 previously
discussed. Application software license revenues in pathology
and radiology declined by $492,000 and $150,000, respectively.
These product lines were both impacted by the introduction in
1997 of client server versions of CoPath and Maxifile. Although
new system contracts for the second quarter 1998 for pathology
and radiology were $2.8 million and $1.7 million, respectively,
compared to $1.8 million and $0.6 million, respectively, for the
same period one year ago, these contracts were entered into too
late in the quarter to impact 1998 second quarter operating
results.
Software support revenues for the second quarter of 1998
increased to 46.6% of total revenues compared to 35.5% for the
second quarter of 1997, an increase of $268,000. Successful
installations continue to result in a growing customer support
base. As of June 30, 1998, recurring annualized billable
support base has increased to $12.4 million, and an additional
$1.8 million of annualized software support base is anticipated
to be generated from delivery of the Company's existing new
systems backlog.
Cost of Products Sold. Cost of products sold as a percentage
of total revenues for the second quarter of 1998 decreased from
21.3% to 12.5% for the same period of 1997. This decrease is
substantially attributed to the decline in computer system
equipment revenues during the comparable periods.
Client Services Expense. Client services expense for the second
quarter 1998 decreased $256,000 to $2,723,000 from $2,979,000
for the second quarter 1997, increasing as a percentage of sales
from 39.5% to 43.0%. 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
second quarter 1998 increased to 21.3% of total operating
revenues from 20.7% incurred during the second quarter 1997, but
declined by $215,000 to $1,350,000 from $1,565,000. The Company
also capitalized less during the second quarter of 1998. During
the second quarter of 1998 the Company capitalized $846,000 or
46.7% of total software development costs, while during the
second quarter 1997 the Company capitalized $954,000 or 44.8% of
total software development costs, a decrease of $108,000.
Together the $323,000 reduction in aggregate software
development costs reflects the impact of redeploying 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
investment in new development efforts as part of the Company's
overall growth strategy.
Sales and Marketing. Sales and marketing costs for the second
quarter 1998 as a percentage of total revenues, increased to
40.7% from 30.2% 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 second quarter of 1998 of $296,000 as
compared to similar costs for the second quarter of 1997.
General and Administrative Expenses. General and administrative
expenses for the second quarter of 1998 increased by $92,000,
and increased to 18.0% of total revenues from 13.9% incurred
during the second quarter of 1997. This increase includes
$373,000 of non-recurring expenses. Closing the Apple Valley,
Minnesota office resulted in $142,000, settlement of the
litigation with the former president and CEO resulted in
$125,000 of severance pay and legal fees incurred, and employee
terminations resulting from the functional reorganization and
streamlining resulted in severance and termination benefits of
$106,000. These non-recurring expenses more than offset the
cost reductions associated with the functional reorganization
and streamlining plan and a reduction of $77,000 in expenses
accrued under the Company's Management Incentive Compensation
Plan ("MIC Plan") for the second quarter of 1998 compared to the
second quarter 1997.
11
Other Income (Expense). Net other income for the second
quarter 1998 decreased by $112,000 to $53,000, as compared to
approximately $165,000 for the same period 1997. Interest
income decreased by $114,000 during the second quarter of 1998
principally due to the cash used by operating and investing
activities.
(Six months ended June 30, 1998 compared to six months ended
June 30, 1997)
Revenues. During the six months ended June 30, 1998 the Company
reported revenues of $12,361,000 a decrease of $5,934,000 from
revenues for the same period 1997. During the first six 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 $2,961,000 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 six months of 1998, only
$126,000 of revenue was recognized under the Sunquest Agreement.
This represents $75,000 of revenue from licenses sold by
Sunquest and $51,000 from software support to Sunquest. In
addition, government revenue of only $886,000 was recognized
during the first six 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 11.4% of total revenues for the first six months of 1998,
compared to 12.6% for the first six months of 1997, a decline of
$896,000. 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 six months
of 1998, decreased by $5,128,000 over the same period a year
ago, from $7,223,000 to $2,095,000. The Company recognized
initial pathology application software license revenue of
$2,777,000 under the Sunquest Agreement during the first six
months of 1997, and only $75,000 of application software license
revenue thereunder during the first six months of 1998. Also,
during the first six months of 1998, the Company recognized only
$27,000 of pathology application software license revenue from
government customers. This represents a $1,789,000 decrease
from the $1,816,000 of application software license revenue
recognized during the first six months of 1997 through
deliveries under a completed U. S. Government sub-contract
agreement. In addition, other pathology application software
license revenue decreased by $402,000 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 $4,893,000.
Laboratory software application license revenue for the six
months ended June 30, 1998 decreased by $135,000. 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. Radiology software application
license revenues for the six months ended June 30, 1998 declined
by $131,000 compared to the first six 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.
