FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1998 or
___Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from to
Commission File Number 0-12516
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, Fifth Floor, Lake Mary, Florida 32746
(Address of principal executive offices) (ZIP Code)
(407) 333-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
The aggregate market value of the voting stock held by non-affiliates, based
on the average bid and asked prices as of March 8, 1999, was $14,816,100. A
total of 12,811,155 shares of the Company's common stock were held by persons
and entities believed to be non-affiliated on March 8, 1999, and the closing
bids and ask prices of the Company's common stock on this date were $1.125
and $1.188, respectively.
As of March 8, 1999, there were 18,395,814 shares outstanding of the issuer's
only class of common stock.
This report consists of fifty-six (56) pages.
The index to exhibits appears on page nineteen (19).
Documents Incorporated by Reference
(1) Portions of the definitive proxy statement for the Company's 1998
Annual Meeting of Shareholders, to be filed within 120 days of the end
of the Company's fiscal year covered by this report, pursuant to
General Instruction G(3) to Form 10-K.
1
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART I
Item 1. Business
General
Dynamic Healthcare Technologies, Inc. ("Dynamic" or the "Company") is a
leading provider of mission-critical healthcare information systems for
clinical services departments and facilities. The Company's product line,
DynamicVision(R), is a suite of image-, voice-, and web-enabled systems for
anatomic pathology, radiology, laboratory, surgical services and health
information management. By making it possible for healthcare professionals to
have access to the information they need about a patient anytime and anywhere,
Dynamic's information systems contribute to higher quality and more cost-
effective delivery of care. Dynamic is headquartered in the greater Orlando
area and has a key operations and development center near Boston. The Company
provides support for all of its systems and offers integration and other
consulting services.
Dynamic currently serves more than 600 customers, most located in the United
States. Key customers include the UCLA Medical Center, Methodist Hospital of
Memphis, Orlando Regional Health System, University of North Carolina
Hospitals, University of Pittsburgh, University of Illinois at Chicago Medical
Center, Memorial Sloan-Kettering Cancer Center, Advocate Health Care, Borgess
Health Alliance, The Mayo Clinic and Medical College of Virginia.
The Company was originally incorporated in California in 1977, reincorporated
in Nebraska in 1982 and subsequently reincorporated in Florida in 1996. The
Company's executive offices are located at 615 Crescent Executive Court, Fifth
Floor, Lake Mary, Florida 32746. Its telephone number is (407) 333-5300 and
its World Wide Web address is http://www.dht.com.
Industry
The healthcare industry continues to undergo rapid and significant change.
Cost containment pressures, industry consolidation, the increasing impact of
managed care, the rising standards of healthcare quality, the availability of
healthcare information on line, the shift from inpatient to outpatient care
settings, competition amongst healthcare providers, increasing involvement of
patients in their healthcare delivery process, and the expectation of and
demand for instant access to information on the part of physicians, patients
and payers represent fundamental trends in today's healthcare operating
environment. While healthcare has been slower than other industries to
recognize the value of information technology, industry surveys indicate that
healthcare providers recognize that the key to effective cost control and
quality management lies in the collection, availability and analysis of
medical records to assess treatment patterns, resource utilization and
outcomes. Caregivers, managers and third party payers face rapidly increasing
demand for information.
While healthcare providers agree that they must invest in information systems
technology to increase productivity and efficiency, measure and manage costs,
and improve the quality of the services they deliver, much of their attention
during 1998 was directed toward assuring Y2K compliance of their existing
information systems. Additionally, the 1998 Annual Healthcare Information
Management and Systems Society ("HIMSS") Leadership Study (February 99)
indicates that 39% of the 1100+ survey respondents site Y2K compliance as the
highest priority for their organizations over the next 12 months. During this
time period, it is expected that these efforts will continue to distract
attention and divert some capital funds that might otherwise be used for new
information systems.
As the need for information continues to grow, hospitals, providers and payers
of all sizes face the challenge of implementing healthcare information systems
that are scaleable, capable of working with existing multiple legacy
information systems and flexible to adapt to changes in the healthcare
marketplace. These systems must also integrate all aspects of managing the
healthcare delivery process.
The healthcare industry continues to consolidate. The breakup and downsizing
of the nation's largest healthcare provider began in 1997 and continues today.
This has led to new mergers and partnerships. There continues to be fewer but
larger healthcare entities and the emerging organizational model is the
integrated delivery network ("IDN"). An IDN is a network of healthcare
organizations that assumes and manages healthcare risk, provides coordinated
care and is held financially and clinically accountable for the health of the
population it serves.
2
IDNs require innovative information systems infrastructures to support their
multi-entity, enterprise environments. Their information systems must
contribute to making the delivery of healthcare services more efficient and
effective across the continuum of care. They must deliver tangible cost
reductions and measurable productivity and quality improvements, making the
availability of complete, timely and cost-effective patient-centered
information essential.
The shift from inpatient to outpatient care settings is another trend that
influences the need for information systems that will connect multiple sites.
When most care was delivered inside the walls of a hospital, paper records,
slides, reports, X-ray film could be transported from department to
department. Managed care and increasing reimbursement pressures have forced a
shift to outpatient surgery, ambulatory care centers and alternative delivery
sites. Information systems technology is vital to the ability of healthcare
providers to manage patient care safely, effectively and cost-efficiently
across multiple sites. According to the HIMSS Leadership Survey, 84% of the
respondents are using telehealth capabilities to communicate across multi-site
environments - with medical image transmission being the highest priority for
1999. This is consistent with the company's focus on its radiology and
Picture Archiving and Communication System (PACS) solutions. In addition to
medical image transmission, telehealth applications include videoconferencing,
professional continuing education as well as patient interviews and education.
The HIMSS Leadership study also confirmed that healthcare providers' attention
to Y2K issues has had some impact on readiness to move ahead with enterprise-
wide electronic health record solutions. However, this same survey indicates
that US healthcare providers are beginning to make progress toward
implementing computer-based patient records (CPR's). Ten percent of this
year's respondents say that their organizations have an operational CPR system
in place, 29% have begun to install a CPR system and 24% say that they have
developed a CPR implementation plan.
It should be noted, however, that Y2K compliance concerns have had little or
no impact on the implementation of solutions in clinical areas such as
anatomic pathology, radiology and laboratory. These departments are critical
to a provider's ability to deliver healthcare services, and the need to
collect, store, distribute and analyze data becomes more important as access
to on-line information affects the expectation of patients, payers and
physicians. Healthcare providers also have an increasing need to compete in
their marketplace, and sophisticated clinical information systems technology
enables them to do so.
The Company believes that its strategy for the delivery of image- voice- and
web-enabled clinical information systems is congruent with today's provider
environments. In addition, by delivering solutions with a clinical emphasis,
healthcare providers are building a basis for an electronic health record.
Products and Services
Dynamic Healthcare Technologies uses the power of technology to improve
patient care and lower costs by connecting people with information. The
Company's DynamicVision(R) family of clinical information systems streamlines
departmental operations and brings together patient records including data,
images, voice and text. The DynamicVision family includes solutions for
radiology, anatomic pathology, health information management, laboratory and
Surgical Services. Using these solutions, health professionals have access to
the clinical information they need to make decisions and manage patient care,
anytime, anywhere.
<TABLE>
Products
Generally Type of
Available Solution Description
<S> <S> <S>
I. Radiology Product line is DynamicVision for Radiology
Dynamic RadPlusTM Radiology Introduced in late 1997, Dynamic RadPlus
Information is a voice and image-enabled client/server
System radiology information system that manages
clerical and administrative functions for
the radiology department. Application areas
include scheduling, patient tracking, film
tracking and department reporting.
Maxifile(R) Radiology A first generation MUMPS-based radiology
Information information system that manages clerical and
System administrative functions for the radiology
department. Application areas include
scheduling, patient tracking, film tracking
and reporting. The Company is aggressively
promoting customer migrations from Maxifile
to Dynamic RadPlus.
3
Dynamic
PACSPlus(TM) PACS An information-enabled picture archiving and
communication system (PACS) that integrates
information from the radiology information
system with images and provides access to
the patient's complete radiology history
via local and remote PACSPlus workstations.
The Company received FDA 510K clearance to
market Dynamic PACSPlus in December 1998.
Dynamic Mammography Dynamic Optima is an integral component of
Optima(R) Dynamic RdPlus that computerizes patient
management, reporting and regulatory
requirements related to mammography
services. Through an OEM agreement, the
Company markets the Penrad system under
the name Dynamic Optima. Penrad Inc. is a
Dynamic business partner.
Dynamic Talk Continuous Dynamic Talk is an integrated component of
Speech RadPlus and gives radiologists the option
Recognition of dictating and editing their own
diagnostic reports using continuous speech
recognition technology, thus reducing
transcription costs and delays in
communicating reports to physicians.
Dynamic WebSight Teleradiology WebSight is a browser-based teleradiology
system that provides radiologists and
physicians with access to images and
information anytime/anywhere.
II. Anatomic
Pathology Product line is DynamicVision for Pathology
Dynamic CoPathPlus Anatomic Dynamic CoPathPlus is a voice and image-
Pathology enabled client/server pathology information
System system that automates specimen accessioning
and case dictation, produces patient and
management reports, and provides SNOMED and
natural language retrieval of diagnoses.
CoPath M Anatomic A first generation, MUMPS-based pathology
Pathology information system that automates specimen
System accessioning and case dictation, produces
patient and management reports, and
provides SNOMED and natural language
retrieval of diagnoses. The Company is
aggressively promoting customer migrations
from CoPath M to CoPathPlus.
Dynamic Image Dynamic PICSPlus is an integrated component
PICSPlus (TM) Management of Dynamic CoPathPlus. It captures stores
System and communicates high-resolution digital
microscope and gross images of pathology
specimens. The foundation of PICSPlus is
the AutoCyte Image Management System, (AIMS),
a product of AutoCyte, Inc. The company
has an exclusive marketing agreement with
AutoCyte, Inc.
Dynamic Talk Continuous Dynamic Talk gives pathologists the option of
Speech dictating and editing their own diagnostic
Recognition reports using continuous speech recognition
technology, thus reducing transcription
costs and report delays.
III. Clinical
Laboratory DynamicVision for Laboratory
Premier Series Laboratory Manages clerical and administrative functions
Information in the clinical laboratory, including
System (LIS) monitoring and controlling specimens,
ordering, tracking and results reporting.
LabPro 2000 Laboratory LabPro is a first generation LIS that
Information manages the clerical and administrative
System (LIS) functions in the clinical laboratory,
including monitoring and controlling
specimens, ordering, tracking and results
reporting. The Company is aggressively
promoting customer migrations from LabPro
to Premier Series.
4
Products
Generally Type of
Available Solution Description
IV. Electronic
Document
Management Product line is DynamicVision for Health
Information Management
Dynamic Electronic An enterprise-wide, electronic document
RecordPlus(TM) Document management system that provides document
Management imaging and management, chart completion,
advanced workflow and business process
automation for the health information
management department (medical records),
business office and other document
intensive departments.
V. Surgical Services Product line is DynamicVision for Surgical
Services
Dynamic Perioperative SurgiPlus is a perioperative clinical
SurgiPlus(TM) Clinical information system currently in development.
Information The first application is Preoperative
System Evaluation. It comprises two components:
A) a Preoperative Assessment that captures
and stores pertinent patient information,
history questionnaires, physical examinations;
and B) a Preoperative Holding module that
captures and presents the documentation
related to final preparation of the
patient by nursing and anesthesia personnel.
Alpha testing for the Preoperative
Assessment module is scheduled for Q1 1999.
Additional modules of SurgiPlus are under
evaluation at this time.
</TABLE>
DynamicVision for Radiology
The Company's solution set for radiology comprises new, client/server
architecture systems. Competitive advantage is gained by the close
relationship between the Radiology Information System (RIS) and the Picture
Archiving and Communication System (PACS). Information collected by the RIS
is available to the PACS, and images captured by the PACS are available to the
RIS. The result is an "image-enabled" RIS combined with an "information-
enabled" PACS. Primary markets for the Company's radiology solutions include
hospitals, clinics and independent diagnostic imaging centers.
DynamicVision for Radiology begins with Dynamic RadPlus, an image-enabled,
client/server radiology information system. RadPlus applications include
scheduling, patient tracking, film tracking, reporting, and management of all
radiology functions. Using RadPlus, facilities can easily adapt to change
with the unique Dynamic Customizer tool, which allows users to make screen
modifications without the expense and delays of reprogramming by the vendor.
RadPlus is also voice-enabled. Through the Dynamic Talk continuous speech
recognition solution, radiologists reduce or eliminate the costs and delays of
transcription and immediately deliver results simply by speaking, editing, and
then approving the reports on-line. The Dynamic Optima mammography management
system, is an integral component of RadPlus. It automates the reporting,
patient management, and regulatory requirements related to mammography
services. Through an OEM agreement, the Company markets the PenRad system
under the name Dynamic Optima. PenRad Inc. is a Dynamic business partner.
Dynamic PACSPlus is an information-enabled picture archiving and communication
system, (PACS) that integrates information from the RIS with images-and
provides access to this information from within the PACSPlus system. Dynamic
WebSight, a vital component of PACSPlus, is a web-based teleradiology system
that provides radiologists and physicians access to radiology images anytime,
anywhere.
DynamicVision for Pathology
The Company's solution set for anatomic pathology (A/P) is a scalable,
client/server solution that is enabled with advanced voice and imaging
capabilities.
Dynamic CoPathPlus is a client/server anatomic pathology system that automates
specimen accessioning and case dictation, produces patient and management
reports, and provides SNOMED and natural language retrieval of diagnoses.
CoPathPlus also enables facilities to adapt to change with Dynamic Customizer,
that allows user modification of specimen data entry windows and report
formats. CoPathPlus is image-enabled through Dynamic PICSPlus, which captures
high-resolution digital images of microscopic and gross specimens and
permanently stores these images electronically with patient and diagnostic
5
data. DynamicVision for Pathology is voice-enabled with the Dynamic Talk
continuous speech recognition solution, which expedites the pathology
dictation process and results in shorter turnaround time in delivering patient
reports to clinicians.
DynamicVision for Laboratory
Premier Series is a laboratory information system that provides functionality
for specimen collection, testing, and result reporting. Configured with a
graphical user interface, Premier Series supports bar coding, instrument
interfaces, paperless microbiology, multi-facility management, and optical
storage. Other features include quality assurance workload recording,
management reporting, and expert system capabilities. Premier Series
integrates with highly specialized blood bank information systems, providing
both transfusion and donor service software, as well as regulatory products.
Premier Series complies with federal regulations and assists laboratories
deciding upon the appropriate and medically necessary course of action in
diagnosing and treating the patient.
DynamicVision for Health Information Management
Dynamic RecordPlus provides document management and workflow capabilities for
the health information management department (medical records) as well as the
patient accounting and other document-intensive departments. It enables health
professionals to view patient records, result reports, and work list
assignments. Comprehensive workflow features automate existing work processes
for improved customer service and increased efficiency. RecordPlus also
handles analysis and assignment of chart deficiencies, electronic signature of
records, and release of information. For the patient accounting department,
Dynamic RecordPlus provides document management and workflow solutions to
enhance the management and flow of accounting-related documents and tasks. It
enables accounting professionals to view financial records and work list
assignments and automates existing work processes for improved customer
service and increased efficiency. RecordPlus also handles management and
prioritization of billing claims, collections, and insurance verification.
