SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1999
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 32751
(Address of principal executive offices) (ZIP Code)
(407)333-5300
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of July 12, 1999, there were 18,550,699 shares outstanding, par value $.01
per share, of the issuer's only class of common stock.
This report consists of seventeen (17) pages.
The index to exhibits appears on page sixteen (16).
1
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
See attached statements following this item number.
2
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
December 31, 1998 June 30, 1999
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,962,426 $ 1,842,319
Accounts receivable, net 6,847,498 8,727,717
Unbilled receivables 2,578,078 3,633,088
Contracts receivable - current 1,150,754 184,745
Other current assets 1,313,364 676,113
Total current assets 13,852,120 15,063,982
Property and equipment, net 5,167,436 4,595,787
Capitalized software development costs, net 9,247,578 9,565,921
Goodwill, net 1,663,032 1,459,258
Contracts receivable - non-current 615,645 775,761
Other assets 58,469 24,757
$ 30,604,280 $ 31,485,466
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,231,540 $ 4,391,761
Deferred revenue 6,729,436 5,890,730
Advance billings 1,828,351 1,203,115
Line of Credit 856,000 2,000,000
Deferred lease incentives - current 190,231 190,231
Other 271,735 287,215
Total current liabilities 14,107,293 13,963,052
Deferred lease incentives - non-current 982,862 887,747
Other 888,358 869,344
Total liabilities 15,978,513 15,720,143
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 June 30, 1999;
$.16 per share annual dividend). 1,811,327 1,811,327
Common stock ($.01 par value; authorized
40,000,000 shares; issued and outstanding
18,271,251 shares as of December 31, 1998 and
18,480,685 shares as of June 30, 1999). 182,713 184,807
Warrants 3,000 3,000
Additional paid-in capital 44,699,416 44,850,172
Deficit (32,070,689) (31,083,983)
Total shareholders' equity 14,625,767 15,765,323
$ 30,604,280 $ 31,485,466
See notes to condensed consolidated financial statements.
</TABLE>
3
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30
1998 1999 1998 1999
Operating revenues:
Computer system equipment sales
<S> <C> <C> <C> <C>
sales and support $ 727,616 $ 1,668,820 $ 1,411,775 $ 3,174,720
Application software
licenses 1,117,011 2,784,843 2,094,566 6,363,682
Software support 2,950,826 2,981,200 5,921,329 5,853,158
Services and other 1,531,258 2,490,233 2,932,843 4,376,963
Total operating revenues 6,326,711 9,925,096 12,360,513 19,768,523
Costs and expenses:
Cost of products sold 793,692 2,311,397 1,425,648 4,462,070
Client services expense 2,723,395 2,584,280 5,662,742 4,815,080
Software development costs 1,350,367 1,601,495 3,085,979 3,245,981
Sales and marketing 2,574,091 1,803,343 5,271,835 4,066,111
General and administrative 1,137,253 1,015,094 2,180,995 2,090,535
Total costs and expenses 8,578,798 9,315,609 17,627,199 18,679,777
Operating income (loss) (2,252,087) 609,487 (5,266,686) 1,088,746
Other income (expense):
Interest expense and financing
costs (11,722) (81,158) (24,796) (148,542)
Interest income and other 64,733 20,812 173,197 46,502
Total other income (expense) 53,011 (60,346) 148,401 (102,040)
Earnings (loss) before
income taxes (2,199,076) 549,141 (5,118,285) 986,706
Income taxes - - - -
Net earnings (loss) $(2,199,076) $ 549,141 $(5,118,285) $ 986,706
Net earnings (loss) available
for common shareholders $(2,199,076) $ 509,141 $(5,118,285) $ 906,706
Weighted average number of
common shares outstanding 18,035,604 18,457,709 18,032,232 18,417,069
Weighted average number of
common and potential common
shares outstanding assuming
full dilution 18,035,604 19,030,720 18,032,232 18,786,373
Earnings (loss) per common
share basic and diluted $ (0.12) $ 0.03 $ (0.28) $ 0.05
See notes to condensed consolidated financial statements.