These decreases more than offset the gain in imaging application
software license revenues of $60,000.
Software support revenues increased $679,000 to $5,921,000 for
the first six months of 1998, compared to $5,242,000 for the
same period one year ago. This increase is principally
attributable to successful implementations of new systems. As
of June 30, 1998, the recurring annualized billable support base
was $12.4 million, with an additional $1.8 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 $590,000 to $2,933,000
from $3,523,000. This decrease principally results from the
training and implementation services in connection with system
installations to the DOD hospitals completed in 1997.
12
Cost of Products Sold. Cost of products sold as a percent of
total revenues for the first six months of 1998 decreased to
11.5% from 13.1% for the same period 1997. Hardware revenues
during the first six months of 1998 similarly decreased to 11.4%
from 12.6% of total revenues for the first six 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. In addition, third party
software costs decreased to $209,000 during the first six months
of 1998 compared to $428,000 incurred during the first six
months of 1997, principally due to the decline in purchases of
the mumps operating system licenses as a result in the decrease
in application software license revenue and the shift to the
client server platform.
Client Services Expense. Client services expense for the first
six months of 1998 decreased $81,000 to $5,663,000 from
$5,744,000 for the first six months of 1997, increasing as a
percentage of sales from 31.4% to 45.8%. 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 six months of 1998 increased to 25.0% of total operating
revenues from 16.0% incurred during the first six months of
1997. Development efforts continued as part of the Company's
overall growth strategy. As such, the Company capitalized
$1,787,000 or 43% of total software development costs during the
first six months of 1998 compared to $1,707,000 or 44.1% of
total software development costs for the same period of 1997.
The intensified development effort during the six months of 1998
resulted in image enabling the Company's client server product
releases for radiology and pathology, and has provided more
uniformity within the Company's product line.
Sales and Marketing. Sales and marketing costs for the first
six months of 1998 as a percentage of total revenues, increased
to 42.7% from 22.0% 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 six months of 1998 of $1,249,000
as compared to similar costs for the first six months of 1997.
General and Administrative Expenses. General and administrative
expenses for the first six months of 1998 decreased by $149,000,
but increased to 17.6% of total revenues from 12.7% incurred
during the first six months of 1997. The decreased expenses
include a $132,000 reduction in amounts accrued under the
Company's Management Incentive Compensation Plan ("MIC Plan").
The MIC Plan accrual reduction and other savings associated with
relocating CoMed and Dynacor administration to the Company's
headquarters, more than offset the non-recurring charges
associated with closing the Apple Valley office of $142,000, the
$125,000 charge to settle the litigation with the former
president and CEO, and employee termination and severance
benefits of $106,000 resulting from the functional
reorganization and streamlining plan.
Other Income (Expense). Net other income for the first six
months of 1998 decreased by $188,000 to $148,000, as compared to
approximately $336,000 for the same period 1997. Interest
income decreased by $194,000 during the first six months of 1998
principally due to the cash used by operating and investing
activities.
Liquidity and Capital Resources
As of June 30, 1998 the Company had cash equivalents of
$1,219,000, working capital of $1,744,000, and a working capital
ratio of 1.17 to 1.
Contracts receivable as of June 30, 1998 decreased $1,055,000 to
$2,037,000 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 June
30, 1998 the Sunquest Agreement had a carrying value of
approximately $954,000. The remaining change in contracts
receivable results from scheduled collections on monthly
installment receivables from radiology information system
customers. As of June 30, 1998, all contracts receivables were
current with applicable payment terms.
13
During the first six months of 1998 the Company capitalized
$1,787,000 of software development costs and purchased $628,000
of additional property and equipment. Development efforts
during the first six months of 1998 resulted in image enabling
the Company's client server product releases for radiology and
pathology, 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 growth 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 and purchased a
sales database. The Company expects to continue to invest in
software development and continued internal growth.
Accounts payable and accrued expenses increased $292,000 to
$3,315,000 as of June 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.
During the first six months of 1998 the Company received
$134,000 in proceeds from the exercise of director and employee
options.
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, is secured by all existing
Company assets, interest thereon is payable monthly in arrears
at the bank's prime rate plus one percent, and is based on
advance formulas tied to receivables.
On July 29, 1998 the Company issued 1,000,000 shares of Series C
Preferred 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 $1,825,000. The Series C Preferred Stock
will accrue 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, may be
automatically converted 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.
The Company intends to continue to enhance its product and
service offerings and to seek market expansion opportunities
beyond the recent product releases. The ability to fund future
working capital requirements is 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.