DynamicVision for Surgical Services
SurgiPlus is a perioperative clinical information system currently in
development. The first application is Preoperative Evaluation. It comprises
two components: A) a Preoperative Assessment that captures and stores
pertinent patient information, history questionnaires, physical examinations;
and B) a Preoperative Holding module that captures and presents the
documentation related to final preparation of the patient by nursing and
anesthesia personnel. Alpha testing of the Preoperative Assessment module is
scheduled for the first quarter of 1999. Additional modules of SurgiPlus are
under evaluation at this time. They include scheduling, interoperative
recording, post-operative care, 48-hour post anesthesia interview, pain
management, report generation, quality control and outcomes analysis.
Consulting, Systems Integration and other Services
The Company provides a full range of professional consulting services
including project management, implementation, planning, training and
education. The Company's technical services include network design,
implementation and support, custom software development, interfaces, and
modifications and systems integration. The Company provides support services
including 24-hour telephone support, and software maintenance and
enhancements.
Research and Development
The Company's research and development program is designed to extend the
capabilities of existing products and develop new healthcare application
solutions. The Company believes that a substantial and sustained commitment
to product development is important to the long-term success of its business.
As of December 31, 1998, 54 professional employees were engaged in research
and development activities. During the years ended December 31, 1996, and
1997 and 1998, the Company spent approximately $3,564,000, $8,336,000 and
$8,064,000, respectively, on research and development. Research and
development expenditures have been directed toward, Dynamic RadPlus(TM),
PACSPlus(TM), CoPathPlus(TM), RecordPlus(TM) and SurgiPlus(TM) product lines.
The Company's research and development benefits from customer input and user
group forums.
Major Clients
The Company does not have a dependence on any single customer the loss of
which would have a material adverse effect. The Company does generate revenue
almost exclusively through sales to the healthcare industry located in the
United States. Due to this concentration, substantially all receivables of
the Company are from healthcare institutions which may be similarly affected
by changes in economic, regulatory or other industry related conditions. The
Company currently has approximately 600 customers. The majority of these
customers are located within the United States.
6
Backlog
As of December 31, 1998 the Company has a combined backlog of approximately
$28 million. The Company had contracts for the delivery of systems and
services totaling approximately $13.8 million on December 31, 1998, compared
to $8.4 million on December 31, 1997. In addition, as of December 31, 1998
the Company had contracts for the delivery of software support services
billable at an annual rate of $14.2 million, compared to $12.6 million as of
December 31, 1997.
Strategic Relationships
The Company has entered into strategic relationships with several leading
technology developers to gain access to certain technologies that are
integrated into the Company's systems. In addition, through these strategic
relationships, the Company is able to cross-market its internally developed or
acquired technologies to customers of its business partners.
IBM - In 1997, the Company acquired IBM's Medical RecordsPlus enterprise
document imaging and management system. This AS/400 product is based on IBM's
ImagePlus/400 image processing system. The Company has also integrated IBM
MedSpeak/Radiology(TM) solution into its RadPlus radiology information system
and MedSpeak/Pathology(TM) into its CoPathPlus anatomic pathology system under
the name Dynamic Talk. This expands the functionality of these two solutions
to include continuous speech recognition for direct dictation of results,
bypassing the need for transcription of diagnostic reports. Continuous speech
recognition allows radiologists and pathologists to dictate at a normal rate
of speech for instantaneous report production, with little or no time lapse
between the spoken and typed word. The Company is also a remarketer of IBM
hardware.
Sybase Corporation (Emeryville, CA) The Company is an Option Solutions(TM)
Partner with Sybase Corporation. This partnership enables Dynamic and Sybase
to deliver enterprise client/server solutions.
AutoCyte, Inc. (Burlington, NC) The Company has an Original Equipment
Manufacturer ("OEM") distribution agreement with AutoCyte, Inc., allowing the
integration of the AutoCyte Image Management System (AIMS) into DynamicVision
for Pathology. Marketed under the name PICSPlus, this solution combines
sophisticated image management features with telepathology capabilities.
Through this agreement, the Company has the exclusive rights to sell the
AutoCyte(TM) Image Management System ("AIMS") within the laboratory and
Anatomic pathology information systems markets in the U.S. and Canada.
AutoCyte was formerly known as Roche Image Analysis Systems.
Sunquest Information Systems (Tucson, Arizona) The Company has a value-added
re-marketer agreement with Sunquest Information Systems ("Sunquest"). Under
the terms of the agreement, Sunquest exclusively markets and sub-licenses the
Company's CoPathPlus anatomic pathology solution to their existing base of
clients. Sunquest may also sell CoPathPlus, when bundled with their
laboratory information system, in the general U.S. healthcare market and on a
stand-alone product basis in the international market.
First Coast Systems (Jacksonville, FL) First Coast is an authorized reseller
of DynamicVision for Laboratory. Through this agreement, First Coast markets
and sells the Premier Series Laboratory Information System as a complement to
their hospital information system solution.
MediHealth Outsourcing (King of Prussia, PA) Dynamic and MediHealth have an
agreement whereby Dynamic's document management and workflow solution,
DynamicVision for Information Management provides the cornerstone for
MediHealth to market health information management (medical records)
outsourcing services to Dynamic clients. These include remote coding, interim
management, and complete department outsourcing.
Integrated Visions, Inc. (Sebastian, FL) Security in accessing the
DynamicVision for Information Management product line is enhanced through the
use of biometric authentication technology (finger image, voice and face
recognition) provided by Integrated Visions, Inc.
PenRad (Plymouth, MN) Through an OEM agreement, Dynamic markets the PenRad
mammography management application as an integrated component of our complete
radiology solution: DynamicVision for Radiology.
Talk Technology, Inc. (Brooklyn, NY) A strategic alliance with Talk
Technology, Inc., enables Dynamic to market and provide service and support
for an interfaced continuous speech recognition solution for our radiology
product line, DynamicVision for Radiology, and our pathology product line,
DynamicVision for Pathology.
7
FileLink Corporation (Bloomington MN) Dynamic is an authorized reseller of
FileLink Corporation's archive file management software which is used in
conjunction with Dynamic PACSPlus, a part of the radiology product line,
DynamicVision for Radiology.
Pegasus Imaging Corporation (Tampa, FL) The Company uses Pegasus Imaging
Corporation's wavelet compression technology in the web-based teleradiology
solution, WebSight, a component of Dynamic PACSPlus. PACSPlus is a part of
Dynamic's radiology product line, DynamicVision for Radiology.
Sales and Marketing
As of December 31, 1998, the Company had 36 full time employees in sales and
marketing related functions. The Company had 19 sales employees and 17
marketing employees. The compensation of the sales employees is substantially
dependent on the achievement of individual sales targets. Marketing personnel
perform telemarketing, proposal development, demonstration coordination,
develop business plans and product marketing programs, competitive analyses,
sales collateral, audio and video products, coordinate trade shows,
advertising, public relations, investor relations activities, and
administrative support.
The Company's sales cycle is typically six to eighteen months and includes
several steps: (i) initial contact and qualification; (ii) development of
proposal in response to request for a proposal or direct sales lead; (iii)
business problem requirements definition; (iv) product demonstrations; (v)
site visits; and (vi) contract preparation and negotiations. Members of the
Company's professional services, product management and sales support
departments, and members of executive management assist the sales force in
completing the proposal, conducting demonstrations and analyzing the
requirements. In support of the sales efforts, the Company advertises in
trade journals, participates in trade shows, publishes articles and provides
speakers for industry shows and conferences. In addition, the Company
receives qualified leads as well as support in proposal development,
demonstrations and site visits from its strategic business partners, which
include IBM, Sunquest Information Systems, AutoCyte, First Coast Systems and
others.
Customers
Dynamic currently serves more than 600 customers, most located in the United
States. Key customers include the UCLA Medical Center, Methodist Hospital of
Memphis, Orlando Regional Health System, University of North Carolina
Hospitals, University of Pittsburgh, University of Illinois at Chicago Medical
Center, Memorial Sloan-Kettering Cancer Center, Advocate Health Care, Borgess
Health Alliance, The Mayo Clinic and Medical College of Virginia.
Competition
The market for information technology in the healthcare industry is intensely
competitive. Many of the Company's competitors have significantly greater
financial, research and development technical and marketing resources than the
Company. Competitors vary in size and in the scope and breadth of the
products and services they offer. The Company's systems compete both with
other technologies and with similar systems developed by other companies.
Other major information management companies, including the companies with
whom the Company has strategic relationships, may enter the markets in which
the Company competes. In addition, in the professional and technical
consulting segment, the Company competes with the consulting divisions of
national accounting firms as well as national and regional healthcare
specialty consulting firms.
Government Regulation
The United States Food and Drug Administration (the "FDA") has issued a
guidance document addressing the regulation of certain computer products as
medical devices under the Federal Food, Drug and Cosmetic Act (the "FFDCA").
To the extent that the computer software is classified as a medical device
under applicable regulations, the manufacturers of such products are required,
depending upon the product, to: register and list their products with the FDA
(Class I), notify the FDA and demonstrated substantial equivalence to other
products on the market before marketing such products (Class II) or, obtain
FDA clearance by filing a Pre Market Application (PMA) that establishes the
safety and effectiveness of the product (Class III). The Company has two
products currently classified as Class II Medical Devices: PACSPlus and
Transfusion Service Manager ("TSM"). As a result of the characterization of
certain of the Company's products as medical devices, the Company's
manufacturing facilities are registered with the FDA and its manufacturing
operations regarding devices are required to be in compliance with the FDA's
rules and regulations. The FDA conducted on-site inspections at the Company's
former Maitland facility in May 1996 and at the Minnetonka facility in June
1996. Both inspections were concluded without incident. On December 19,
1997, the FDA issued a letter of Substantial Equivalence to the Company for
the TSM product. This letter was the positive outcome of the 510(k)
submission process begun in March 1996. On December 8, 1998, the FDA issued a
letter of Substantial Equivalence for the Company's PACSPlus product. This
letter was the positive outcome of the
8
Special 510(k) submission process begun in June 1998. There can be no
assurance that the Company ultimately will be able to obtain or maintain
required FDA approvals to market its products.
Intellectual Property
The Company relies upon trade secrets, copyright laws and confidentiality
agreements with employees and customers to protect its rights in its software
technology. The Company does not hold any patents nor has it filed copyrights
with respect to any of its software technology. Due to the rapid pace of
innovation within the software industry, the Company believes that patent,
trade secret and copyright protection are less significant than the Company's
ability to further develop, enhance and modify its current products and other
clinical information systems through the technology and creative skills of its
personnel. To minimize the possibility of third parties imitating the
Company's systems, the Company licenses object codes only and does not license
or otherwise distribute source codes.
The Company's employees are required to enter into confidentiality agreements
which prohibit the disclosure of confidential information and which require
employees to report and assign to the Company all concepts, developments,
discoveries and inventions conceived during their employment.
The Company has obtained federal trademark protection for DynamicVision(R),
CoPath(R), Maxifile(R), and Optima(R). There can be no assurance that the
legal protections and precautions taken by the Company will be adequate to
prevent misappropriation of the Company's technology. In addition, these
protections do not prevent independent third-party development of
functionally equivalent or superior technologies or services. The Company
does not believe its operations or products infringe on the intellectual
property rights of others.
There can be no assurance that others will not assert infringement or trade
secret claims against the Company with respect to its current or future
products or that the Company will be successful in defending any such claim.
Employees
As of March 5, 1999, the Company had 212 full time employees, of which 54 were
employed in research and development, 94 in client services, 28 in general and
administrative and 36 in sales and marketing. None of the Company's employees
is represented by a labor union or subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes
that its employee relations are good.
Factors Affecting Forward-Looking Statements
This report, and other reports, proxy statements and other communications to
stockholders, as well as oral statements made by representatives of the
Company, may contain forward-looking statements and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission, that are subject to risks and uncertainties, including, but not
limited to, the impact of competitive products and pricing, product demand and
market acceptance, new product development, reliance on key strategic
alliances, availability of products procured from third party vendors, the
healthcare regulatory environment, fluctuations in operating results and with
respect to, among other things, the Company's future revenues, operating
income and earnings per share, as well as plans and objectives of management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof.
The Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The following are some, but not necessarily all, of the
factors that may cause the Company's actual results to vary materially from
those which are the subject of any such forward-looking statements.
The Company is engaged in the business of developing, marketing and supporting
computer software to its customers ("Company Software Products"). The
Company also distributes products necessary for operation of Company Software
Products and such products are sometimes obtained by customers of the Company
from other sources ("Third Party Products"). Software that uses only two
digits to identify a year in the date field may fail or create errors in the
year 2000 ("Year 2000 Issues"). The impact of unresolved Year 2000 Issues,
including possible (i) failure by the Company and vendors of Third Party
Products to complete efforts to avoid or minimize Year 2000 Issues on a timely
basis, (ii) failure of Customers to be ready to or cooperate in the deployment
of Year 2000 versions of Company Software Products and Third Party Products on
a timely basis, and (iii) deferral by customers of current installations and
prospective purchase decisions with respect to Company Software Products may
materially adversely impact the Company's business, financial condition and
results of operations, or adversely affect the Company's relationships with
customers, vendors or others. Unless all material Year 2000 Issues involving
the Company's computer software products are timely and properly identified,
assessed, and remediated, and unless adequate contingency plans are properly
formulated with respect to Year 2000 Issues, the Year 2000 Issues may
materially adversely
9
impact the Company's business, financial condition and results of operations,
or adversely affect the Company's relationships with customers, vendors or
others.
The costs, timing and scheduling of deployment and installation of Year 2000
versions of Company Software Products and Third party Products, as well as the
ability of the Company to assist customers in the installation of Company
Software Products, will depend in part on the readiness, ability and
cooperation of customers and their suppliers. Due to uncertainties associated
with customers' readiness, cooperation and sources of products and services,
there can be no assurance that Year 2000 Issues will not materially adversely
effect the Company's business, results of operations, or financial conditions,
or adversely affect the Company's relationships with customers, vendors or
others.
Some customers and prospects of the Company operate in complex computing
environments that include products and services not supplied by the Company.
The costs, timing and scheduling by customers of work related to Year 2000
Issues involving such products and services may cause some customers and
prospects to defer current projects or prospective purchase decisions
regarding Company Software Products. If Year 2000 Issues cause customers and
prospects to defer current projects or prospective purchase decisions, the
Company's financial business and operational goals may be deferred or may not
be realized at all, with the result that the Company's business, results of
operations, or financial condition could be materially adversely affected.
Due to uncertainties associated with customers and prospects, there can be no
assurance that Year 2000 Issues will not materially adversely effect the
Company's business, results of operations, or financial condition or adversely
affect the Company's relationships with customers, vendors or others.
The costs of the Company's Year 2000 identification, assessment, remediation,
testing, deployment and contingency planning efforts, and the dates on which
the Company believes it will complete such efforts, are based upon
management's current best estimates, which were derived using numerous
assumptions regarding future events, including the continued availability of
certain resources, third-party remediation plans, and other factors. There
can be no assurance that these estimates will prove to be accurate, and actual
results could differ materially from those currently anticipated. Specific
factors that could cause such material differences include, but are not
limited to, the availability of and cost of personnel trained in Year 2000
Issues, the ability to correctly and effectively identify, assess, remediate,
and test all relevant computer codes, equipment, and embedded technology, and
similar uncertainties, the ability of the Company to timely install and deploy
Year 2000 releases of Company Software Products and Third Party Products. As
a result of any of such factors alone or in combination, the Company may
experience an increase in warranty and other claims. In addition, since there
is no uniform definition of "compliance with Year 2000," and since the
Company sells a myriad of different combinations of products and services
under varying contractual terms, the Company is not able to assess or estimate
the possible impact of such possible claims. No assurance can be given that
the aggregate cost of defending and resolving such claims, if any, will not
materially adversely affect the Company's results of operations. Although
some of the Company's agreements with manufacturers and others from whom it
purchases products for resale contain provisions requiring such parties to
indemnify the Company under some circumstances, there can be no assurance that
such indemnification arrangements will cover all of the Company's liabilities
and costs relate to claims by third parties related to Year 2000 Issues.