</TABLE>
4
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) $(5,118,285) $986,706
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization 1,574,441 1,742,320
Noncash issuance of common stock pursuant to
employee benefit plan 189,123 199,975
Book value of disposed property 31,789 -
Changes in assets and liabilities:
Accounts receivable (167,078) (1,880,219)
Unbilled receivables 496,860 (1,055,010)
Contracts receivable 1,055,677 805,893
Other (327,708) 670,963
Accounts payable and accrued expenses 291,622 160,221
Deferred revenue (824,084) (838,706)
Advance billings (30,798) (625,236)
Net cash provided (used) by operating
activities (2,828,441) 166,907
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (1,786,913) (1,296,661)
Purchases of property and equipment ( 627,948) (83,693)
Net cash used in investing activities (2,414,861) (1,380,354)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 134,371 32,875
Payment of preferred stock dividends - (80,000)
Borrowings/(repayments) on line of credit - 1,144,000
Borrowings/(repayments) on long-term debt and
capital lease obligations (123,710) (3,535)
Other (14,043) -
Net cash provided (used) by financing activities (3,382) 1,163,190
Net (decrease) in cash and cash equivalents (5,246,684) (120,107)
Cash and cash equivalents, beginning of period 6,465,685 1,962,426
Cash and cash equivalents, end of period $ 1,219,001 $1,842,319
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 24,796 $ 82,367
Income taxes paid/(received) $ - $ -
See notes to condensed consolidated financial statements.
</TABLE>
5
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999
(A) Unaudited Financial Statements:
The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles for
interim financial statements and with instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all the disclosures required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments and accruals considered necessary for
fair presentation of financial information have been included and are of a
normal recurring nature. Quarterly results of operations are not necessarily
indicative of annual results. These statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Dynamic Healthcare Technologies, Inc. 1998 Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(B) Line of Credit:
The Company's Revolving Line of Credit Agreement with Silicon Valley Bank, a
commercial bank ("Bank"), has been modified to reduce the effective interest
rate and has been extended through April 23, 2000. As a result of 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 for two consecutive quarters during
1999, the Company's interest rate was decreased to the Bank's prime rate (7.75%
on June 30, 1999). As of June 30, 1999, borrowings against this Line of Credit
were $2,000,000, and borrowings available under the Line of Credit were
$5,000,000. Future borrowing capacity is contingent on the Company's continued
compliance with profitable quarterly operations and the quick ratio requirement.
The Line of Credit is secured by all existing Company assets.
6
Item 2. Management's discussion and analysis of financial condition and
results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 system 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 Systems, 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 positioned
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
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 provide
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
approximately $6.4 million for the second quarter of 1999 compared to $8.1
million in the first quarter of 1998.
The Company's revenues are derived from the licensing and sale of systems
comprised of internally developed software and third party software and
hardware, professional services, maintenance and support services. The
Company's services include implementation and training, product management and
customer software development. Revenues from professional services and
maintenance and support services typically increase as the number of installed
systems increases. Computer system equipment sales revenues are generally
recognized when hardware is shipped. Computer system equipment sales
and support revenues include hardware support contracts for a specific period
from which revenue is recognized ratably over the corresponding contract period.
Application software license revenues are recognized when application software
is delivered to the customer. Installation and training service revenues,
included with application software licenses, are recognized as the services are
performed. Software support revenues principally include contracts for remote
dial-up problem diagnosis, maintenance and corrective support services, each of
which covers a specified period for which revenue is recognized ratably over the
corresponding contract period. Services and other revenues include custom
programming services, post-contract support obligations and other services,
which are provided under separate contract and are recognized as services are
performed.
Cost of products sold includes the cost of hardware sold, costs of third party
software licenses and hardware support subcontracts. Client service expense
includes the direct and indirect costs associated with implementation and
support personnel. Software development costs include the direct and indirect
salaries and wages of software research and development personnel, direct
research and development expenses, and software amortization expense, reduced by
capitalized software development costs. Software development is expensed until
such time as technological feasibility is established and then is 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
7
marketing costs, advertising, trade show costs, user group costs and travel and
entertainment expenses related to the sale and marketing of the Company's
products and services. General and administrative expenses include salaries and
expenses for corporate administration, financial, legal and human resources.