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.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June, the Company's action against the Company's former
president and chief executive officer, in the District Court of
Lancaster County, Nebraska, alleging fraud, negligence and
breach of fiduciary duty, as well as the defendant's counter
claim for defamation seeking $280,000 in severance pay in
addition to two years worth of benefits, were simultaneously
resolved. The Company agreed to pay $82,000 in severance pay
and $43,000 in defendants legal expenses in the stipulation. As
of June 30, 1998 the Company accrued the $125,000 settlement and
the related expense has been included in general and
administrative expenses reported for the quarter ended June 30,
1998.
There were no other material developments in existing or
pending legal proceedings involving the Company.
Item 2. Changes in Securities and Use of Proceeds
The information required by this item is incorporated by
reference to Footnote (C) of the condensed consolidated
financial statements included in Part I therein, and Item 4
Submission of Matters to a Vote of Securities Holders herein.
Item 3. Defaults Upon Senior Securities
None
15
Item 4. Submission of Matters to a Vote of Securities Holders
The Company's Annual Meeting of Shareholders was held on June
4, 1998, in Maitland, Florida. Eight directors were elected to
the Company's Board. A listing of those directors follows:
Name and Principal Occupation Number of Votes Received
Jerry L. Carson
Executive Vice President, CFO
Evans Enterprises 16,042,449
Mitchel J. Laskey
President and CEO
Dynamic Healthcare Technologies, Inc. 16,049,349
Thomas J. Martinson
President
Martinson & Company, Ltd. 16,044,069
Bret Maxwell
Vice Chairman
First Analysis Corporation 16,068,020
David M. Pomerance
President
MMRI, Inc. 15,525,894
Guy Rabbat
Vice President
General Electric Company 15,776,364
Daniel Raynor
Managing Partner
The Argentum Group 16,068,020
Richard W. Truelick
President
Truelick Associates 16,032,120
A proposal to engage KPMG Peat Marwick, LLP as the Company's
independent certified public accountants for the fiscal year
ending December 31, 1998 passed by a vote of 16,113,853 to
99,700 with 12,494 votes abstaining.
A proposal for employer matching contributions, related to 1998
employee deferrals to the Dynamic Healthcare Technologies, Inc.
401(k) plan, be made monthly in the form of Company common
stock, and reserving 500,000 shares of common stock for this
purpose passed by a vote of 8,467,625 to 2,388,767 with 31,980
votes abstaining.
A proposal to adopt an amendment to the Employee Stock Purchase
Plan ("ESP Plan") to extend the expiration date to December 31,
2003 passed by a vote of 8,837,083 to 1,892,504 with 19,950
votes abstaining.
A proposal to ratify issuance of a special Stock Option
Agreement in favor of Mr. Mitchel J. Laskey passed by a vote of
8,229,866 to 2,349,741 with 169,930 votes abstaining. The
options granted under the Special Stock Option Agreement grant
Mr. Laskey the option to acquire up to 400,000 shares of the
Company's Common Stock, $.01 par value, are exercisable through
December 31, 2002, are nontransferable, vest in accordance with
the vesting provisions currently in effect for the Company's
Director and Management Plan, and are summarized as follows:
16
Number of Options Exercise Price
100,000 $ 6.00
100,000 $ 7.50
100,000 $ 9.00
100,000 $10.50
400,000
A proposal to increase the number of Board members to eight (8)
and elect Guy Rabbat as a member of the Board of Directors
passed by a vote of 15,776,364 to 409,658 with 40,025 votes
abstaining.
A proposal to adopt an amendment to Article II, Section 2 of the
Company's By-Laws passed by a vote of 10,439,068 to 379,925 with
99,376 votes abstaining.
The Board of Directors had proposed an amendment to the By-Laws
of the Company pursuant to Section 607.1020 of the Florida
Business Corporation Act and Article II of the By-Laws of the
Company, which relates to the number of Directors of the
Company, by deleting Article II, Section 2 in its entirety, and
replacing it with a new Article II, Section 2 as set forth below.
Current Article II, Section 2
Section 2, Number. The corporation shall have seven directors
initially. The number of directors may be increased or
decreased from time to time by the holders of a majority of the
outstanding shares of the corporation at any regular or special
meeting of shareholders, but no decrease shall have the effect
of shortening the term of an incumbent director (unless the
shareholders remove the director), nor shall there ever be less
than one director.