An important element of the Company's business strategy has been and may
continue to be expansion through acquisitions, both to extend its customer
base and to acquire strategic technology. The Company's ability to expand
successfully through acquisitions depends on many factors including the
identification of appropriate acquisition opportunities, negotiation of
suitable terms and management's ability to effectively integrate and operate
the acquired businesses. The Company competes for acquisitions with other
companies, certain of which have significantly greater financial and
management resources. The Company's financial performance will be subject to
the risks of the performance of the acquired businesses as well as the
financial effects associated with integration of such businesses.
The healthcare industry is subject to changing political, economic and
regulatory influences, many of which relate to control of healthcare costs.
Such changes may affect operational aspects of the healthcare industry,
including procurement practices and the availability and/or allocation of
capital funds, which could result in greater selectivity, thus adversely
impacting the Company's ability to sell its products. The Company cannot
predict with any certainty what impact, if any, future regulation or
healthcare reform might have on its results of operations, financial condition
or business.
The Company's quarterly revenues and results of operations have varied
significantly as a result of a number of factors, including (i) the volume and
timing of systems sales and installations; (ii) the timing of client
acceptances; (iii) the length and complexity of the systems sales and
installation cycles; (iv) seasonal buying trends as a result of clients'
annual purchasing and budgeting practices. The Company expects that these
variations will continue for the foreseeable future. The Company recognizes
revenues from the software portion of system sales on a percentage-of-
completion method based upon completion of specified milestones. As a result,
the timing of revenue recognition varies considerably and could be impeded by
a number of factors, including availability of Company personnel, the
Company's need to allocate system installation resources to other
installations or to research and development activities, availability of
client personnel and other resources, and complexity of
10
the clients' needs and delays imposed by clients. Any trend of delays in
progress toward completing a material system installation or a number of
smaller installations could reduce the revenues recognized in any given
period and could have a material adverse effect on the Company's business
and results of operations. Because a significant percentage of the Company's
expenses, particularly employee compensation, is relatively fixed, variations
in the timing of systems sales and installations can cause significant
variations in operating results from quarter to quarter. If total revenues
are below expectations in any period, the Company's inability to adjust
spending to compensate fully for the lower revenues may magnify the adverse
effect of such a shortfall on the Company's results of operations.
Accordingly, the Company believes that period-to-period comparisons of revenue
and results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance.
The Company expects that the United States Food and Drug Administration
("FDA") is likely to become increasingly active in regulating computer
software that is intended for use in health care settings. In March 1994, the
FDA issued a letter advising that the FDA considers medical devices to include
software products intended for use in the manufacture of blood and blood
components or for the maintenance of data used to assist personnel in making
decisions concerning the suitability of blood donors and the release of blood
or blood components for transfusion or further manufacture. As such, the FDA
determined that manufactures and distributors of these products, such as the
Company, are subject to FDA regulation. The FDA can impose extensive
requirements governing pre- and post market conditions such as device
investigation, approval, labeling and manufacturing. Compliance with these
new requirements and any future requirements imposed by the FDA could be
costly and could delay or preclude the introduction of certain new products.
The Company is unable to determine at this time the effect, if any, that these
requirements may have on its business.
Competition in the Company's industry is subject to continual change in not
only the products and services offered but also in the manner in which vendors
are selected by customers. Accordingly, the Company's continued success will
be dependent on its ability to develop new products and services on a timely
basis and at competitive prices.
The Company's systems include applications that may relate to confidential
medical histories and treatment plans. Improper disclosure of this
information or any failure by the Company's systems to provide accurate and
timely information could result in claims against the Company by its clients
or their patients. A successful claim brought against the Company in excess
of its insurance coverage could have a material adverse effect on the
Company's business or results of operations, and even unsuccessful claims
could result in the expenditure of substantial funds in litigation and the
diversion of management time and resources. There can be no assurance that
the Company will not be subject to such claims in the future, that such claims
will not result in liability in excess of any insurance coverage maintained by
the Company with respect to such claims, that insurance will cover such claims
or that appropriate insurance will continue to be available to the Company at
commercially reasonable rates.
While the Company maintains insurance protecting against certain asserted
claims, there can be no assurance that its insurance coverage would adequately
cover any or all such claims asserted against the Company.
The Company must anticipate and adapt to evolving industry standards and new
technological developments. The market for the Company's products is
characterized by continued and rapid technological advances. The Company's
future success will depend in part on its ability to be responsive to these
technological developments and challenges, which could also lower the cost of
products and services or otherwise result in competitive pricing pressures.
The Company relies on a combination of trade secret, copyright and trademark
laws, together with nondisclosure, other contractual provisions and technical
measures to protect its proprietary rights in its products. There can be no
assurance that these protections will be adequate or that the Company
competitors will not independently develop technologies that are equivalent or
superior to the Company's technology. Although the Company believes that its
products and other proprietary rights do not infringe upon the proprietary
rights of third parties, there can be no assurance that third parties will not
assert infringement claims against the Company in the future.
The stock market has, from time to time, experienced extreme price and volume
fluctuations, particularly in the high technology sector, which have often
been unrelated to the operating performance of particular companies. The
Company experiences fluctuations in its stock price related to these general
market swings as well as announcements of technological innovations, new
product introductions by the Company or its competitors, market conditions in
the computer software or hardware industries and healthcare reform measures.
These fluctuations may adversely effect the Company's ability to make
acquisitions utilizing its stock.
11
Item 2. Properties
The Company's corporate headquarters are located at 615 Crescent Executive
Court, Suite 600, Lake Mary, Florida 32746. The Lake Mary location consists
of approximately 53,800 square feet of office space under a lease that expires
March 1, 2005. In addition, the Company also maintains an office at Two
University Office Park, 51 Sawyer Road, Waltham, Massachusetts 02154 as the
Company's clinical solutions center. The Waltham location consists of
approximately 30,000 square feet under lease that expires on November 30,
1999. The Company believes that its current facilities are sufficient to meet
its near-term requirements.
Item 3. Legal Proceedings
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. The $125,000 settlement and the related
expense has been included in general and administrative expenses reported for
the year ended December 31, 1998.
In July 1997, the Company commenced a declaratory judgement action in Dakota
County, Minnesota District Court seeking a declaration that the Company had
properly terminated the services of an individual. The individual filed a
counterclaim and demanded $200,000 in settlement of a claim alleging breach of
contract, promissory estoppel and fraud. The parties are engaged in discovery
and trial is presently scheduled for the second quarter of 1999. The Company
is vigorously defending all claims made by the individual, and after
consultation with its counsel has assessed the likelihood of an unfavorable
outcome as remote.
As of the date hereof, there are no other material legal proceedings pending
against the Company. In the opinion of management, the legal proceedings in
which the Company is involved will not have a material effect on the Company's
consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 1998.
12
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matter
(a) The information called for by this item is incorporated herein by reference
from page 55 of Exhibit 13 to this Form 10-K.
(b) As of March 10, 1999, there were approximately 3,700 shareholders of the
Company's Common Stock.
(c) The Company has declared no cash dividends on its common stock since its
inception and plans to continue to invest all earnings back into the
Company in the foreseeable future.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by reference from
page 25 of Exhibit 13 to this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is incorporated herein by reference from
page 26 through page 37 of
Exhibit 13 to this Form 10-K.
Item 7(A). Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated herein by reference from
page 37 of Exhibit 13 to this Form 10-K.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference from
page 38 through page 56 of Exhibit 13 to this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in and/or disagreements with accountants on accounting
and/or financial disclosures during 1997 or 1998.
13
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
14
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
-Independent Auditors' Report on the financial statements.
-Balance Sheets as of December 31, 1997 and 1998.
-Statements of Operations for the years ended December 31, 1996, 1997 and
1998.
-Statements of Shareholders' Equity for the years ended December 31,
1996, 1997 and 1998.
-Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998.
-Notes to Financial Statements.
The Financial Statements listed above are all incorporated by reference to
pages 38 through 56 of Exhibit 13 to this Form 10-K.
2. Financial Statement Schedules
Index Schedule No. Page No.
Independent Auditors' Report on Financial
Statement Schedule --- 16
Valuation and Qualifying Accounts II 17
All other schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes
thereto.
3. Exhibits
Exhibit 11: Statement regarding computation of per share earnings.
Exhibit 13: 1998 Annual Report to Security Holders.
(b) No reports were filed on Form 8-K during the quarter ended
December 31, 1998.
15
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dynamic Healthcare Technologies, Inc.:
Under date of February 19, 1999, we reported on the consolidated balance sheets
of Dynamic Healthcare Technologies, Inc. as of December 31, 1997 and 1998 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998, as contained in the annual report on Form 10-K for the year 1998. In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related 1996, 1997 and 1998 information
in the consolidated financial statement schedule as listed in the accompanying
index. This consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
1996, 1997 and 1998 information in this consolidated financial statement
schedule based on our audits.
In our opinion, such 1996, 1997 and 1998 information in the consolidated
financial statement schedule, when considered in relation to the basic 1996,
1997 and 1998 consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/S/KPMG LLP
KPMG LLP
Orlando, Florida
February 19, 1999
16
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Schedule II
<TABLE>
Balance At Charged to Write-Offs
Beginning of Cost and Retirements & Other Balance At
Description Year Expenses Collections Additions End of Year
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Allowance for
Doubtful Accounts
Receivable $140,837 $ -- $ 37,637 $222,902(1) $ 326,102
Accumulated
Amortization of
Capitalized
Software
Development
Costs $2,549,167 $1,128,402 $ 309,269 $ -- $ 3,368,300
Year Ended December 31, 1997:
Allowance for
Doubtful Accounts
Receivable $ 326,102 $ -- $ 19,046 $ -- $ 307,056
Accumulated
Amortization of
Capitalized
Software
Development
Costs $ 3,368,300 $1,484,276 $ 23,305 $ -- $4,829,271
Year Ended December 31, 1998:
Allowance for
Doubtful Accounts
Receivable $ 307,056 $ 206,805 $ 153,861 $ -- $ 360,000
Accumulated
Amortization
of Capitalized
Software
Development
Costs $4,829,271 $ 1,756,798 $ -- $ -- $6,586,069
</TABLE>
(1) Other additions represents the valuation accounts of Dimensional Medicine,
Inc. and Collaborative Medical Systems, Inc. acquired in acquisitions
accounted for as purchase business combinations.
17
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Commission File No. 0-12516
IRS E.I.N. 59-3389871
By: /S/PAUL S. GLOVER Date: March 25, 1999
Paul S. Glover
Vice President of Finance,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/DAVID M. POMERANCE Chairman of the Board March 25, 1999
David M. Pomerance
/S/MITCHEL J. LASKEY President, CEO, Treasurer
Mitchel J. Laskey & Director March 25, 1999
/S/PAUL S. GLOVER Vice President of Finance,
Paul S. Glover CFO & Secretary March 25, 1999
/S/JERRY L. CARSON Director March 25, 1999
Jerry L. Carson
/S/THOMAS J. MARTINSON Director March 25, 1999
Thomas J. Martinson
/S/BRET R. MAXWELL Director March 25, 1999
Bret R. Maxwell
/S/DANIEL RAYNOR Director March 25, 1999
Daniel Raynor
/S/RICHARD W. TRUELICK Director March 25, 1999
Richard W. Truelick
/S/GUY RABBAT Director March 25, 1999
Guy Rabbat
18
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
Page
Description of Exhibits Number
Exhibit 11 Statement regarding computation of per share earnings. 20
Exhibit 13 Annual Report to Shareholders of Dynamic Healthcare
Technologies, Inc. for the fiscal year ended
December 31, 1998. 22
19
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
EXHIBIT 11
Statement Regarding
Computation of
Per Share Earnings
20
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
COMPUTATION OF WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
AND
EARNINGS PER SHARE FOR THE YEARS ENDED
DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
Years Ended December 31,
1996(1) 1997(1) 1998
<S> <C> <C> <C>
Earnings (loss) available for common
shareholders
Net earnings (loss) $(15,618,372) $ 1,042,958 $(9,012,690)
Preferred stock dividends (251,037) -- (67,555)
Earnings (loss) available for
common shareholders $(15,869,409) $ 1,042,958 $(9,080,245)
Common and common equivalent
Shares outstanding
Basic:
Weighted average number of common
shares outstanding 9,224,775 17,905,214 18,127,641
Diluted:
Weighted average number of common
shares outstanding 9,224,775 17,905,214 18,127,641
Dilutive effect of options
and warrants using average
market price -- 526,200 --
Weighted average common and
potential common shares
outstanding assuming full
dilution 9,224,775 18,431,414 18,127,641
Earnings (loss) per share basic
and diluted $ (1.72) $ 0.06 $ (0.50)
</TABLE>
(1) Includes the operating results and related financial information of
Dynacor, Inc. which merged with Dynamic Healthcare Technologies, Inc.
on May 22, 1997 in a business combination accounted for as a pooling
of interests.
21
FORM 10-K
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
EXHIBIT 13
Annual Report to Shareholders
of Dynamic Healthcare Technologies, Inc.
for the Fiscal Year Ended December 31, 1998
22
OUTSIDE FRONT COVER
Dynamic Healthcare Technologies, Inc.
1998 Annual Report
23
INSIDE FRONT COVER
Dynamic Healthcare Technologies, Inc. is a leader in providing advanced
information technologies for the healthcare industry. Dynamic's enterprise
information solutions enable healthcare providers to capture, manage and share
electronic health information across the continuum of care.
Contents
Company Profile.............................................................
Selected Financial Data.....................................................
Fellow Shareholders.........................................................
Focus & Execution Creating Value............................................
Management's Discussion and Analysis........................................
Financial Statements and Notes..............................................
Independent Auditors' Report................................................
Board of Directors and Officers.............................................
Shareholders Information....................................................
24
SELECTED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1998
(In thousands except per share data and current ratio)
The following selected financial data for the five years ended December 31,
1998, were derived from the financial statements of Dynamic Healthcare
Technologies, Inc. and subsidiary. These data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements, related notes and other financial
information included herein.
<TABLE>
1994(1) 1995 1996(2) 1997 1998
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 9,517 $12,088 $19,826 $36,545 $25,829
Restructuring Charge 686 -- -- -- --
Net Earnings (Loss) from
Continuing Operations (4,592) (590) (15,618) 1,043 (9,013)
Net Earnings (Loss) Per
Common Share (0.79) (0.09) (1.72) 0.06 (0.50)
Working Capital (2,976) 2,274 9,191 6,534 (255)
Current Ratio .54 1.56 1.80 1.59 .98
Total Assets 8,539 11,557 31,825 32,977 30,604
Long-Term Liabilities 869 2,786 591 454 1,871
Shareholders' Equity 1,168 4,703 19,771 21,423 14,626
</TABLE>
The Company has declared no cash dividends on common stock since its inception.
(1) Includes the operating results and related financial information since the
acquisition of Dynamic Technical Resources, Inc., accounted for as a purchase
business combination, which occurred on August 23, 1994.
(2) Includes the operating results and related financial information since the
acquisitions of Dimensional Medicine, Inc. ("DMI"), on May 1, 1996 and
Collaborative Medical Systems, Inc. ("CoMed"), on December 17, 1996, including
the non-recurring write off of in-process research and development of
$15,057,569 or $1.63 per common share, in connection with the CoMed
acquisition. Both of these acquisitions were accounted for as purchase
business combinations.