The sales cycle for the Company's systems is typically six to eighteen months
from initial contact to contract signing. The product delivery cycle is
variable. When application software licenses are provided by modem, product
delivery is immediate. In other instances, product delivery is over two
or more years, particularly with enterprise-wide electronic healthcare record
solutions involving significant and continuing customer service requirements.
Accordingly, the product delivery cycle depends upon the combination of products
purchased and the implementation plan defined by the customer in the master
sales agreement. Each customer contract is separately negotiated. The
installation schedule for a clinical information systems, or departmental
electronic healthcare record implementations, typically require six to twelve
months. Under its standard master sales agreement, the Company generally
receives a partial payment upon execution of the agreement, a hardware
installment payment upon delivery of hardware, installation progress payments
upon the completion of defined milestones and final payment upon system
acceptance.
The following table sets forth, for the three and six month periods ended June
30, 1998 and 1999, certain items in the Company's statements of operations as a
percentage of total operating revenues:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1999 1998 1999
Operating revenues:
Computer system equipment
<S> <C> <C> <C> <C>
sales and support 11.5 % 16.8 % 11.4 % 16.1 %
Application software licenses 17.7 % 28.1 % 17.0 % 32.2 %
Software support 46.6 % 30.0 % 47.9 % 29.6 %
Services and other 24.2 % 25.1 % 23.7 % 22.1 %
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of products sold 12.5 % 23.4 % 11.5 % 22.6 %
Client services expense 43.0 % 26.0 % 45.8 % 24.5 %
Software development costs 21.3 % 16.1 % 25.0 % 16.5 %
Sales and marketing costs 40.7 % 18.2 % 42.7 % 20.3 %
General and administrative expense 18.0 % 10.2 % 17.6 % 10.6 %
Total operating expenses 135.5 % 93.9 % 142.6 % 94.5 %
Operating income (loss) (35.5)% 6.1 % (42.6)% 5.5 %
Other income (expense) 0.8 % (.6)% 1.2 % (.5)%
Net earnings (loss) (34.7)% 5.5 % (41.4)% 5.0 %
</TABLE>
Results of Operations
(Three months ended June 30, 1999 compared to three months ended June 30, 1998)
Revenues. During the quarter ended June 30, 1999 the Company reported revenues
of $9,925,000 an increase of $3,598,000 from revenues for the same period 1998.
The Company's radiology system revenues increased by $1,471,000, from $1,134,000
recognized during the second quarter of 1998 to $2,605,000 recognized during the
second quarter of 1999. Pathology revenues for the second quarter of 1999
increased by $1,832,000 to $4,277,000 from $2,445,000 during the same period of
1998. Similarly, laboratory information system revenues for the second quarter
of 1999 also increased by $440,000 to $2,192,000 from $1,752,000 during the
second quarter of 1998. As previously mentioned, during 1997 the Company
introduced new technology product releases in virtually every market segment
in which the Company competes. Lengthy initial sales cycles significantly
impacted 1998 performance, while record fourth quarter 1998 sales bookings, and
the resulting record high new systems backlog as of December 31, 1998, resulted
in increased system implementations during the second quarter of 1999. Although
the Records Plus product line revenues decreased by $126,000 from $874,000
reported for the second quarter of 1998 to $748,000 for the second quarter of
1999, third party hardware deliveries for the product line declined by $282,000
and software application license revenues increased by $148,000. Emergence of
the Records Plus product line is expected to be delayed as customers focus on
Year 2000 remediation efforts. In summary, the Company's recent new system
8
sales success and increased system implementations resulted in an increase in
system implementation and service revenues during the second quarter of 1999 of
$3,568,000, or a more than 105% increase from $3,376,000 during the second
quarter of 1998 to $6,944,000.