Proposed New Article II, Section 2
Section 2, Number. The corporation shall have seven (7)
directors initially. The number of directors may from time to
time hereafter be decreased to a minimum of five (5) directors
and increased to a maximum of nine (9) directors, as follows:
(i) at any regular, annual or special meeting of the Board of
Directors, by the vote of directors representing two-thirds
(2/3) of the entire Board of Directors; (ii) by written consent
of two-thirds (2/3) of the entire Board of Directors; or (iii)
by the vote of the holders of a majority of the issued and
outstanding shares present, in person or by proxy, at any annual
or special meeting of the shareholders, but in no event shall a
decrease in the number of directors have the effect of
shortening the term of an incumbent director, unless the
shareholders shall also approve the removal of such director.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3: Amendment to Articles of Incorporation
Exhibit 11: Statement Regarding Computation of Per Share
Earnings.
(b) Reports on Form 8-K:
The Registrant filed a Form 8-K dated June 5, 1998 with the
Commission reporting a proposed private placement of up to
$4,000,000 of units consisting of Series C Preferred Stock and
Warrants.
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: July 31, 1998 /S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, CEO and Treasurer
Date: July 31, 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 3: Amendment to Articles of Incorporation 20
Exhibit 11: Statement regarding computation of per share earnings 28
Exhibit 15: Letter regarding unaudited interim financial information 29
19
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Exhibit 3
AMENDMENT TO ARTICLES OF INCORPORATION
OF
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Article VI of the Articles of Incorporation of DYNAMIC
HEALTHCARE TECHNOLOGIES, INC. was amended by the corporation's
board of directors on July 24, 1998. The corporation is filing
these Articles of Amendment to Articles of Incorporation
pursuant to F.S. 607.0602.
1. The name of the corporation is DYNAMIC HEALTHCARE
TECHNOLOGIES, INC. (the "Corporation").
2. Article VI of the Articles of Incorporation of DYNAMIC
HEALTHCARE TECHNOLOGIES, INC. was amended as follows:
The Corporation is authorized to issue Forty Million
(40,000,000) shares of Common Stock at $.01 par value per share.
The Corporation is authorized to issue Ten Million (10,000,000)
shares of Preferred Stock, at $.01 par value per share, in such
series and variations in the relative rights and preferences,
including voting rights, if any, between such series as the
Board of Directors shall determine.
Of the shares of Preferred Stock, the Corporation is authorized
to issue up to One Million (1,000,000) shares of Series C 8%
Redeemable Convertible Preferred Stock, $.01 par value per share
(the "Series C Preferred Stock"), which shall have the following
attributes:
1. Designations. One Million (1,000,000) shares of the
Preferred Stock of the Corporation shall constitute a series of
Preferred Stock designated as "Series C 8% Redeemable
Convertible Preferred Stock" ("Series C Preferred Stock").
2. Dividends.
(a) Each holder of shares of Series C Preferred Stock will be
entitled to receive, on a pari passu basis, when and as declared
by the Board of Directors out of assets of the Corporation
legally available for payment, a cumulative annual cash dividend
at the rate of $0.16 per share of the Series C Preferred Stock
payable quarterly in arrears on March 31, June 30, September 30
and December 31, commencing September 30, 1998 (each a "dividend
payment date"); provided that, if on any such day banks in the
City of New York are authorized or required to close, dividends
otherwise payable on such day will be payable on the next day
that banks in the City of New York are not authorized or
required to close. Such dividends will be payable, in arrears,
to holders of record as they appear on the stock books of the
Corporation on such record dates, not more than 60 days nor less
than 10 days preceding the payment dates thereof, as shall be
fixed by the Board of Directors. The amount of dividends
payable per share for each dividend period shall be computed by
dividing by four the $0.16 annual dividend. The amount of
dividends payable on the Series C Preferred Stock for the
initial dividend period and for any period shorter than a full
quarterly dividend shall be computed on the basis of a 360-day
year of twelve 30-day months. Dividends on shares of Series C
Preferred Stock shall cease to accrue upon the redemption or
conversion of such shares pursuant to Section 4 or Section 6
hereof.
(b) In the event the Corporation (i) shall be in default under
the terms of any loan agreements or similar agreement with
commercial lenders for borrowed money; (ii) shall file for, or
have filed against it a petition for bankruptcy; or (iii) shall
not make a dividend payment when due (any of which, shall be an
"Event of Default") the dividend rate on the Series C Preferred
Stock shall increase to fifteen (15%) percent per annum (the
"Default Dividend Rate"), so long as the Event of Default
continues.
(c) The Corporation may not declare or pay any dividend or make
any distribution of assets on, or redeem, purchase or otherwise
acquire, shares of common stock of the Corporation ("Common
Stock") or of any other stock of the Corporation ranking junior
to the Series C Preferred Stock as to the payment of dividends or
20
the distribution of assets upon liquidation, dissolution or
winding up, unless all accrued and unpaid dividends on the
Series C Preferred Stock for all prior dividend periods have
been or contemporaneously are declared and paid (including any
dividends paid pursuant to Section 2(b)) and the full quarterly
dividend on the Series C Preferred Stock and for the current
dividend period has been or contemporaneously is declared and
set apart for payment.