25
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Dynamic Healthcare Technologies, Inc. ("Dynamic" or the "Company")
develops, markets and supports a broad product line of information system
solutions for radiology, anatomic pathology, clinical laboratory and
electronic health record applications. Dynamic's products are designed to
enhance productivity, reduce costs and improve the quality of patient care by
providing electronic storage and on-line access to patient information
previously maintained on a variety of media. The Company provides a full
range of professional consulting services including project management,
implementation, planning and support, custom software and interface
development and modifications, and systems integration. Dynamic provides
support services including 24-hour telephone support, and software maintenance
and enhancements.
Dynamic currently serves approximately 600 customers, most of which are
located in the United States. Key customers include the UCLA Medical Center,
Methodist Hospital of Memphis, Orlando Regional Health System, Ohio State
University Hospital, University of Pittsburgh, Temple University Hospital,
University of Illinois at Chicago Medical Center, Memorial Sloan-Kettering
Cancer Center, Advocate Health Care, Borgess Health Alliance, The Mayo Clinic
and UniHealth.
During 1997, the Company introduced new technology product releases in
virtually every market segment in which the Company competes. Well-publicized
healthcare information technology industry research indicates that sales
cycles for these products typically range from 6-18 months in duration. The
disruption of in-process sales cycles by the new products introduction in 1997
significantly impacted the Company's new system revenue for 1998. During
1998, operations focused on perfecting the initial installations of the
products introduced in 1997, which further impacted revenue recognition in
1998. However, during the fourth quarter of 1998, the Company realized record
new system sales bookings of $ 7.5 million and began 1999 with the highest new
systems backlog in the Company's history of more than $13.8 million. This
together with more than $14.2 million in annualized customer support revenue
under contract positions Dynamic to enter 1999 with a total revenue backlog of
$28 million, also the highest in the Company's history.
In addition, during 1998 the Company reengineered its internal process of
development, customer support and product installations. This reengineering
has resulted in the consolidation of three facilities into the Lake Mary
headquarters, a common structure to the Company's product line which permits a
higher level of cross utilization of technical professionals for development,
support and installation services, and is expected to provided significant
anticipated future cost efficiencies. Base quarterly operating expenses,
defined as total operating expenses less the cost of products sold, sales
commissions and customer billable expenses, has been reduced to a budgeted
amount of approximately $6.4 million for the first quarter of 1999 compared to
$8.1 million in the first quarter of 1998.
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 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 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. The available borrowing capacity is subject to limitation based
upon a percentage of qualified
26
receivables, and is contingent upon continuing compliance with a minimum
quick ratio (as defined), and the Company maintaining profitable operations
in 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. The
transaction 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, and resulted in net proceeds to
the Company of $1,814,000.
The Company's revenues are derived from (i) computer equipment sales and
support, (ii) application software licenses, (iii) software support and (iv)
services and other revenues. The Company generally recognizes revenues from
computer equipment sales at the time the products are shipped. Computer
system equipment sales and support revenues include hardware support contracts
for a specific period from which revenue is recognized ratably over the
corresponding contract period. Application software license revenues are
recognized when application software is delivered to the customer.
Installation and training service revenues, included with application software
licenses, are recognized as the services are performed. Software support
revenues principally include contracts for remote dial-up problem diagnosis
and maintenance and corrective support services, each of which covers a
specified period for which revenue is recognized ratably over the
corresponding contract period. Services and other revenues include project
management, training, consulting, custom programming services, post-contract
support obligations and others services, which are provided under separate
contract and are recognized as services are performed. Revenue from
professional services and maintenance and support services typically increase
as the number of installed systems increases.
Cost of products sold includes the cost of hardware sold, costs of third party
software licenses and hardware support subcontracts. Client service expense
includes the direct and indirect costs associated with implementation and
support personnel. Software development costs include the direct and indirect
salaries and wages of software research and development personnel, direct
research and development expenses, and software amortization expense, reduced
by capitalized software development costs. Software development costs are
expensed until such time as technological feasibility is established and then
are capitalized in compliance with Statement of Financial Accounting Standards
No. 86 "Accounting for Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Sales and marketing costs include direct and indirect
salaries, commissions, joint marketing costs, advertising, trade show costs,
user group cost and travel and entertainment expenses related to the sale and
marketing of the Company's products and services. General and administrative
expenses include salaries and expenses for corporate administration,
financial, legal and human resources.
The sales cycle for the Company's systems is typically six to eighteen months
from initial contact to contract signing. The product delivery cycle is
variable. Based on the customer's implementation plan, product delivery may
take two or more years, particularly with enterprise-wide electronic
healthcare record solutions involving significant and continuing customer
service requirements. Accordingly, the product delivery cycle depends upon
the combination of products purchased and the implementation plan defined by
the customer in the master sales agreement. Each customer contract is
separately negotiated. The installation schedules for clinical information
systems, or departmental electronic healthcare record implementations,
typically require six to twelve months. Under its standard master sales
agreement, the Company generally receives a partial payment upon execution of
the agreement, a hardware installment payment upon delivery of hardware,
installation progress payments upon the completion of defined milestones and
final payment, which may vary with each contract.
27
Results of Operations
The following table sets forth, for each of the periods indicated, certain
selected statement of operations data expressed as a percentage of total
operating revenues:
<TABLE>
1996 1997 1998
<S> <C> <C> <C>
Operating revenues:
Computer system equipment sales and support 20.0% 14.1% 10.2%
Application software licenses 32.7 35.4 20.9
Software support 30.8 30.0 45.4
Service and other 16.5 20.5 23.5
Total operating revenues 100.0 100.0 100.0
Costs and expenses:
Cost of products sold 18.0 14.5 12.6
Client services expenses 32.9 31.0 42.4
Software development costs 15.5 16.2 25.7
Sales and marketing 23.5 24.9 36.5
General and administrative 13.0 12.5 17.8
In-process research and development 75.9 - -
Total costs and expenses 178.8 99.1 135.0
Operating income (loss) (78.8) 0.9 (35.0)
Other income (expense) 0.1 2.0 0.1
Income taxes - - -
Net earnings (loss) (78.7)% 2.9% (34.9)%
</TABLE>
28
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues. During the year ended December 31, 1998 the Company reported
revenues of $25,829,000 a decrease of $10,716,000 from revenues for the year
ended December 31, 1997. During 1997, the Company recognized initial
pathology application software license revenue of $2,777,000 under the value
added re-marketing agreement with Sunquest Information Systems, Inc. (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 1998, only
$202,000 of revenue was recognized under the Sunquest Agreement. This
represents $100,000 of revenue from licenses sold by Sunquest and $102,000
from software support to Sunquest. In addition, government revenue of only
$1,299,000 was recognized during 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 10.2% of
total revenues for 1998, compared to 14.1% for 1997, a decline of $2,517,000.
Neither the Sunquest Agreement nor deliveries to the Department of Defense
hospitals had any associated hardware revenue. The disruption of in-process
sales cycles by the new product introductions in 1997 significantly impacted
the Company's new system revenue for 1998, and new system sales have
historically been more hardware intensive than upgrades and add-on sales.
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 1998, decreased by $7,521,000 over
the same period a year ago, from $12,917,000 to $5,396,000. The Company
recognized initial pathology application software license revenue of
$2,777,000 under the Sunquest Agreement and $100,000 of additional licenses
thereunder during 1997. Only $100,000 of application software license revenue
was recognized under the Sunquest Agreement during 1998. Also, during 1998,
the Company recognized only $27,000 of pathology application software license
revenue from government customers. This represents a $1,902,000 decrease from
the $1,929,000 of application software license revenue recognized during 1997
through deliveries under a completed U.S. Government sub-contract agreement.
In addition, other pathology application software license revenue decreased by
$750,000 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 $5,429,000.
Laboratory software application license revenue for 1998 increased by $15,000.
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. The increase in laboratory system application revenues during 1998
has principally resulted from successful customer migrations. Radiology
software application license revenues for 1998 declined by $1,344,000 compared
to 1997. This primarily resulted from the introduction of the new RadPlus
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 $1,488,000 of application
software license revenue during 1997. There was no multi-site radiology
revenue during 1998. Electronic health record application software license
revenues declined by $717,000 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 $745,000 to $11,723,000 for 1998, compared
to $10,978,000 for the same period one year ago. This increase is principally
attributable to successful implementations of new systems. As of December 31,
1998, the recurring annualized billable support base is $12.1 million, with an
additional $2.1 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 $1,423,000 to $6,073,000 from
$7,496,000. 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
1998.
29
Cost of Products Sold. Cost of products sold as a percent of total revenues
for 1998 decreased to 12.6% from 14.5% for the same period 1997. Hardware
revenues during 1998 similarly decreased to 10.2% from 14.1% of total revenues
for 1997, due to the decline in new system revenues as previously discussed.
Third party product costs also expanded during 1998 as the Company completed a
variety of interfaces to strategic software technology partners.
Client Services Expense. Client services expense for of 1998 decreased
$363,000 to $10,958,000 from $11,321,000 for 1997, increasing as a percentage
of sales from 31.0% to 42.4%. 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 RadPlus
(December 1997), and new releases of PACSPlus (October 1997), and Dynamic
RecordPlus (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 1998 increased to
25.7% of total operating revenues from 16.2% incurred during 1997.
Development efforts continued as part of the Company's overall growth
strategy. As such, the Company capitalized $3,174,000 or 39.4% of total
software development costs during 1998 compared to $3,906,000 or 46.9% of
total software development costs for 1997. The development effort during 1998
resulted in new releases and enhancements to the Company's client server
products.
Sales and Marketing. Sales and marketing costs for 1998 as a percentage of
total revenues, increased to 36.5% from 24.9% for 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 1998 of $307,000 as compared to
similar costs for 1997.
General and Administrative Expenses. General and administrative expenses for
1998 increased by $51,000 to 17.8% of total revenues from 12.5% incurred
during 1997. During 1998 the Company completed a functional reorganization and
streamlining plan. The Company re-engineered its internal development,
customer support and product installation processes, resulting in
consolidation of three facilities into the Lake Mary headquarters. The re-
engineering accompanied the progression to a common structure to Dynamic's
product line, a move which permits more cross utilization of technical
professionals for development, support and installation services, and is
expected to provide significant future cost efficiencies. Base quarterly
operating expenses - defined as total operating expenses less the cost of
products sold, sales commissions and customer billable expenses - have been
reduced to approximately $6.4 million for the first quarter of 1999 compared
to $8.1 million during the first quarter of 1998. The cost savings from
completion of the plan, together with a $279,000 reduction in expenses accrued
under the Company's management incentive compensation plan for 1998, were more
than offset by increases in bad debt charges of $207,000, teambuilding
expenses of $112,000, $125,000 in litigation settlement costs with the
Company's former President and CEO, and $319,000 in non-recurring severance
and termination benefits incurred in connection with the plan.
Other Income (Expense). Net other income for 1998 decreased by $690,000 to
$41,000, as compared to $731,000 for 1997. The Company incurred approximately
$139,000 in aggregate losses on sale and abandonment of fixed assets in
connection with the office consolidation activities completed substantially
during the third quarter of 1998. Net interest income decreased by $509,000
during 1998 principally due to the cash used by operating and investing
activities. In addition, net interest expense and financing costs increased
by $42,000 principally due to amortization of deferred financing costs and
interest charges associated with the line of credit established in July 1998.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues. The Company's total consolidated revenues were $36,545,000 for the
year ended December 31, 1997, compared to $19,826,000 for the corresponding
period of 1996, representing an increase of $16,719,000 or 84.3%. During the
year ended December 31, 1997 the Company reported pathology revenues of
$15,784,000, representing
30
an increase of $14,913,000 over similar revenues in 1996, attributable to the
acquisition of CoMed in late 1996. Radiology revenues resulting from the
Maxifile and PACsPlus+ product line acquired with DMI in May 1996, increased to
$7,736,000 from $5,182,000 or by $2,554,000. Management attributes this
increase to the expanded market reach for the Company's product line that
cross selling provided post acquisition of DMI and CoMed. Laboratory
information system revenue for the year ended December 31, 1997, declined by
$872,000 to $8,004,000 compared to $8,876,000 reported for the same period
1996. LabPro 2000 installations during 1997 consisted of migrating customers
from the prime platform to the IBM AS400 platform. Migration contracts
typically have nominal associated application software license revenue. In
addition, imaging revenues declined by $263,000 to $3,382,000 and other
revenues increased by $387,000 to $1,639,000. The Company experienced
lengthened initial sales cycles for the DynamicVision product released for
general availability in November 1996. Other revenues increased principally
as a result of converting add-on business from a customer base expanded through
acquisitions.
Computer system equipment sales and support revenues during the year ended
December 31, 1997 increased $1,182,000 to $5,154,000 compared to $3,972,000
for 1996, but declined as a percentage of total revenues to 14.1% from 20.0%.
The increase in application software license revenues during 1997 overshadowed
the increase in hardware revenues. Hardware revenues can cause significant
fluctuations in top line performance, but traditionally have had nominal
impact on earnings due to its relatively low margins compared with other
sources of Company revenue.
Application software license revenue during 1997 increased by $6,443,000 or to
35.4% of total revenues compared to 32.7% during 1996. The Company recognized
pathology application software license revenue of $7,639,000 during 1997,
while during 1996 there was $597,000 of pathology revenues. The pathology
product line was acquired with CoMed in December of 1996. Imaging software
application license revenues decreased $268,000. The DynamicVision product
introduction announced in November 1996 was being significantly enhanced
during 1997. New anticipated product releases elongated initial sales cycles
for DynamicVision. Radiology software application license revenues increased
$128,000 as a result of post acquisition cross-marketing capabilities, and
deliveries on a five site sale consummated during the third quarter 1997. The
decline in laboratory software application license revenues of approximately
$467,000 is attributed to installations of LabPro 2000 during 1997 consisting
primarily of migrating customers from the prime platform to the IBM AS400
platform. Migration contracts typically have nominal associated application
software revenue. Additionally, realignment of the laboratory sales force
after the acquisition of Dynacor, including integration of the new Premier
Series lab product, contributed to this decrease by diverting attention from
the normal sales process.
Software support revenues increased $4,873,000 to $10,978,000 for 1997,
compared to $6,105,000 for the same period one year ago, an increase of 79.8%.
The acquisition of CoMed resulted in 1997 software support revenues from
pathology of $4,363,000. Additionally, successful installations continue to
result in accretions in software support revenues. As of December 31, 1997,
the Company's recurring annualized billable support base has increased to
$12.6 million, and an additional $1.2 million of annualized software support
revenue was anticipated to be generated from delivery of the Company's
existing new systems backlog.
Service and other revenues increased by $4,221,000 to $7,496,000 from
$3,275,000. This increase principally results from the training and
implementation services in connection with pathology system installations to
the United States Department of Defense Military Treatment Facilities, and the
five site radiology system sale closed during the third quarter of 1997.
Cost of Products Sold. Cost of products sold as a percent of total revenues
for 1997 decreased by 3.5% to 14.5% from 18.0% for 1996. Although, hardware
revenues during 1997 decreased 5.9% to 14.1% from 20.0%, approximately
$1,098,000 of costs attributable to third party software licensing, or 3.0% of
total revenues, were included in the cost of products sold. Third party
software licensing costs result from the purchase of the Mumps operating
system in connection with both the newly acquired pathology and radiology
product lines, and royalties to IBM in connection with imaging sales.
Client Services Expense. Client services expense for 1997 increased
$4,790,000 to $11,321,000 from $6,531,000 for 1996. However, as a percentage
of total revenues during the respective periods, client services expense
decreased to 31.0% from 32.9%. The Company previously reported increased
staffing in connection with the 1996
31
acquisitions of DMI and CoMed, the introduction of the DynamicVision product
line, and the general release of CoPath C/S. These increased costs were more
than offset by the increase in total revenues.