Computer system equipment sales and support revenues increased by $941,000 to
16.8% of total revenues for the second quarter of 1999, compared to 11.5% for
the second quarter of 1998. Management attributes the increase to the increased
implementation of new system sales and does expect a higher involvement in the
delivery of computer hardware to customers in connection with the Company's
increasing emphasis of offering a sole source solution to customers.
Application software license revenue during the second quarter of 1999,
increased by $1,668,000 over the same period a year ago, from $1,117,000 to
$2,785,000, and similarly service and other revenues increased by $959,000 to
$2,490,000 from $1,531,000. These increases principally result from the
increased implementation of new system sales.
Software support revenues modestly increased by $30,000 to $2,981,000 for the
second quarter of 1999, compared to $2,951,000 for the same period one year ago.
As of June 30, 1999, the recurring annualized billable support base was $12.2
million. An additional $2.5 million of annualized software support revenue is
anticipated to be generated from delivery of the Company's existing new systems
backlog.
Cost of Products Sold. Cost of products sold as a percent of total revenues for
the second quarter of 1999 increased to 23.4% from 12.5 % for the same period in
1998. Hardware and application software license revenues during the second
quarter 1999 similarly increased to 44.9% from 29.2% of total revenues for the
first quarter 1998, due to the significant increase in new system
implementations.
Client Services Expense. Client services expense for the second quarter 1999
decreased $139,000 to $2,584,000 from $2,723,000 for the second quarter 1998,
decreasing as a percentage of sales from 43.0% to 26.0%. The Company previously
reported decreased staffing in connection with the re-engineering and cost
reduction plan completed in 1998. Product installation, delivery and support
services were standardized along all product lines as the Company centralized
these functions.
Software Development Costs. Software development costs for the second quarter
1999 decreased to 16.1% of total operating revenues from 21.3% incurred during
the second quarter 1998. The $251,000 increase in software development expense
reported for the second quarter of 1999 of $1,601,000, compared to $1,350,000
reported for the second quarter of 1998, resulted from a $193,000 reduction in
capitalized software development costs, and an increase in software amortization
during the second quarter of 1999 of $120,000 to $506,000 from $386,000
amortized during the second quarter of 1998. These changes combined for a real
reduction in total software departmental costs incurred during the second
quarter of 1999 of $62,000, as compared to the departmental costs incurred
during the second quarter of 1998. Although development efforts continue as
part of the Company's overall growth strategy, including enhancements to
existing product lines and toward completion of the Company's SurgiPlus product,
this reduction in the level of investment in new product development reflects
the relatively recent wholesale product line introductions made by the Company.
Sales and Marketing. Sales and marketing costs for the second quarter 1999 as a
percentage of total revenues, decreased to 18.2% from 40.7% for the same period
of 1998. This decrease of $771,000 from $2,574,000 to $1,803,000 in sales and
marketing expenses is despite an increase in sales commissions incurred for the
second quarter of 1999 of $156,000, from $255,000 incurred during the second
quarter of 1998 to $411,000 incurred during the second quarter of 1999,
resulting from increased sales closings. This translates to a base sales and
marketing cost reduction of approximately $927,000, attributed to the sales
realignment program undertaken in 1998, in connection with the Company's cost
reduction plan.
General and Administrative Expenses. General and administrative expenses for
the second quarter of 1999 decreased by $122,000 and decreased to 10.2% of total
revenues from 18.0% incurred during the second quarter of 1998. This decrease
was despite an increase of $100,000 in amounts accrued under the Company's
Management Incentive Compensation Plan ("MIC Plan"). The Company did not pay
any MIC Plan compensation for 1998.
Other Income (Expense). The Company incurred $60,000 of net other expense for
the second quarter of 1999 compared to $53,000 of net other income reported for
the second quarter of 1998. Net interest income/expense decreased by $113,000
principally due to the cash used by operating and investing activities during
1998.
9
(Six months ended June 30, 1999 compared to six months ended June 30, 1998)
Revenues. During the six months ended June 30, 1999 the Company reported
revenues of $19,769,000 an increase of $7,408,000 or 60% from revenues of
$12,361,000 for the same period 1998. The Company's radiology system revenues
increased by $3,650,000, from $2,135,000 recognized during the first six
months of 1998 to $5,786,000 recognized during the first six months of 1999.