3. Rights on Liquidation, Dissolution or Winding Up, Etc.
(a) In the event of any voluntary or involuntary liquidation of
the Corporation, the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus
or earnings, shall be distributed in the following order of
priority:
(i) The holders of the Series C Preferred Stock shall be
entitled to receive, prior and in preference to any distribution
to the holders of Common Stock or any class of stock ranking as
to dividends or upon liquidation junior to the Series C
Preferred Stock (x) as to the holders of Series C Preferred
Stock, an amount equal to the greater of (A) $2.00 per share for
each share of Series C Preferred Stock then outstanding, and, in
addition, an amount equal to all accrued but unpaid dividends on
such share of Series C Preferred Stock as of the date such
payment is made to the holders of Series C Preferred Stock or
(B) the amount the holders of Series C Preferred Stock would
have received had the holders of Series C Preferred Stock
converted the Series C Preferred Stock into Common Stock as
provided in Section 6 immediately prior to the voluntary or
involuntary liquidation and, in addition, an amount equal to all
accrued but unpaid dividends on such shares of Series C
Preferred Stock as of the date such payment is made to the
holders of Series C Preferred Stock.
(ii) Distributions made to holders of Series C Preferred Stock
pursuant to this Section 3(a) shall be made pro rata based on
the amounts the respective liquidation preferences of the Series
C Preferred Stock determined in accordance with Section 3(a)(i)
bear to the total amount available for distribution.
(iii) After distribution of the amounts set forth in Section
3(a)(i) above, the remaining assets of the Corporation available
for distribution, if any, to the shareholders of the Corporation
shall be distributed to the holders of issued and outstanding
shares of Common Stock, pro rata, based upon their respective
holdings.
4. Redemption of Series C Preferred Stock
(a) On any date on or after two (2) years from the date of
issuance, the Corporation may, at its option, (unless otherwise
prevented by law) redeem, upon the written notice to the holders
of the then outstanding shares of Series C Preferred Stock
(which notice shall state the Corporation's intention to
exercise the redemption option set forth herein as provided in
Section 4(a)). The redemption price of shares of the Series C
Preferred Stock shall be equal to $2.00 plus any accrued but
unpaid dividends as of the redemption date.
(b) Notice of any Series C Preferred Stock redemption date and
the redemption option exercisable in connection therewith
pursuant to this Section 4 shall be sent by the Corporation by
first-class certified mail, return receipt requested, postage
prepaid, to the holders of record of shares of Series C
Preferred Stock at their respective addresses as the same shall
appear on the books of the Corporation. Such notice shall be
mailed not less than 30 nor more than 60 days in advance of the
applicable Series C Preferred Stock redemption date. At any
time on or after the Series C Preferred Stock redemption date,
the holders of record of shares of Series C Preferred Stock to
be redeemed on such Series C Preferred Stock redemption date in
accordance with this Section 4 shall be entitled to receive the
applicable redemption price upon actual delivery to the
Corporation or its agents of the certificates representing the
shares to be redeemed. If upon any redemption the assets of the
Corporation available for redemption shall be insufficient to
pay the holders of the shares of Series C Preferred Stock the
full amounts to which they shall be entitled, the holders of
shares of Series C Preferred Stock shall share ratably in any
such redemption according to the respective amounts which would
be payable in respect of such shares to be redeemed to the
holders thereof if all amounts payable on or with respect to
such shares were paid in full.
5. Voting Rights. The holders of the Series C Preferred Stock
shall have no voting rights whatsoever, except for any voting
rights to which they may be entitled under the laws of the State
of Florida, provided, however, that if dividends on the Series C
Preferred Stock shall be in arrears for two calendar quarter(s)
21
and so long as such dividends shall be in arrears, each holder
of shares of Series C Preferred Stock shall be entitled to such
number of votes in respect of such Series C Preferred Stock as
shall equal the largest whole number of shares of Common Stock
into which such Series C Preferred Stock are then convertible as
provided in Section 6 hereof, to vote on all matters to which
holders of Common Stock shall be entitled to vote, voting
together with the holders of Common Stock as one class.