Software Development Costs. Software development costs for 1997 increased
$2,839,000 to $5,914,000 from $3,075,000, an increase of .7% of total revenues
to 16.2% from 15.5% incurred during 1996. This department was reorganized
during the fourth quarter of 1996 to coordinate the talent of the DMI and
CoMed acquisitions. The Company capitalized $3,906,000 of software
development costs during 1997 compared to $1,618,000 for 1996. As outlined in
the Company's secondary offering in September 1996, the Company continued to
significantly invest in development efforts as part of the Company's overall
growth strategy.
Sales and Marketing. Sales and marketing costs for 1997 increased by
$4,465,000 to $9,123,000 from $4,658,000, an increase of 1.4% of total
revenues to 24.9% from 23.5% for the same period of 1996. During late 1996
and the first half of 1997, the Company expanded and trained a national sales
and marketing force in connection with the Company's external growth plans, in
preparation for the launch of the Company's new DynamicVision product line,
and the general release of CoPath C/S, Maxifile C/S, and PACsPlus+ product
lines in 1997.
General and Administrative Expenses. General and administrative expenses for
1997 increased by $1,976,000, to $4,554,000 from $2,578,000 incurred during
1996, but decreased as a percentage of total revenues by .5% to 12.5% from
13.0%. The Company has experienced considerable growth through the purchase
acquisitions of CoMed and DMI and the pooling of Dynacor. Additionally,
$279,000 of compensation has been accrued and expensed for 1997 under the
management incentive compensation plan. There was no such expense incurred
during the same period in 1996. Despite these cost increases, the Company
experienced offsetting cost reductions, principally in finance and
administration, associated with consolidating the acquisitions.
Other Income (Expense). Net other income for 1997 increased by $710,000 to
income of $731,000, as compared to $21,000 for 1996. Interest income
increased by $441,000, and interest and other expenses decreased by $269,000
for 1997 principally due to the availability of proceeds resulting from the
Company's secondary offering completed in the fourth quarter of 1996.
Liquidity and Capital Resources
As of December 31, 1998 the Company had cash equivalents of $1,962,000 and a
working capital deficiency of $255,000, and a working capital ratio of .98 to
1.
Accounts receivable and unbilled receivables as of December 31, 1998 increased
from similar balances on December 31, 1997 by $459,000, or an increase of
5.1%. These balances as a percentage of the Company's total annualized
revenues increased to 36.5% as of December 31, 1998 compared to 24.5% one year
prior. As a result, days sales outstanding in accounts receivable and
unbilled receivables increased to 133.2 days as of December 31, 1998, compared
to 89.6 days as of December 31, 1997. Disrupted sales cycles in 1997 and
early 1998, resulting from the new product introductions made in 1997,
significantly impacted recognized new system revenues during 1998. As an
indication of this, support revenues grew as a percentage of revenues in 1998
to 45.4%, up from 30.0% for 1997. Since the Company's support base has a
fourth quarter billing concentration, due to calendar year renewals, and
support revenues became such a higher percentage of total Company revenues,
both the total receivables balances and the days sales outstanding in
receivables increased.
Contracts receivable as of December 31, 1998 decreased $1,326,000 to
$1,766,000 as compared to the balance of $3,092,000 on December 31, 1997. The
Company entered into a licensing agreement with Sunquest Information Systems,
Inc. resulting in initial licensing fees receivable in three installments of
$1,000,000 each. The first installment was collected upon signing on February
7, 1997, the second installment was collected in 1998, and the final
installment was contractually due February, 1999. Subsequent to December 31,
1998 the final installment was received. The remaining change in contracts
receivable is attributable to scheduled collections on monthly installment
receivables from customers.
Other current assets as of December 31, 1998 increased $521,000 to $1,313,000
from the 1997 year end balance of $792,000. This resulted principally from an
increase in deferred sales commissions. During the fourth quarter of 1998
32
virtually no new systems sale bookings for the quarter were recognized as
revenue, generating the increase in deferred commissions.
During 1998 the Company capitalized $3,174,000 of software development costs
and purchased $2,872,000 of additional property and equipment. Significant
development efforts resulted in new releases and significant enhancements in
both the RadPlus and CoPathPlus products. In addition, enhancements continued
on PacsPlus, WebSight, Premier Series, RecordPlus and AccessPlus (formerly
DynamicVision Desktop). The Company plans to significantly advance
development of the perioperative information management system SurgiPlus and
continues to enhance RadPlus, CoPathPlus, PACSPlus, WebSight and RecordPlus in
1999.
Property purchases included equipment, leasehold improvements and furniture
which were made primarily to accommodate the consolidation of the Company's
former Maitland, Apple Valley and Minnetonka offices to the new corporate
headquarters in Lake Mary, Florida. This includes $1,490,000 of leasehold
improvements capitalized, $1,237,000 of which was offset by lessor provided
lease incentives on the Lake Mary facility.
Accounts payable and accrued expenses increased $1,208,000 to $4,231,000 as of
December 31, 1998 from $3,023,000 as of December 31, 1997. Included in this
increase was $196,000 of accrued sales compensation principally due to the
increased selling activity in the fourth quarter of 1998 compared to the same
quarter of 1997. In connection with the consolidation of Maitland, Apple
Valley and Minnetonka offices to Lake Mary, Florida, as of December 31, 1998
the Company accrued $185,000 of lease termination costs and $175,000 of build-
out costs. Also included in accrued expenses as of December 31, 1998, was
approximately $213,000 of severance and termination benefits associated with
the Company's process re-engineering and cost reduction plan.
Deferred revenue as of December 31, 1998 increased by $273,000 to $6,729,000
from $6,456,000. This resulted principally from the increase in annual
contract support base, and a corresponding increase in advance support
billings during the fourth quarter of 1998.
Advanced billings as of December 31, 1998 increased by $568,000 to $1,828,000
from the 1997 year end balance of $1,260,000. This resulted principally from
the record fourth quarter sales bookings in 1998 and the related increased
receipt of customer deposits.
As of December 31, 1998 the Company reported $1,173,000 of total current and
non-current deferred lease incentives, and no such balances on December 31,
1997. The lessor, in connection with the new Lake Mary office, provided
approximately $1,237,000 of lease incentives which are being amortized evenly
over the 78 month lease life, which began on September 1, 1998, as a reduction
in office rent expense.
Other current and non-current liabilities as of December 31, 1998 increased by
an aggregate of $345,000 from the December 31, 1997 balance of $815,000 to
$1,160,000. This increase is principally attributed to approximately $326,000
of office rent expense accrued to offset the six month rent abatement provided
under the new office lease agreement for the Lake Mary facility.
During 1998, the Company received $135,000 in proceeds from the exercise of
employee options and warrants.
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 and three quarters percent (9.5% on December 31, 1998).
Available borrowing capacity is limited to the lesser of $3,000,000 or 60% of
qualified receivables, $2,823,000 at December 31, 1998. Future borrowing
capacity is contingent on the Company's compliance with a minimum quick ratio
(as defined) of 1.25 to 1, and maintaining profitable quarterly operations in
excess of any increase in the carrying value of capitalized software
development costs in 1999, at which time the borrowing capacity will be
limited to the lesser of $5,000,000 or 70% of qualified receivables. As of
December 31, 1998 borrowings against this line of credit were $856,000, and
$3,120 of interest expense on the line of credit had been recognized.
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
33
Company in a private placement transaction, which resulted in net proceeds to
the Company of $1,814,000. 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 and December 31,
1998 all of the then accrued Series C Preferred Stock dividends aggregating
$27,555 and $40,000, respectively, were declared and paid.
During 1998 the employer match contribution of $349,454 to the Company's
401(k) defined contribution savings plan was made through the issuance of
208,823 shares of the Company's common stock at an average price of $1.67 per
share.
As of December 31, 1998 the Company had net operating loss carryforwards for
federal income tax purpose of approximately $20 million, which can be used to
offset Federal taxable income in future years. Future equity offerings
combined with sales of the Company's equity during the preceding years may
cause changes in ownership under Section 382 of the Internal Revenue Code of
1986, as amended, which will limit the use of the Company's net operating loss
carryforward existing as of the date of the ownership change. In the event
the Company has taxable income in the future, a change of ownership under
Section 382 may result in the application of such limitations and could have a
material adverse effect on the Company.
Management believes that existing cash, and funds available from alternative
financing options, together with funds expected to be generated by operations
will be sufficient to meet operating requirements for at least the next twelve
months.
Year 2000
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
programs, both those which the Company produces and sells to its customers and
those programs which it uses to manage and administer its own affairs, that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations.
The Company's internally used computer equipment, software and devices with
embedded technology-including both information systems and non-information
systems (together, "Internal Use Systems") - may fail to operate properly or
as expected due to Year 2000 Issues. This could result in a system failure or
miscalculations causing disruption of the Company's operations, including
among other things, a temporary inability to process transactions, send
invoices, conduct communications, or engage in similar normal business
activities. In addition, computer software products sold, marketed, and
supported by the Company ("Company Software Products") and the products of
third parties that are distributed by the Company or others and are necessary
for operation of Company Software Products ("Third Party Products"), may fail
to operate properly or as expected due to Year 2000 Issues. This could,
result in system failures or miscalculations causing disruption of customers'
operations, including among other things, a temporary inability to process
transactions, send invoices, conduct communications, treat patients, or engage
in similar normal business activities. Further, products and services used by
the Company's customers, but not supplied by the Company, could fail to
operate properly or as expected due to Year 2000 Issues. Customers' efforts
to plan for such events could result in the deferral by customers of current
installations of and plans to purchase Company Software Products. The Company
has undertaken various initiatives intended to address Year 2000 Issues with
respect to Internal Use Systems, Company Software Products, and Third Party
Products. The Company has established working groups whose primary functions
are to (i) develop and implement the Company's definition of Year 2000
readiness, (ii) assess Internal Use Systems, Third Party Products and Company
Software Products for Year 2000 Issues, (iii) monitor development, testing and
remediation efforts with respect to Company Software Products, (iv) monitor
testing of Company Software Products and Third Party Products, (v) review
customer preparations to implement Year 2000 releases of Company Software
Products, (vi) monitor and coordinate the Company's deployment plans and
results with respect to Year 2000 releases of Company Software Products,
34
(vii) monitor and coordinate contingency plans with respect to Internal Use
Systems, Company Software Products and Third Party Products, and (viii) provide
centralization, accuracy and consistency of the Company's communications
regarding Year 2000 Issues.
The Company has engaged independent experts to assist in all of its efforts
with respect to Year 2000 Issues and to independently evaluate and validate
such efforts as of this time.
The Company has mailed letters or otherwise communicated with many of its
significant vendors of Internal Use Systems and related service providers to
determine the extent to which Year 2000 Issues affect products and services of
such vendors and providers. The Company is engaged in but has not completed
efforts to communicate with other vendors and service providers involved in
its Internal Use Systems to request more responses to its communications and
to verify the responses received. Due to uncertainties associated with
vendors and service providers, the Company is unable to predict whether Year
2000 Issues involved in its Internal Use Systems will have a material adverse
effect on the Company's business, results of operations, or financial
condition, despite the Company's current assessment to the contrary.
The Company works closely with vendors of Third party Products and has
communicated with them to determine the extent to which their products and
services are or will be Year 2000 compliant. In addition, the Company is
testing or plans to test Year 2000 releases of certain Third Party Products.
Based upon its current assessment, the Company believes it has received
adequate assurances that Third Party Product vendors expect to address all
their significant Year 2000 Issues on a timely basis. Due to uncertainties
associated with Third Party Product vendors, the Company is unable to predict
whether a material adverse effect on business, results of operations, or
financial condition may result from Year 2000 Issues related to Third party
Products, despite the Company's current assessment to the contrary.
The Company began development of Year 2000 versions of some Company Software
Products in 1997 and continues to progress through development cycles with
respect to some Company Software Products. The Company began deploying Year
2000 releases of Company Software Products in 1997 and expects to complete
deployment of such releases for all products during the second half of 1999.
The Company continues to test and monitor performance of Year 2000 releases of
Company Software Products in customer environments. The Company expects to
deliver and deploy maintenance releases of Company Software Products in the
ordinary course of business to remediate any Year 2000 Issues as identified
during and after deployment of Year 2000 releases of Company Software
Products. Based on the Company's assessment, the Company believes continuing
efforts will be required to assist customers in deploying and testing Year
2000 releases of Company Software Products in their unique environments. The
Company expects an increase in service and support effort levels as the Year
2000 approaches.
The Company develops, markets and supports many different products, and the
amount of effort applied with respect to individual products varies from
product to product. The Company estimates that as of December 31, 1998 it had
completed approximately 90% of the development efforts relating to Year 2000
versions of all of the Company Software Products. The projects comprising the
remaining 10% of these efforts are in process and expected to be substantially
completed in the first half of 1999. The Company estimates that as of
December 31, 1998 it had completed approximately 75% of the deployment efforts
relating to Year 2000 versions of all Company Software Products. The projects
comprising the remaining 25% of these efforts are in process and are expected
to be substantially completed in the first half of 1999, but the Company
expects to continue efforts to remediate and maintain Year 2000 versions of
Company Software Products in customer environments and to support customers'
efforts relating to Year 2000 Issues through the early part of 2000.
The Company is currently engaged in but has not completed contingency planning
to address personnel, resource, technical and communication issues relating to
its service and remediation efforts. The Company expects that its
development, remediation, testing, deployment and contingency planning efforts
with respect to Company Software Products will continue up to and beyond
December 31, 1999, but expects the level of development, testing and
deployment will decrease in 1999.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational, business and financial problems (including possible loss of
revenue), if any, that would be reasonably likely to result from the impact of
unresolved Year 2000 Issues, including possible (i) failure by the Company and
vendors of Third Party Products to complete efforts to avoid or minimize Year
35
2000 Issues on a timely basis, (ii) failure of Customers to be ready to or
cooperate in the deployment of Year 2000 versions of Company Software Products
and Third Party Products on a timely basis, and (iii) deferral by customers of
current installations and prospective purchase decisions with respect to
Company Software Products. The Company has not yet completed its contingency
plans relating to Year 2000 scenarios it deems sufficiently probable to merit
contingency planning. The Company currently plans to complete such analysis
and contingency planning by June 30, 1999.
The Company presently believes that Year 2000 Issues will not pose significant
operational problems for the Company. However, unless all material Year 2000
Issues are timely and properly identified, assessed, and remediated, and
unless adequate contingency plans are properly formulated with respect to Year
2000 Issues, the Year 2000 Issue may materially adversely impact the Company's
business, financial condition and results of operations, or adversely affect
the Company's relationships with customers, vendors and others.
The costs, timing and scheduling of deployment and installation of Year 2000
versions of Company Software Products and Third Party Products, as well as the
ability of the company to assist customers in the installation of Company
Software Products, will depend in part on the readiness, ability and
cooperation of customers and their suppliers. Due to uncertainties associated
with customers' readiness, cooperation and sources of products and services,
there can be no assurance that Year 2000 Issues will not materially adversely
effect the Company's business, results of operations, or financial condition,
or adversely affect the Company's relationships with customers, vendors or
others.
Some customers and prospects of the Company operate in complex computing
environments that include products and services not supplied by the Company.
The costs, timing and scheduling by customers of work related to Year 2000
Issues involving such products and services may cause some customers and
prospects to defer current projects or prospective purchase decisions
regarding Company Software Products. If Year 2000 Issues cause customers and
prospects to defer current projects or prospective purchase decisions, the
Company's financial condition could be materially adversely affected. Due to
uncertainties associated with customers and prospects, there can be no
assurance that Year 2000 Issues will not materially adversely effected the
Company's business, results of operations, or financial condition or adversely
affect the Company's relationships with customers, vendors and others.