Pathology revenues for the six months ended June 30, 1999 increased by
$2,946,000 to $7,808,000 from $4,862,000 during the same period of 1998.
Similarly, laboratory information system revenues for the six months ended June
30, 1999 also increased by $941,000 to $4,532,000 from $3,591,000 during the
first six months of 1998. Revenues from the Records Plus product line increased
nominally by $37,000 from $1,455,000 to $1,492,000, comparing the six months
ended 1998 to the same period of 1999, respectively. As previously mentioned,
during 1997 the Company introduced new technology product releases in virtually
every market segment in which the Company competes. Lengthy initial sales
cycles significantly impacted 1998 performance, while record fourth quarter 1998
sales bookings, and the resulting record high new systems backlog as of December
31, 1998, resulted in increased system implementations during the first six
months of 1999. In summary, the Company's recent new system sales success and
increased system implementations resulted in a substantial increase in system
implementation and service revenues during the six months ended June 30, 1999
compared to the same period a year ago.
Computer system equipment sales and support revenues increased by $1,763,000 to
16.1% of total revenues for the six months ended June 30, 1999 compared to 11.4%
for the six months ended June 30, 1998. Management attributes the increase to
the increased implementation of new system sales and does expect a higher
involvement in the delivery of computer hardware to customers in connection with
the Company's increasing emphasis of offering a sole source solution to
customers.
Application software license revenue during the six months ended June 30, 1999,
increased by $4,269,000 over the same period a year ago, from $2,095,000 to
$6,364,000, and similarly service and other revenues increased by $1,444,000 to
$4,377,000 from $2,933,000. These increases principally result from the
increased implementation of new system sales.
Software support revenues modestly decreased by $68,000 to $5,853,000 for the
six months ended June 30, 1999, compared to $5,921,000 for the same period one
year ago. During 1998 the Company announced the discontinuance of support for a
limited offering of legacy laboratory and financial products in connection with
Year 2000 remediation efforts. Management expects support revenues to continue
to grow with the implementation of new system sales. As of June 30, 1999, the
recurring annualized billable support base was $12.2 million, and an additional
$2.5 million of annualized software support revenue is anticipated to be
generated from delivery of the Company's existing new systems backlog.
Cost of Products Sold. Cost of products sold as a percent of total revenues for
the six months ended June 30, 1999 increased to 22.6% from 11.5 % for the same
period 1998. Hardware and application software license revenues during the
first six months of 1999 similarly increased to 48.3% from 28.4% of total
revenues for the first six months of 1998, due to the significant increase in
new system implementations.
Client Services Expense. Client services expense for the six months ended June
30, 1999 decreased $848,000 to $4,815,000 from $5,663,000 for the six months
ended June 30, 1998, decreasing as a percentage of sales from 45.8% to 24.5%.
The Company previously reported decreased staffing in connection with the re-
engineering and cost reduction plan completed in 1998. Product installation,
delivery and support services were standardized along all product lines as the
Company centralized these functions.
Software Development Costs. Software development costs for the six months ended
June 30, 1999 decreased to 16.5% of total operating revenues from 25.0% incurred
during the six months ended June 30, 1998. The $160,000 increase in software
development expense reported for the six months ended June 30, 1999 of
$3,246,000, compared to $3,086,000 reported for the six months ended June 30,
1998, resulted from a variety of impacts. First a $490,000 reduction in
capitalized software development costs from $1,787,000 capitalized during the
six months ended June 30, 1998 to $1,297,000 capitalized during the six months
ended June 30, 1999 increased the expense. In addition, software amortization
during the six months ended June 30, 1999 of $978,000 increased by $177,000
compared to the $801,000 amortized during the six months ended June 30, 1998,
also increasing the expense. However, a real reduction in total software
departmental costs incurred during the six months ended June 30, 1999 of
$507,000, as compared to the departmental costs incurred during the six months
ended June 30, 1998 minimized the net increase. Although development efforts
continue as part of the Company's overall growth strategy, including
enhancements to existing product lines and toward completion of the
Company's SurgiPlus product, this reduction in the level of investment in new
product development reflects the relatively recent wholesale product line
introductions made by the Company.