6. Conversion of Series C Preferred Stock.
(a) The holders of Series C Preferred Stock shall have the
right, at such holder's option, at any time or from time to time
to convert such shares of Series C Preferred Stock into such
whole number of fully paid and nonassessable shares of Common
Stock which results from multiplying the number of shares of
Series C Preferred Stock to be converted by the "Conversion
Value" and dividing the result by the Conversion Price. The
number of shares of Common Stock into which the Series C
Preferred Stock is convertible is hereinafter collectively
referred to as the "Conversion Rate" for such series. The
initial Conversion Price per share of the Series C Preferred
Stock shall be $2.00, and the Conversion Value per share of
Series C Preferred Stock shall be $2.00. The holder of any
shares of Series C Preferred Stock exercising the aforesaid
right to convert such shares into shares of Common Stock shall
be entitled to receive, in cash, an amount equal to all accrued
dividends with respect to such shares of Series C Preferred
Stock up to and including the respective conversion date of the
Series C Preferred Stock.
(b) Each share of Series C Preferred Stock shall automatically
be converted into shares of Common Stock at the then effective
Conversion Price in accordance with Section 6(a) for such series
if the Corporation's Common Stock shall have traded above 200%
of the then effective Conversion Price for twenty (20)
consecutive trading days with an average weekly trading volume
of at least 250,000 shares provided that the shares of Common
Stock received upon conversion must be registered or eligible to
be sold pursuant to Rule 144 promulgated under the Securities
Act of 1933 as amended.
(c) The Conversion Price of the Series C Preferred Stock shall
be subject to adjustment from time to time as set forth below.
(i) If the Corporation shall issue, after the initial issuance
date of the Series C Preferred Stock, any Additional Stock (as
defined below) without consideration or for a consideration per
share less than the Conversion Price for the Series C Preferred
Stock in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall forthwith (except
as otherwise provided in this clause (i)) be reduced to such
lower purchase price (or in the case of options and similar
securities, the consideration received for the option and the
consideration to be received upon exercise of such option) or,
if for no consideration, $.01.
(ii) "Additional Stock" as used herein shall mean any shares of
Common Stock issued (or deemed to have been issued) or rights,
warrants, options or other exchangeable securities convertible
into Common Stock (including shares of Common Stock held in the
Corporation's Treasury) by the Corporation after July 29, 1998.
(iii) Except to the limited extent provided for in subsection
6(c)(vii), no adjustment of such Conversion Price pursuant to
this section 6(c) shall have the effect of increasing the
Conversion Price for the Series C Preferred Stock above the
Conversion Price for the Series C Preferred Stock in effect
immediately prior to such adjustment.
(iv) No adjustment in the Conversion Price for the Series C
Preferred Stock shall be required unless such adjustment would
require an increase or decrease of at least one cent ($0.01) in
such price; provided, however, that any adjustments which by
reason of this subsection (iv) are not required to be made shall
be carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations
under this Section 6(c) shall be made to the nearest one cent
($0.01). In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions
or other expenses allowed, paid or incurred by the Corporation
for any underwriting or otherwise in connection with the
issuance and sale thereof.
22
(v) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
value thereof as determined in good faith by the Board of
Directors.
(vi) In the case of the issuance (whether before, on or after
the original issuance date of the Series C Preferred Stock) of
options to purchase or rights to subscribe for Common Stock,
securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following
provisions shall apply for all purposes of this Section 6(c):
(A) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the
passage of time, but without taking into account potential
anti-dilution adjustments) of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the
manner provided in subsections 6(c)(v) and 6(c)(vi), if any,
received by the Corporation upon the issuance of such options or
rights plus the minimum exercise price provided in such options
or rights (without taking into account potential anti-dilution
adjustment) for the Common Stock covered thereby.
(B) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of
time, but without taking into account potential anti-dilution
adjustments) for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof, shall be deemed to
have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any
such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any,
to be received by the Corporation (without taking into account
potential anti-dilution adjustments) upon the conversion or
exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be
determined in the manner provided in subsections 6(c)(v) and
6(c)(vi).
(C) In the event of any change in the number of shares of Common
Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or
exchangeable securities (excluding a change resulting solely
from the anti-dilution provisions thereof if such change results
from an event which gives rise to an anti-dilution adjustment
under this subsection 6(c)), the Conversion Price of the Series
C Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment
shall be made for the actual issuance of Common Stock or any
payment of such consideration upon the exercise of any such
options or rights or the conversion or exchange of such
securities.
(D) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible
or exchangeable securities, the Conversion Price of the Series C
Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities or options or
rights related to such securities, shall be recomputed to
reflect the issuance of only the number of shares of Common
Stock (and convertible or exchangeable securities which remain
in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or
upon the exercise of the options or rights related to such
securities.
(E) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to subsections
6(c)(vi)(A) and 6(c)(vi)(B) shall be
23
appropriately adjusted to
reflect any change, termination or expiration of the type
described in either subsection 6(c)(vi)(C) or 6(c)(vi)(D).