The costs of the Company's Year 2000 identification, assessment, remediation,
testing, deployment and contingency planning efforts, and the dates on which
the Company believes it will complete such efforts, are based upon
management's current best estimates, which were derived using numerous
assumptions regarding future events, including the continued availability of
certain resources, third-party remediation plans, and other factors. There
can be no assurance that these estimates will prove to be accurate, and actual
results could differ materially from those currently anticipated. Specific
factors that could cause such material differences include, but are not
limited to, the availability of and costs of personnel trained in year 2000
Issues, the ability to correctly and effectively identify, assess, remediate,
and test al relevant computer codes, equipment, and embedded technology, and
similar uncertainties, the ability of the Company to timely install and deploy
Year 2000 releases of Company Software Products, a failure of the Company to
provide, obtain or make available adequate resources to assist customers in
installing Year 2000 releases of Company Software Products and Third Party
Products. As a result of any such factors alone or in combination, the
Company may experience an increase in warranty and other claims. In addition,
since there is no uniform definition of "compliance with Year 2000," and
since the Company sells a myriad of different combinations of products and
services under varying contractual terms, the Company is not able to assess or
estimate the possible impact of such possible claims. No assurance can be
given that the aggregate cost of defending and resolving such claims, if any,
will not materially adversely affect the Company's result of operations.
Although some of the Company's agreements with manufacturers and others from
whom it purchases products for resale contain provisions requiring such
parties to indemnify the Company under some circumstances, there can be no
assurance that such indemnification arrangements will cover all of the
Company's liabilities and costs relate to claims by third parties related to
Year 2000 Issues.
During 1997 the Company converted its human resources, time tracking, general
accounting and payroll systems to systems which have been represented to be
Year 2000 compliant. The Company believes that all of its internal management
information systems and non-information systems are currently Year 2000
compliant and, accordingly, does not anticipate any significant expenditures
to remediate or replace existing Internal Use Systems.
36
Inflation and Changing Prices
The Company believes that the general state of the economy and inflationary
trends have only a limited effect on its business. Historically, inflation
has not had a material effect on the Company. Changing prices of computer
hardware could have a material effect on the cost of materials sold and the
related selling price of software and hardware sales.
Market Risk
The Company is exposed to interest rate changes primarily as a result of its
variable rate line of credit used to finance the Company's short-term working
capital needs and general corporate purposes. The Company's interest rate
risk management objectives is to limit the impact of interest rate changes on
earning and cash flows and to lower its overall borrowing costs.
The Company's market risks associated with its line of credit borrowings
outstanding is that the interest rate under the line of credit agreement is
based on the prime rate plus one and three quarters percent (9.5% as of
December 31, 1998). The line of credit agreement expires on July 23, 1999.
Fair value of the line of credit as of December 31, 1998 was equal to its
carrying value of $856,000.
Recent Accounting Pronouncements
In October 1997, the AICPA issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, which supersedes SOP 91-1. SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements (i.e.,
software products, upgrades/enhancements, post contract customer support,
installation, training, etc.) to be allocated to each element based on the
relative fair values of the elements. The Company adopted SOP 97-2 for
software transactions entered into beginning January 1, 1998. The impact of
SOP 97-2 did not materially alter the Company's revenue recognition methods.
37
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
1997 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,465,685 $ 1,962,426
Accounts receivable, net 6,066,305 6,847,498
Unbilled receivables 2,900,702 2,578,078
Contracts receivable - current 1,409,571 1,150,754
Other current assets 792,038 1,313,364
Total current assets 17,634,301 13,852,120
Property and equipment, net 3,699,761 5,167,436
Capitalized software development costs, net 7,830,349 9,247,578
Goodwill, net 2,070,581 1,663,032
Contracts receivable - non-current 1,682,780 615,645
Other assets 59,258 58,469
$32,977,030 $30,604,280
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,023,349 $ 4,231,540
Deferred revenue 6,456,120 6,729,436
Advance billings 1,259,876 1,828,351
Line of Credit -- 856,000
Deferred lease incentives - current -- 190,231
Other 361,107 271,735
Total current liabilities 11,100,452 14,107,293
Deferred lease incentives - non-current -- 982,862
Other 453,788 888,358
Total liabilities 11,554,240 15,978,513
Shareholders' equity:
Series C redeemable convertible preferred stock
($.01 par value; issued and outstanding 1,000,000
shares with an aggregate liquidation preference of
$2,000,000, as of December 31, 1998, and a $.16 per
share annual dividend). -- 1,811,327
Common stock ($.01 par value; authorized 40,000,000
shares; issued and outstanding 18,008,210 and
18,271,251 shares in 1997 and 1998, respectively). 180,082 182,713
Warrants -- 3,000
Additional paid-in capital 44,300,707 44,699,416
Deficit (23,057,999) (32,070,689)
Total shareholders' equity 21,422,790 14,625,767
$32,977,030 $30,604,280
</TABLE>
See notes to consolidated financial statements.
38
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
1996 1997 1998
<S> <C> <C> <C>
Operating revenues:
Computer system equipment sales
and support $ 3,971,549 $ 5,154,256 $ 2,637,601
Application software licenses 6,474,674 12,917,390 5,396,122
Software support 6,104,933 10,977,540 11,722,897
Services and other 3,275,124 7,495,923 6,072,679
Total operating revenues 19,826,280 36,545,109 25,829,299
Costs and expenses:
Cost of products sold 3,566,608 5,321,053 3,242,556
Client services expense 6,530,687 11,321,158 10,958,132
Software development costs 3,074,728 5,913,550 6,646,471
Sales and marketing 4,658,070 9,123,366 9,430,307
General and administrative 2,577,776 4,554,028 4,605,237
In-process research and development 15,057,869 -- --
Total costs and expenses 35,465,738 36,233,155 34,882,703
Operating income (loss) (15,639,458) 311,954 (9,053,404)
Other income (expense):
Interest expense and financing costs (320,685) (51,661) (94,049)
Gain (loss) on disposal of property -- 28,100 (139,063)
Interest income 341,771 754,565 273,826
Total other income (expense) 21,086 731,004 40,714
Earnings (loss) before income taxes (15,618,372) 1,042,958 (9,012,690)
Income taxes -- -- --
Net earnings (loss) $(15,618,372) $ 1,042,958 $(9,012,690)
Net earning (loss) available for
common shareholders $(15,869,409) $ 1,042,958 $(9,080,245)
Earnings (loss) per common share
Basic and diluted $ (1.72) $ 0.06 $ (0.50)
Weighted average number of common
shares outstanding 9,224,775 17,905,214 18,127,641
</TABLE>
See notes to consolidated financial statements.
39
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
Common Additional
Series Series Series Series Warrants Stock Paid-In Deficit
A B CM C
Preferred
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996,
as previously
reported $9,688 $37,500 $ - $ - $ - $68,616 $13,070,163 $(8,482,585)
Conversion of
Series A
Preferred
Stock (9,688) - - - 9,688 - -
Conversion of
Series B
Preferred
Stock - (37,500) - - - 37,500 - -
Preferred Stock
Dividends - - - - - - (275,881) -
Issuance of
Common Stock - - - - - 43,345 22,673,919 -
Exercise of
Stock Options - - - - - 609 142,434 -
Employee Stock
Purchase Plan - - - - - 314 101,156 -
Common Stock issued to effect
CMDI acquisition - - - - - 10,000 4,990,000 -
Issuance of
Series CM Preferred
Stock in connection
with the CoMed
acquisition - - 60 - - - 2,999,940 -
Net loss - - - - - - - (15,618,372)
Balance,
December 31, 1996 - - 60 - - 170,072 43,701,731 (24,100,957)
Conversion of
Series CM
Preferred Stock - - (60) - - 5,650 (5,590) -
Exercise of Stock
Options & Warrants - - - - - 3,721 384,387 -
Employee Stock
Purchase Plan - - - - - 639 220,179 -
Net income - - - - - - - 1,042,958
Balance,
December 31, 1997 - - - - - 180,082 44,300,707 (23,057,999)
Issuance of
Series C Preferred
Stock and Warrants
in Private Placement
Transaction - - - 1,811,327 3,000 - - -
Exercise of Stock
Options - - - - - 271 54,167 -
Employee Stock
Purchase Plan - - - - - 510 80,523 -
Employee 401(k)
Plan Match - - - - - 1,850 331,574 -
Preferred Stock
Dividends - - - - - - (67,555) -
Net Loss - - - - - - - (9,012,690)
$ - $ - $ - $1,811,327 $3,000 $182,713 $44,699,416 $(32,070,689)
</TABLE>
See notes to consolidated financial statements.
40
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(15,618,372) $1,042,958 $(9,012,690)
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 1,900,211 3,016,713 3,323,374
Book value of disposed property 64,875 20,074 181,828
Employer 401(k) contributions not
requiring cash -- -- 333,424
Provision for doubtful accounts
receivable -- -- 206,805
Purchased in-process research and
development 15,057,869 -- --
Changes in assets and liabilities:
Accounts receivable 1,017,582 (440,096) (987,998)
Unbilled receivables (1,371,029) (788,889) 322,624
Contracts receivable (201,737) (2,399,515) 1,325,952
Other 169,619 73,144 (194,965)
Accounts payable and accrued expenses (53,683) 193,219 1,208,181
Deferred revenue 372,217 1,302,856 273,316
Advance billings (1,005,682) (1,718,541) 568,475
Net cash provided (used) by
operating activities 331,870 301,923 (2,451,664)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of net assets of Dimensional
Medicine Inc. (1,349,389) -- --
Purchase of Collaborative Medical
Systems, Inc. (6,591,075) -- --
Capitalized software development costs (1,618,060) (3,906,254) (3,174,028)
Purchases of property and equipment (1,098,553) (1,841,306) (1,142,941)
Restricted cash released/(deposited) -- 60,000 --
Net cash used by investing
activities (10,657,077) (5,687,560) (4,316,969)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of
credit, net -- -- 856,000
Borrowings (repayments) under bank note
payable (2,800,000) -- --
Proceeds from issuance of common stock 22,961,777 608,926 135,471
Proceeds from issuance of Series C
Preferred Stock and Warrants -- -- 1,814,327
Payment of preferred stock dividends (275,881) -- (67,555)
Borrowings (repayments) capital lease
obligations and other debt (400,619) (208,040) (472,869)
Net cash provided (used) by
financing activities 19,485,277 400,886 2,265,374
Net increase (decrease) in cash and cash
equivalents 9,160,070 (4,984,751) (4,503,259)
Cash and cash equivalents, beginning
of year 2,290,366 11,450,436 6,465,685
Cash and cash equivalents, end of year $11,450,436 $ 6,465,685 $1,962,426
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 320,685 $ 51,661 $ 94,049
NON-CASH TRANSACTIONS:
Furniture and fixtures under capital
lease $ -- $ -- $ 492,495
Leasehold incentives received $ -- $ -- $1,236,503
</TABLE>
See notes to consolidated financial statements.
41
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Dynamic Healthcare Technologies, Inc. ("Dynamic" or the
"Company") is a leading provider of mission-critical healthcare information
systems for clinical services departments and facilities. The Company's
product line, DynamicVision(R), is a suite of image-, voice-, and web-enabled
systems for anatomic pathology, radiology, laboratory, surgical services and
health information management. Dynamic is headquartered in the greater
Orlando area and has a key operations and development center near Boston. The
Company provides support for all of its systems and offers integration and
other consulting services.
Basis of Consolidation - The consolidated financial statements include the
accounts of Dynamic Healthcare Technologies, Inc. and its wholly-owned
subsidiary, Collaborative Medical Systems Corp. which was incorporated on
November 27, 1996 (collectively the "Company" or the "Registrant"). All
significant inter-company transactions and accounts have been eliminated in
consolidation.
On May 1, 1996, Dimensional Medicine, Inc. ("DMI") was purchased by and
merged into DMI Acquisition Corporation ("DMIAC"), a newly formed wholly
owned subsidiary of the Registrant. The transaction was consummated by
purchasing all of the outstanding common stock and retiring and assuming
certain debt obligations of DMI. The acquisition has been accounted for using
the purchase method. On September 2, 1996, DMIAC was merged with and into the
Company.
On December 17, 1996, Collaborative Medical Systems, Inc. ("CoMed") was
purchased by an merged into Collaborative Medical Systems Corp. ("CMSI"), a
newly formed wholly owned subsidiary of the Registrant. The transaction was
consummated by purchasing all of the outstanding stock of CoMed using both
available cash, and common and preferred stock of the Company. The
acquisition was accounted for using the purchase method. Upon consummation of
the transaction the Company wrote off the acquired in-process research and
development (see also Note H).
Accounts Receivable - Accounts receivable is stated at net book value less an
allowance for doubtful accounts of $307,000 and $360,000 for the years ended
December 31, 1997 and 1998, respectively. Bad debt expense for each of the
years ended December 31, 1996, 1997, and 1998 was $0, $0, and $206,805,
respectively.
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation and amortization. The cost of property and equipment
is depreciated and amortized over the estimated useful lives of the related
assets, ranging from five to ten years, using the straight-line method.
Software Development Costs - Costs incurred to establish the technological
feasibility of computer software products are research and development costs
and are charged to expense as incurred. Costs of producing product masters
subsequent to establishing technological feasibility, including coding and
testing, are capitalized. Capitalization of computer software costs ceases
when the product is available for general release to customers. Amortization
of capitalized software development costs for the years ended December 31,
1996, 1997 and 1998 were $1,128,402, $1,484,276, and $1,756,798, respectively.
Accumulated amortization of capitalized software development costs is
$4,829,271 and $6,586,069 at December 31, 1997 and 1998, respectively.
Capitalized software development costs are amortized using either the
straight-line method over the estimated economic life of the products
(initially five years) or the ratio of current revenues to current and
anticipated revenues for the product, whichever results in the greater amount
of amortization. Unamortized capitalized costs of a computer software product
in excess of its estimated net realizable value are expensed. No such expense
has been recorded for the years ended December 31, 1996, 1997 and 1998.
42
Goodwill - Goodwill is stated at cost less accumulated amortization. Goodwill
is amortized using the straight-line method over a period of seven years.
Amortization of goodwill for the years ended December 31, 1996, 1997, and 1998
was $165,000, $408,000, and $407,549, respectively. Accumulated goodwill
amortization as of December 31, 1997 and 1998 was $782,556 and $1,189,805,
respectively. The Company assesses the recoverability of goodwill based upon
projected operations over a period which represents the approximate remaining
life of goodwill. The Company evaluates the recoverability of goodwill based
on this forecast of future cash from operations and income, and using a
discount rate that reflects the Company's average cost of funds.
Revenues - Revenues are derived from the sale of computer hardware, licensing
and sub-licensing of software, professional and technical consulting services,
and maintenance and support services. Each customer contract is negotiated
separately. Application software licenses and computer system equipment
revenues are recorded when hardware and application software are delivered.
Installation and training revenues, which are included with application
software licenses revenues in the statements of operations are recognized as
the services are performed. Software support revenues principally include
contracts for continuing support services which cover a specific period, and
from which revenue is recognized ratably over the period of the contract.
Also included in software support revenue are revenues from other significant
continuing obligations and post contract support obligations, which are
typically under separate contract and are recognized as the services are
performed. Services revenues are recognized as the services are performed.
Employee Benefit Plan - The Company has a 401(k) defined contribution savings
plan covering all full-time employees. Eligible employees may elect to defer
up to 20% of their compensation, but limited to the maximum allowed by the
Internal Revenue Code. Company contributions are made at the discretion of
the Board of Directors and amounted to $186,829, $420,487, and $349,454 in
1996, 1997 and 1998, respectively. During 1998 the employer match
contribution was made through the issuance of 208,823 shares of the Company's
common stock at an average issuance price of $1.67.
Stock-Based Employee Compensation Plans - The Company accounts for its stock
option plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option as if the fair-
value-based method defined in SFAS No. 123 had been applied. The Company
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosures of SFAS No. 123.