(vii) If, prior to the conversion or redemption of a share of
Series C Preferred Stock, the Company shall issue any shares of
Common Stock as a stock dividend or subdivide the number of
outstanding shares of Common Stock into a greater number of
shares of Common Stock, then, and in either of such cases, the
number of shares of Common Stock into which a share of Series C
Preferred Stock is then convertible shall be proportionately
increased; and, conversely, in the event the Company shall
contract the number of outstanding shares of Common Stock by
combining such shares of Common Stock into a smaller number of
shares of Common Stock, then, and in such case, the number of
shares of Common Stock into which a share of Series C Preferred
Stock is then convertible shall be proportionately decreased.
The declaration of a dividend payable in cash on shares of
Common Stock at substantially the same time as the Company
offers to its shareholders a right to purchase new shares of
Common Stock from the proceeds of such dividend or for an amount
substantially equal to the dividend, shall, for the purpose
hereof, be deemed to have been issued as a share dividend. Any
dividend paid or distributed upon the shares of Common Stock or
a class of securities convertible into shares of Common Stock
shall be treated as a dividend paid on the Common Stock to the
extent that shares of Common Stock are issuable upon the
conversion thereof.
An adjustment made pursuant to this subparagraph (d) shall
become effective (i) in the case of a dividend, immediately
after the opening of business on the day following the record
date for the determination of shareholders entitled to receive
such dividend and (ii) in the case of a subdivision or
contraction, immediately after the time when such subdivision or
contraction, as the case may be, becomes effective.
(d) Before any holder of Series C Preferred Stock shall be
entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any
transfer agent for the Series C Preferred Stock, and shall given
written notice to the Corporation at its principal corporate
office, of the election to convert the same and shall state
therein the name or names in which the certificate or
certificates for the shares of Common Stock are to be issued.
The Corporation shall, as soon as practicable thereafter, issue
and deliver at such office to such holder of Series C Preferred
Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the
shares of Series C Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock
as of such date.
(e) In the event the Corporation shall declare a distribution
payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or options or rights to the holders
the Corporation's Common Stock, then, in each such case for the
purpose of this subsection 6(e), the holders of the Series C
Preferred Stock shall be entitled to a proportionate share of
any such distribution as though they were the holders of the
number of shares of Common Stock of the Corporation into which
their shares of Series C Preferred Stock are convertible as of
the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such
distribution.
(f) If at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for
elsewhere in this Section 6) provision shall be made so that the
holders of the Series C Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series C Preferred
Stock the number of shares of stock or other securities or
property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section 6 with respect to the rights of the
holders of the Series C Preferred Stock after the
recapitalization to the end that the provisions of this Section
6 (including adjustment of the Conversion Price then in effect
and the number of shares issuable upon conversion of the Series
C Preferred Stock) shall be applicable after that event as
nearly equivalent as may be practicable.
24
(g) The Corporation will not, by amendment of its Amended and
Restated Articles of Incorporation, as amended through the date
of the filing hereof, or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 6 and in the
taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of the
Series C Preferred Stock against impairment.
(h) If any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation or merger of
the Corporation with and into another corporation, or the sale
of all or substantially all of its assets to another
corporation, shall be effected while any shares of Series C
Preferred Stock are outstanding in such a manner that holders of
shares of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby each holder of Series C
Preferred Stock shall thereafter have the right to receive upon
the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore
receivable upon conversion of Series C Preferred Stock, such
shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of
shares of such Common Stock immediately theretofore so
receivable had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in such case
appropriate provision shall be made with respect to the rights
and interests of the holders of Series C Preferred Stock to the
end that the provisions hereof shall thereafter be applicable,
as nearly as may be possible, in relation to any shares of
stock, securities or assets thereafter deliverable upon the
conversion of such shares of Series C Preferred Stock. The
Corporation shall not effect any such consolidation, merger or
sale unless prior to or simultaneously with the consummation
thereof the survivor or successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to each holder of
Series C Preferred Stock, the obligation to deliver to such
holders of Series C Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing
provisions, such holder of Series C Preferred Stock may be
entitled to receive, and containing the express assumption of
such successor corporation of the due and punctual performance
and observance of every provision of these Articles of
Incorporation to be performed and observed by the Corporation
and of all liabilities and obligations of the Corporation
hereunder with respect to the Series C Preferred Stock.
(i) (i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series C Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded
to the nearest whole share. In lieu of any fractional shares to
which the holder would otherwise be entitled, the Corporation
shall make a cash payment equal to the Current Market Price of
the Common Stock as of two business days prior to payment
multiplied by such fraction.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series C Preferred Stock pursuant to
this Section 6, the Corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series C
Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Series C
Preferred Stock, furnish or cause to be furnished to such holder
a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price for such Series C
Preferred Stock at the time in effect, and (C) the number of
shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of a
share of such Series C Preferred Stock.