Income Taxes - Deferred income taxes are provided on items that are recognized
in different reporting periods for financial accounting and income tax
purposes using the then enacted tax rates.
Earnings Per Share - Basic earnings per share is computed on the basis of the
weighted average number of shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of shares outstanding
plus potential common stock which would arise for the exercise of stock
options and warrants, if dilutive.
Cash Equivalents - For purposes of the statement of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates relate to revenue recognition on
contracts and to the recoverability of software development costs and
goodwill. Actual results could differ from those estimates.
43
Concentration of Credit Risk - The Company generates revenue primarily through
sales to entities operating within the healthcare industry located throughout
the United States. Due to this concentration, substantially all receivables
at December 31, 1997 and 1998, are from healthcare institutions which may be
similarly affected by changes in economic, regulatory or other conditions.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential
credit losses and such losses have been within management's expectations.
The Company invests its excess cash in deposits with major financial
institutions, in U.S. government agency securities and in commercial paper of
companies with strong credit ratings. Generally, the investments mature
within 90 days and, therefore, are subject to little risk. The Company has
not experienced losses related to these investments.
Fair Value of Financial Instruments - The following methods and assumptions
were used to estimate the fair value of the Company's financial instruments:
The fair value of cash and cash equivalents approximates its carrying amounts
because of the short maturity of those instruments. The fair value of
contract receivables approximates its carrying value, and is estimated by
discounting the guaranteed minimum payments and unguaranteed contract
residuals at the imputed incremental borrowing rates of the related customers
(see also Note C herein). The fair value of bank note payable and line of
credit are estimated based on the current rates available to the Company for
debt of the same remaining maturities and approximates its carrying amount.
Reclassifications - Certain prior year balances have been reclassified to
conform to the 1998 presentation.
B PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
December 31,
1997 1998
<S> <C> <C>
Furniture and fixtures $ 845,992 $ 1,245,211
Equipment 6,161,529 6,848,943
Leasehold improvements 181,523 1,553,173
7,189,044 9,647,327
Less accumulated depreciation and
amortization 3,489,283 4,479,891
$ 3,699,761 $ 5,167,436
</TABLE>
C. CONTRACTS RECEIVABLE:
Contracts receivable represent receivables from customers under long-term
financing arrangements.
During the quarter ended March 31, 1997, the Company entered into a value-
added re-marketing agreement with Sunquest Information Systems, Inc.
("Sunquest") for the non-exclusive sale of CoPath Client/Server product
licenses. The initial license fee of $3,000,000 was receivable in three (3)
annual installments of $1,000,000 due in February 1997, 1998 and 1999. As of
December 31, 1998 contract receivables included $991,955 under this contract
representing the present value of the remaining installment with an imputed
interest rate of 8.25%. Subsequent to December 31, 1998 the 1999 installment
was collected.
On July 5, 1997, the Company entered into a multi-site radiology information
system sale payable in varying monthly installments extending through March
2003. Total minimum installments due under this contract aggregate
$5,754,000. Deferred revenue equal to the present value of the minimum
payments and estimated residual value discounted at an imputed rate of 8.5%,
of $3,618,000 was initially recorded. During 1997, $3,402,000 of revenue was
recognized upon implementation of the system and $125,000 of interest income
was recognized on the related contract receivable. On November 28, 1997 the
Company assigned its rights to receive minimum payments under this contract to
a third party in exchange for cash.
Also included in contracts receivable are other amounts due from customers in
monthly installments of principal and interest with initial terms ranging from
one to five years. The future minimum principal payments to be received under
contract receivables as of December 31, 1998 are summarized as follows:
44
Year Ended December 31,
1999 $1,150,754
2000 106,122
2001 90,803
2002 21,515
2003 397,205
Thereafter --
Total $1,766,399
D. 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, in September of 1998, the
Company leased furniture and fixtures under a capital lease obligation.
The capital lease obligation requires 36 non-cancelable monthly
installments of $15,837 which began in October 1998, bears an interest
rate of 9.8% and provides for a $100 purchase option to the Company at
lease expiration in October 2001. As of December 31, 1998, furniture and
fixtures under the capital lease obligation are summarized as follows:
Cost $ 523,049
Accumulated Depreciation (33,099)
Net Book Value December 31, 1998 $ 489,950
Minimum future lease payments under the capital lease obligation as of
December 31, 1998 are summarized as follows:
Year Ended December 31,
1999 $ 190,044
2000 190,044
2001 142,533
522,621
Less: Amount representing interest (66,159)
456,462
Less: Current portion of capital
lease obligation (151,977)
Non-current portion of capital
lease obligation $ 304,485
The capital lease obligation balances are included with other current and non-
current liabilities on the balance sheet.
Operating Leases
The Company leases office space under non-cancelable operating leases. The
leases call for monthly payments over terms of 36 to 78 months and include
renewal options. Total rent expense on all operating leases was $603,000,
$1,217,000, and $1,609,000 for the years ended December 31, 1996, 1997 and
1998, respectively. The 1998 rent expense includes $185,000 of accrued lease
termination charges included in accounts payable and accrued expenses as of
December 31, 1998, resulting from consolidating the Apple Valley, Minnesota
and Maitland, Florida facilities.
The future minimum rental payments under operating leases as of December 31,
1998 are as follows:
Year Ended December 31,
1999 $1,618,869
2000 1,028,180
2001 1,045,916
2002 1,064,112
2003 1,082,840
Thereafter 1,352,540
Total $7,192,457
45
Deferred Lease Incentives
In connection with lease of the Lake Mary office space the Company was
provided $1,236,503 of lease incentives, which are being amortized on a
straight line basis over the 78 month lease term beginning September 1, 1998,
as a reduction in office rent expense.
E. NOTE PAYABLE
Included in other current and non-current liabilities is a note payable (the
"Note"). The Note is payable in fixed monthly installments of $7,228, bears
fixed interest at a rate of 8.74%, and matures on February 1, 2003. On
December 31, 1998 current and long-term portions on the Note were $62,820 and
$239,184, respectively.
The Note was issued subject to the terms of the sale of the Company's right to
receive minimum payments under a radiology system contract (the "Contract")
(see also Note C). The Note plus any accrued interest becomes immediately due
should any of the following occur: 1) The Company fails to make a scheduled
installment payment. 2) Any default in the agreement governing the sale of the
minimum payments occurs. 3) The customer defaults on the terms of the
Contract. The Note is secured by all the hardware and software included in
the Contract plus any payments due to the Company under the Contract other
than the minimum payments sold.
As of December 31, 1998, maturities pursuant to the Note are as follows:
Year Ended December 31,
1999 $ 62,820
2000 68,536
2001 74,772
2002 81,575
2003 14,301
Total $ 302,004
F. LINE OF CREDIT
On July 24, 1998 the Company entered into a $5,000,000 Revolving Line of
Credit Agreement with Silicon Valley Bank, a commercial bank ("Bank"). The
Revolving Line of Credit Agreement 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 and three quarters percent (9.5% on December
31, 1998). Available borrowing capacity is limited to the lessor of
$3,000,000 or 60% of qualified receivables, $2,823,000 at December 31, 1998.
Future borrowing capacity is contingent on the Company's compliance with a
minimum quick ratio (as defined) of 1.25 to 1, and maintaining profitable
quarterly operations in excess of any increase in the carrying value of
capitalized software development costs in 1999, at which time the borrowing
capacity will be limited to the lessor of $5,000,000 or 70% of qualified
receivables. As of December 31, 1998 borrowings against this line of credit
were $856,000, and $3,120 of interest expense on the line of credit had been
recognized.
G. SERIES C REDEEMABLE CONVERTIBLE 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 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 and December 31,
1998 all of the then accrued Series C Preferred Stock dividends aggregating
$27,555 and $40,000, respectively, were declared and paid (see also Note K).
46
H. CAPITAL STOCK, WARRANTS AND OPTIONS
During 1993, the shareholders approved and the Company adopted a stock warrant
and option plan for directors and management employees (the "D&M Plan"),
whereby 250,000 shares of common stock were reserved for issuance. During
1997, the shareholders approved increasing shares reserved for issuance
pursuant to the D&M Plan to 650,000. Under the D&M Plan directors' and
management employee warrants are five year warrants which vest under varying
terms and are issued at an exercise price equal to the market price of the
Company's common stock on the date of grant. During 1995, the shareholders
approved an amendment to the D&M Plan to conform the terms of vesting to 40%
upon grant plus 20% per year for each of three years thereafter, and to
provide for early vesting upon death or employment termination without cause
for all future options granted under the D&M Plan. Additionally, annual
warrants are issued to certain outside directors at the beginning of that
director's third consecutive term in office. Each annual warrant is for 5,000
shares of the Company's Common Stock, has a five year term, has an exercise
price equal to the average of the closing bid and ask prices of the Company's
Common Stock on the date of issuance, and is fully vested upon issuance. At
December 31, 1998 the Company had stock warrants and options outstanding to
purchase shares of its common stock under the D&M Plan as follows:
<TABLE>
Number Presently Price Year Expiration
of Shares Exercisable Per Share Granted Date
<S> <C> <C> <C> <C> <C>
Directors'
Warrants: 10,000 10,000 $1.94 1994 June 1999
5,000 5,000 $2.25 1994 June 1999
15,000 15,000 $1.00 1995 June 2000
15,000 15,000 $1.97 1996 Mar. 2001
76,500 61,200 $6.06 1996 May 2001
10,000 4,000 $5.88 1997 June 2002
35,500 14,200 $1.44 1998 June 2003
Management
Employees'
Options: 7,500 4,500 $4.75 1996 Dec. 2001
33,333 20,000 $5.00 1997 May 2002
97,500 39,000 $3.28 1998 Jan. 2003
305,333 187,900
</TABLE>
The Company adopted an incentive stock option plan in 1983 for key employees
whereby 400,000 shares of common stock were reserved for issuance under the
Plan. Options granted vest 40%, 30% and 30% on the first, second and third
anniversaries of their issuance, respectively and expire ten years after the
date of grant. At December 31, 1998 and December 31, 1997, the Company had
granted options of 355,040 shares, of which options for 118,240 shares had
been exercised, 231,800 expired unexercised and options for 5,000 shares were
exercisable at a weighted average exercise price of $1.81 per share and a
weighted average remaining contractual life of twenty-two months as of
December 31, 1997 and ten months as of December 31, 1998. No new options will
be granted or were granted after 12/31/92 under the terms of this Plan.
During 1993, the shareholders approved and the Company adopted a new ten year
incentive stock option plan for employees whereby 100,000 shares of common
stock were reserved for issuance under the Plan. The terms of this 1993 ISO
Plan are similar to the 1983 Plan. During 1995 and 1997, the shareholders
approved increasing shares reserved for issuance pursuant to the 1993 ISO Plan
to 600,000 then 1,500,000, respectively. At December 31, 1998, the Company
had granted options of 1,790,707 shares, 75,000 options had been exercised,
682,379 options were terminated and options for 323,823 shares were
exercisable at a weighted average exercise price of $3.02 and a weighted
average remaining contractual life of 7.4 years. As of December 31, 1998
options for 1,033,328 shares were outstanding with a weighted average exercise
price of $2.72 per share and a weighted average contractual life of 8.6 years.
Under both the 1983 Plan and the 1993 Plan, the exercise price for stock
options may not be less than the market price of the Company's common stock at
date of grant.
47
As of January 1, 1998 and December 31, 1998, the weighted average exercise
prices of options outstanding under the ISO Plans were $3.82 and $2.72,
respectively. Additionally, during 1998 the weighted average exercise prices
of options exercised, granted and canceled under the ISO Plans were $1.12,
$2.44 and $4.01, respectively.
Incentive stock option activity under the 1983 and 1993 Plans and price
information follows:
<TABLE>
<S> <C> <C>
Stock Option
Shares Price Range
Balance at December 31, 1995 193,050 $1.00 - $2.25
Exercised (35,410) $1.00 - $2.25
Granted 447,500 $1.97 - $5.38
Canceled (28,300) $1.00 - $1.97
Balance at December 31, 1996 576,840 $1.00 - $5.38
Exercised (51,940) $1.00 - $1.97
Granted 397,707 $3.59 - $5.19
Canceled (61,360) $1.00 - $5.00
Balance at December 31, 1997 861,247 $1.00 - $5.38
Exercised (1,650) $1.00 - $1.97
Granted 757,750 $ .97 - $3.28
Canceled (579,019) $1.00 - $5.38
Balance at December 31, 1998 1,038,328 $1.00 - $5.25
</TABLE>
During 1993 the shareholders approved and the Company adopted an Employee
Stock Purchase Plan effective for a five year period beginning January 1,
1994. The Company reserved 200,000 shares of common stock for issuance under
the Plan. During 1997, the shareholders approved increasing shares reserved
for issuance to 600,000 shares, and during 1998 shareholders approved
extending the Plan through December 31, 2003. The Plan operates in one or
more phases of six months each and is open for enrollment by employees working
at least 20 hours per week and who have completed at least five months of
service. A summary of plan activity is as follows:
<TABLE>
<C> <C> <C> <C>
Phase # Phase Ending Date Shares Issued Price
1 June 30, 1994 5,274 $ 1.650
2 December 31, 1994 2,535 $ .980
3 June 30, 1995 6,256 $ .930
4 December 31, 1995 22,575 $ .930
5 June 30, 1996 14,026 $ 2.045
6 December 31, 1996 17,321 $ 4.202
7 June 30, 1997 23,826 $ 4.200
8 December 31, 1997 40,116 $ 3.010
9 June 30, 1998 50,964 $ 1.590
10 December 31, 1998 57,973 $ .680
240,866
</TABLE>
Phase ten (10) shares were issued in January 1999.
The Company's Board of Directors, in connection with employment agreements,
has granted employment options. Employment options are exercisable for five
years from the date of grant in accordance with a vesting schedule of 40% upon
grant plus 20% per year for each of three years thereafter at an exercise
price equal to the fair market value on the date of the grant. On August 23,
1994, the Company's Board of Directors, in connection with an employment
agreement, granted options to Mitchel J. Laskey, the Company's President and
then COO (now CEO), for 250,000 shares of common stock under similar terms at
an exercise price equal to the fair market value on the date of the grant of
$1.6875. On September 13, 1995, the Company's Board of Directors reduced the
exercise price on Mr. Laskey's employment options to $1.00 per share. On
December 17, 1996 the Company's Board of Directors, in connection with various
other employment agreements, granted options covering 96,000 shares of common
48
stock under similar terms at an exercise price equal to fair market value on
the date of the grant of $5.00. On January 1, 1997 the Company's Board of
Directors granted additional employment options to Mitchel J. Laskey for
50,000 shares of common stock under similar terms at an exercise price of
$4.63 which represents the fair market value on the date of grant. During
1998 47,500 of the Mitchel J. Laskey January 1, 1997 options expired. On
January 1, 1998 the Company's Board of Directors approved additional options
to Mitchel J. Laskey for 400,000 shares of common stock, 100,000 shares at a
strike price of $6.00, $7.50, $9.00 and $10.50 each. All of these employment
option agreements provide for early vesting upon death or employment
termination without cause and were issued at exercise prices no less than the
fair market value of the shares on the date of grant. As such, in accordance
with APB 25 no corresponding compensation expense was recognized.
The Articles of Incorporation authorize 20,000,000 shares of $.01 par value
common stock. During 1997, the Company's shareholders approved increasing the
number of authorized common shares to 40,000,000.
The Articles of Incorporation authorize 10,000,000 shares of $.01 par value
preferred stock, in such series and variations in the relative rights and
preferences, including voting rights, if any, between series as the Board of
Directors shall determine.
On July 31, 1995 the Company completed a Private Placement Offering issuing
$775,000 of Subordinated Convertible Notes, bearing simple interest at 9% per
annum, together with detachable warrants to purchase 155,000 shares of the
Company's common stock, ("debt warrants"). The warrants are exercisable at
$1.00 per common share, and are exercisable for five years from the date of
issuance (70,000 in June 1995 and 85,000 in July 1995). On November 28,1995
all of the Subordinated Convertible Notes were converted into 968,750 shares
of Series A Preferred Stock. As of December 31, 1998, none of the debt
warrants were exercised.
On December 5, 1995 the Company issued 3,375,000 shares of Series B Preferred
Stock for $2.7 million, and on December 29, 1995 issued 375,000 shares of
Series B Preferred Stock for an additional $300,000 in Private Placement
transactions.
In connection with the Private Placement of the shares of Series B Preferred
Stock, the Board of Directors of the Company authorized the issuance on
December 8,1995 of warrants to purchase 210,000 shares of the Company's common
stock for $1.00 per share to a financial consultant ("Series B warrants") for
$25,000. These warrants are exercisable for five years from the date of
issuance. As of December 31, 1998, none of the Series B warrants were
exercised.
As of December 31, 1996 dividends declared and paid on Series A and Series B
Preferred Stock were $57,931 and $217,950, respectively. The Company's
registration of the common stock underlying conversion of the Series A and
Series B Preferred Stock was declared effective on September 27, 1996. As
such on September 27, 1996, 968,750 shares of Series A and 3,750,000 shares of
Series B Preferred Stock were converted on a share for share basis to common
stock.
On October 2, 1996 the Company received proceeds of $20,941,650 in a common
stock offering from the issuance of 3,892,500 shares of common stock at $5.75
per share net of underwriting commissions of $1,440,225. Stock issuance costs
incurred amounted to $714,846. Pursuant to the terms of the offering a
portion of the proceeds were immediately used to repay the subordinated notes
payable of $1,000,000, the bank note payable of $2,743,882, and related
accrued interest.
On October 30, 1996 the underwriters exercised their options to cover over-
allotments made in connection with the common stock offering. Upon exercise,
the Company received additional proceeds of $2,377,960 from the issuance of
442,000 shares of common stock at $5.75 per share net of underwriting
commissions of $163,540.
On December 17, 1996, in connection with the acquisition of CoMed, the Company
issued 1,000,000 common shares and 6,000 shares of Series CM Preferred Stock,
$.01 par value, to the former shareholders of CMSI. The Series CM Preferred
Stock was automatically converted into 564,996 shares of the Registrant's
common stock at the close of business on August 29, 1997 ("Contingent
Shares"), pursuant to a formula based upon the average closing bid and ask
price of the Registrants common stock as quoted on the National Market for the
49
five (5) trading day period ending August 29, 1997 (the "CSAVG"). The CSAVG
during this period was $5.175 and the number of shares of the Registrant's
common stock issued as Contingent Shares was pro-rated accordingly.
During 1998 the employer match contribution of $349,454 to the Company's
401(k) defined contribution savings plan was made through the issuance of
208,823 shares of the Company's common stock at an average price of $1.67 per
share.
I. IN-PROCESS RESEARCH AND DEVELOPMENT
In-process research and development ("IPR&D"), costs identified with the
purchase of CoMed on December 17, 1996, principally development efforts in
connection with the CoPath client server product and client server development
tool-kit, totaling $15,057,869, were expensed immediately following the
acquisition. The fair value of the acquired IPR&D was determined by
independent appraisers under the income approach. The income approach
attempts to measure the income-producing capability of the acquired in-process
activities and calculates the present value of the future economic benefits
expected to be derived by successful completion of the IPR&D, net of allocable
expenses and discounted to account for the level of risk associated with the
purchased research.
J. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
Year Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
Current income tax expense (benefit)
before operating loss carry forward $(347,000) $ -- $ --
Tax effects of temporary differences, net of
Changes in related valuation allowance 123,000 725,000 431,000
Non-recognition of benefits of operating loss
Carry forward 224,000 -- --
Benefits of operating loss carry forward -- (725,000) (431,000)
$ -- $ -- $ --
</TABLE>
Deferred income taxes reflect the net tax effects of operating loss and tax
credit carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The tax effects of significant items comprising the
Company's net deferred tax as of December 31, 1997 and 1998, are as follows:
<TABLE>
1997 1998
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $4,883,000 $8,488,000
Tax credit carryforwards 655,000 655,000
Other 282,000 458,000
5,820,000 9,601,000
Deferred tax liabilities:
Capitalized software development costs (2,553,000) (3,120,000)
Other (20,000) (60,000)
Net deferred tax asset 3,247,000 6,421,000
Valuation allowance (3,247,000) (6,421,000)
Net deferred tax $ -- $ --
</TABLE>
The net deferred tax asset is reduced by a valuation allowance due to the
uncertainty associated with the realization of the net deferred tax asset.
The valuation allowance increased $3,174,000 from the allowance of $3,247,000
at January 1, 1998.
The provisions for Federal income taxes differs from the amount computed by
applying the statutory rate to net earnings (loss) before income taxes for
each of the three years in the period ended December 31, 1998 as follows:
50
<TABLE>
Amount of Tax
1996 1997 1998
<S> <C> <C> <C>
Computed expected tax expense (benefit) $(5,310,000) $ 355,000 $(3,154,000)
State taxes, net of federal benefit (34,000) -- (450,000)
In-process research & development
not deductible for tax 5,120,000 -- --
Non-recognition (recognition) of the
benefits of operating loss carryforward
and the related valuation allowance
change 224,000 (355,000) 3,604,000
$ -- $ -- $ --
</TABLE>
At December 31, 1998, the Company had unused net operating loss carryforwards
for tax and alternative minimum tax purposes of approximately $20,894,000 and
$19,320,000, respectively, and unused tax credits of approximately $655,000.
These operating loss carryforwards and tax credits expire in varying amounts
during 1999 through 2013.
K. RELATED PARTY TRANSACTIONS
The Company expensed $165,000, $159,000 and $63,000 during 1996, 1997 and
1998, respectively, for consulting and advisory fees paid to MMRI, Inc. which
is majority owned by the Company's Chairman of the Board, David Pomerance.
The private placement transaction closing on July 29, 1998, more fully
discussed in Note G, 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.
L. 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. The $125,000 settlement and the related
expense has been included in general and administrative expenses reported for
the year ended December 31, 1998.
In July 1997, the Company commenced a declaratory judgement action in Dakota
County, Minnesota District Court seeking a declaration that the Company had
properly terminated the services of an individual. The individual filed a
counterclaim and demanded $200,000 in settlement of a claim alleging breach of
contract, promissory estoppel and fraud. The parties are engaged in discovery
and trial is presently scheduled for the second quarter of 1999. The Company
is vigorously defending all claims made by the individual, and after
consultation with its counsel has assessed the likelihood of an unfavorable
outcome as remote.
As of the date hereof, there are no other material legal proceedings pending
against the Company. In the opinion of management, the legal proceedings in
which the Company is involved will not have a material effect on the Company's
consolidated financial statements.
M. STOCK BASED COMPENSATION PRO FORMA INFORMATION
Options granted to the Company's directors and employees under the 1983 and
1993 Incentive Stock Option Plans, various employment agreements, and the D&M
Stock Option Plan (hereafter, the "Plans"), are accounted for under APB
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. The exercise price of each option granted under these Plans
is at least equal to the market price of the Company's stock on the date of
grant. Accordingly, no compensation has been recognized for directors and
employees under these Plans. Had compensation cost for the Plans been
determined based on the fair value of the options at the grant dates
consistent with the method of Statement of Financial Accounting Standards 123,
Accounting for Stock-Based Compensation (SFAS 123), the Company's net earnings
(loss) and net earnings (loss) per share would have reflected the pro forma
amounts indicated below.
51
<TABLE>
1997 1998
<S> <C> <C> <C>
Net earnings (loss) As reported $1,042,958 $(9,012,690)
Pro forma $ 173,536 $(9,448,792)
Net earnings (loss) As reported $1,042,958 $(9,080,245)
available to common Pro forma $ 173,536 $(9,516,248)
shareholder
Basic and diluted earnings As reported $ 0.06 $ (0.50)
(loss) per share Pro forma $ 0.01 $ (0.52)
</TABLE>
The fair value of each option grant under SFAS 123 is estimated on the date of
grant using the Black-Scholes option-pricing model. Volatility was computed
based on the daily common stock high, low and close information provided by
NASDAQ for the twenty days prior to the close of trading on the date of each
option grant, and range from 58% - 122% for options granted during 1995, 33% -
165% for options granted during 1996, 61% - 114% for options granted during
1997 and 59% - 234% for options granted during 1998. Risk free rates of 6.5%
for options granted with a ten year exercise period, and 6% for options
granted with a three to five year exercise period were used for options
granted during 1995 through 1997 and 5% for all options granted during 1998.
The initial forfeiture rate under the 1993 ISO Plan for 1995, 1996 and 1997
was 30%, under the D&M Plan for 1995, 1996 and 1997 was 15%, and ranged
between 0% and 15% for options granted in connection with continuing
employment agreements. The initial forfeiture rate during 1998 under the 1993
ISO Plan was 70%, under the D&M Plan 35% and for options granted in connection
with employment agreements was 100%. Valuation of 1993 ISO Plan options were
reduced by 20%, and the valuation of Non-ISO Plan options were reduced by 35%,
to reflect the respective transfer restrictions. The weighted average grant
date fair value of options granted during 1996, 1997 and 1998, were $2.66,
$2.23 and $0.41, respectively.
N. UNAUDITED QUARTERLY INFORMATION
Quarterly operating results are summarized as follows (in thousands, except
per share data):
<TABLE>
Three Months Ended (Unaudited)
1997 March 31(1) June 30(1) September 30 December 31
<S> <C> <C> <C> <C>
Total Operating Revenues $10,748 $ 7,547 $10,554 $ 7,696
Operating Income (Loss) 2,804 (1,931) 683 (1,244)
Net Earnings (Loss) 2,974 (1,766) 886 (1,051)
Net Earnings (Loss) Per Share .17 (.10) .05 (.06)
Shareholders' Equity 23,059 21,439 22,349 21,423
</TABLE>
(1) Results include the accounts of Dynacor, Inc., with which the Company
merged in a transaction accounted for as a pooling-of-interests on May 22, 1997.
<TABLE>
Three Months Ended (Unaudited)
1998 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Total Operating Revenues $ 6,034 $ 6,327 $ 8,319 $ 5,149
Operating Income (Loss) (3,015) (2,252) (9) (3,777)
Net Earnings (Loss) (2,919) (2,199) (100) (3,776)
Net Earnings (Loss) Per Share (.16) (.12) (.01) (.21)
Shareholders' Equity 18,557 16,628 18,410 14,626
</TABLE>
52
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dynamic Healthcare Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Dynamic
Healthcare Technologies, Inc. as of December 31, 1997 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on those
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dynamic
Healthcare Technologies, Inc. as of December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/S/KPMG LLP
KPMG LLP
Orlando, Florida
February 19, 1999
53
CORPORATE INFORMATION
Board of Directors
David M. Pomerance Mitchel J. Laskey, C.P.A.
Chairman President, Chief Executive Officer
Dynamic Healthcare Technologies, Inc. Dynamic Healthcare Technologies, Inc.
Jerry L. Carson Thomas J. Martinson
Executive Vice President and Chief Financial Officer
President Evans Enterprises
Martinson & Company, Ltd.
Bret R. Maxwell Daniel Raynor
Managing Director Managing Partner
First Analysis The Argentum Group
Richard W. Truelick Guy Rabbat
President Corporate Vice-President
Truelick Associates Solectron Corporation
Executive Officers
Mitchel J. Laskey Scott E. Waldrop
President and Chief Executive Officer Senior Vice President
Treasurer Chief Operating Officer
Michael L. Carlay Paul S. Glover
Senior Vice President Vice President, Finance
Sales and Marketing Chief Financial Officer and Secretary
Corporate Officers
Steven J. Akerson Brian M. Paige
Vice President, Corporate Operations Vice President, Development
Mary Lu Lander Linda A. Moline
Vice President, Marketing Vice President, Consultant Services
Michael A. Pomerance Frank M. Iafrato
Area Vice President, Lab/Medical Area Vice President, Radiology Sales
Records Sales
Joseph M. Johnson
Area Vice President, Pathology Sales
Legal Counsel
Cohen, Berke, Bernstein, Brodie & Kondell, P.A.
2601 S. Bayshore Drive
Miami, Florida 33133-5460
(305)854-5900
Transfer Agent Independent Auditors
Norwest Bank Minnesota, N.A. KPMG LLP
161 North Concord Exchange 111 North Orange Avenue, Suite 1600
St. Paul, Minnesota 55075 Orlando, Florida 32801
(612)450-4064 (407)423-3426
54
STOCK TRADING INFORMATION
The Common Stock of Dynamic Healthcare Technologies, Inc. is traded on the
NASDAQ National Market System under the NASDAQ symbol DHTI.
COMMON STOCK INFORMATION
The number of stockholders of record of the Company's Common Stock was
approximately 3,685 on March 10, 1998. High and low bid quotations for the
Common Stock for the last eight quarters are presented below:
<TABLE>
1997 1998
<C> <C> <C> <C> <C>
Quarter Ended High Low High Low
March 31 $8.6250 $4.5000 $3.7500 $2.2500
June 30 7.8125 4.0625 2.5630 0.8750
September 30 6.0000 4.0000 2.3750 0.9380
December 31 6.5000 3.0630 1.1880 0.4690
</TABLE>
The foregoing quotations reflect inter-dealer prices without retail mark-up,
mark-down, or commission and may not necessarily represent actual
transactions.
ANNUAL REPORT ON FORM 10-K, WITHOUT EXHIBITS
Dynamic Healthcare Technologies, Inc.'s annual filing with the Securities and
Exchange Commission (Form 10-K) is available upon request without charge to
shareholders by writing to:
Cynthia Sucher
Investor Services Department
Dynamic Healthcare Technologies, Inc.
615 Crescent Executive Court
Lake Mary, Florida 32746
(407) 333-5300
ANNUAL MEETING
The Annual Meeting of Shareholders of Dynamic Healthcare Technologies, Inc.
will be held on June 10, 1999, in Lake Mary, Florida.
55
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Dynamic Healthcare Technologies, Inc.:
We consent to incorporation by reference in the registration statements (No.
33 -72684, 33-72764 and 333-57713) on Form S-8 of Dynamic Healthcare
Technologies, Inc. of our reports dated February 27, 1998, relating to the
consolidated balance sheets of Dynamic Healthcare Technologies, Inc. as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1998, and related schedule,
which reports appear in the December 31, 1998 report on Form 10-K of
Dynamic Healthcare Technologies, Inc.
/S/KPMG LLP
KPMG LLP
Orlando, Florida
March 24, 1999
56
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,962,426
<SECURITIES> 0
<RECEIVABLES> 7,207,498
<ALLOWANCES> 360,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,852,120
<PP&E> 9,647,327
<DEPRECIATION> 4,479,891
<TOTAL-ASSETS> 30,604,280
<CURRENT-LIABILITIES> 14,107,293
<BONDS> 0
0
1,811,327
<COMMON> 182,713
<OTHER-SE> 12,631,727
<TOTAL-LIABILITY-AND-EQUITY> 30,604,280
<SALES> 2,637,601
<TOTAL-REVENUES> 25,829,299
<CGS> 3,242,556
<TOTAL-COSTS> 34,882,703
<OTHER-EXPENSES> 139,063
<LOSS-PROVISION> 168,336
<INTEREST-EXPENSE> 94,049
<INCOME-PRETAX> (9,012,690)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,012,690)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,012,690)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