(j) In the event of any taking by the Corporation of a record of
the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to
receive any other right, the Corporation shall mail to each
holder of Series C Preferred Stock, at least twenty (20) days
prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
25
(k) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the
shares of the Series C Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series
C Preferred Stock; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the
Series C Preferred Stock, in addition to such other remedies as
shall be available to the holder of such Series C Preferred
Stock, the Corporation will take such corporate action as may,
in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including,
without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to
these provisions. The Corporation shall pay all documentary,
stamp or other transactional taxes attributable to the issuance
or delivery of shares of capital stock of the Corporation upon
conversion of any shares of Series C Preferred Stock; provided,
however, that the Corporation shall not be required to pay any
taxes which may be payable in respect of any transfer involved
in the issuance or delivery of any certificate for such shares
in a name other than that of the holder of the shares of Series
C Preferred Stock in respect of which such shares are being
issued. All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will,
upon issuance by the Corporation, be validly issued, fully paid
and nonassessable and free from all taxes, liens or charges with
respect thereto.
(l) Any notice required by the provisions of this Section 6 to
be given to the holders of shares of Series C Preferred Stock
shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his
address appearing on the books of the Corporation.
(m) In the event any shares of Series C Preferred Stock shall be
converted pursuant to this Section 6, the shares so converted
shall be canceled. The Amended and Restated Articles of
Incorporation of the Corporation, as amended, may be
appropriately amended from time to time to effect the
corresponding reduction in the Corporation's authorized capital
stock.
7. Definitions. The term "Current Market Price" at any date of
one share of Common Stock means the daily closing price on the
day before the day in question. The closing price shall be the
last reported sales price or, in case no such reported sales
took place on such day, the average of the last reported bid and
asked prices, in either case on the principal national
securities exchange on which the common stock is listed or
admitted to trading (or if the common stock is not at the time
listed or admitted for trading on any such exchange, then such
price as shall be equal to the average of the last reported bid
and asked prices as reported by the National Association of
Securities Dealers Automated Quotations Systems ("NASDAQ") on
such day, or if, on any day in question, the common stock shall
not be quoted on NASDAQ, then such price shall be equal to the
last reported bid and asked prices on such day as reported by
the National Quotation Bureau, Inc. or any similar reputable
quotation and reporting service, if such quotation is not
reported by the National Quotation Bureau, Inc. If such
quotation is not reported by a reputable quotation and reporting
service, then Current Market Price shall be as determined in
good faith by a majority of the Corporation's Board of Directors.
8. The foregoing resolution was duly adopted by the Board of
Directors of the Corporation on July 24, 1998.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
26
IN WITNESS WHEREOF, the undersigned Director of this Corporation
has executed these Articles of Incorporation on July 27, 1998.
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
By: /S/ MITCHEL J. LASKEY
Mitchel J. Laskey, Director
27
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Exhibit 11
Computation of Weighted Average Number of Shares
Outstanding and Per Share Earnings
Three Months Ended Six Months Ended
June 30, (Unaudited) June 30, (Unaudited)
1997 1998 1997 1998
Earnings (loss) available for
common shareholders:
Net earnings (loss) $(1,766,026) $(2,199,076) $1,208,730 $(5,118,285)
Common and common equivalent
shares outstanding
Basic:
Weighted average number of
common shares outstanding 17,328,473 18,035,604 17,286,218 18,032,232
Diluted:
Weighted average number of
common shares outstanding 17,328,473 18,035,604 17,286,218 18,032,232
Dilutive effect of options
and warrants using average
market price -- -- 947,906 --
Weighted average number of
common and common equivalent
shares outstanding assuming
full dilution 17,328,473 18,035,604 18,234,124 18,032,232
Earnings (loss) per share
basic and diluted $ (0.10) $ (0.12) $ 0.07 $ (0.28)
28
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 July 31, 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
July 31, 1998
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,219,001
<SECURITIES> 0
<RECEIVABLES> 6,536,662
<ALLOWANCES> 303,279
<INVENTORY> 0
<CURRENT-ASSETS> 12,071,541
<PP&E> 7,729,471
<DEPRECIATION> 4,002,204
<TOTAL-ASSETS> 27,324,692
<CURRENT-LIABILITIES> 10,327,087
<BONDS> 369,606
181,566
0
<COMMON> 0
<OTHER-SE> 16,446,433
<TOTAL-LIABILITY-AND-EQUITY> 216,627,999
<SALES> 1,411,775
<TOTAL-REVENUES> 12,360,513
<CGS> 1,425,648
<TOTAL-COSTS> 17,627,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,796
<INCOME-PRETAX> (5,118,285)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,118,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,118,285)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