10
Sales and Marketing. Sales and marketing costs for the six months ended June
30, 1999 as a percentage of total revenues, decreased to 20.3% from 42.7% for
the same period of 1998. This decrease of $1,206,000 from $5,272,000 to
$4,066,000 in sales and marketing expenses is despite an increase in sales
commissions incurred for the first six months of 1999 of $550,000 from $478,000
incurred during the six months ended June 30, 1998 to $1,028,000 incurred during
the six months ended June 30, 1999, resulting from increased sales closings.
This translates to a base sales and marketing cost reduction of approximately
$1,756,000, attributed to the sales realignment program undertaken in 1998, in
connection with the Company's cost reduction plan.
General and Administrative Expenses. General and administrative expenses for
the six months ended June 30, 1999 decreased by $90,000 and decreased to 10.6%
of total revenues from 17.6% incurred during the six months ended June 30, 1998.
This decrease was despite an increase of $280,000 in amounts accrued under the
Company's Management Incentive Compensation Plan ("MIC Plan"). The Company did
not pay any MIC Plan compensation for 1998.
Other Income (Expense). The Company incurred $102,000 of net other expense for
the six months ended June 30, 1999 compared to $148,000 of net other income
reported for the six months ended June 30, 1998. Net interest income/expense
decreased by $250,000 principally due to the cash used by operating and
investing activities during 1998.
Liquidity and Capital Resources
As of June 30, 1999 the Company had cash equivalents of $1,842,000, line of
credit draws of $2,000,000, working capital of $1,101,000, and a working capital
ratio of 1.08 to 1.
Accounts receivable as of June 30, 1999 increased by $1,880,000 and unbilled
receivables increased by $1,055,000 from similar account balances on December
31, 1998, principally as a result of the increased new system installations in
progress.
Contracts receivable as of June 30, 1999 decreased by $805,000 to $961,000 as
compared to the balance of $1,766,000 on December 31, 1998. The Company
collected the final $1,000,000 installment due under the Sunquest Agreement
during the first quarter of 1999. The remaining change in contracts receivable
results from scheduled collections on monthly installment receivables from
radiology information system customers.
During the first half of fiscal 1999 the Company capitalized $1,297,000 of
software development costs and purchased $84,000 of additional property and
equipment. Development efforts during the first half of 1999 included
enhancements to the Company's existing product line and advancement of
SurgiPlus. No significant property purchases are currently planned.
Deferred revenue as of June 30, 1999 decreased by $838,000 to $5,891,000 from
$6,729,000 reported as of December 31, 1998. The Company has a concentration of
calendar year annual customer support contracts with January 1 start dates,
which typically results in quarterly volatility to the deferred revenue balance.
Advanced billings as of June 30, 1999 declined by $625,000 to $1,203,000 from
the 1998 year end balance of $1,828,000. During the fourth quarter, during
which the Company reported its highest ever sales bookings quarter, significant
customer deposits were received.
As a result of the Company's reporting two consecutive quarters of profitability
in 1999, the interest rate on the existing line of credit with Silicon Valley
Bank has been reduced to the bank's prime rate (7.75% on June 30, 1999). As of
June 30, 1999 borrowings against the line were $2,000,000, and borrowings
available under the line were $5,000,000. Future borrowing capacity is
contingent on the Company's continued compliance with profitable quarterly
operations and the quick ratio requirement.
During the second quarter of 1999 the Company received $22,725 in proceeds from
the exercise of director and employee options.
The Company intends to continue to enhance its product and service offerings and
to seek market expansion opportunities beyond the recent product releases. The
Company's ability to meet its future working capital requirements is dependent
on the Company's ability to maintain profitable operations or to obtain suitable
additional financing.
11
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. 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.
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, (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 estimates that as of June 30, 1999 it had completed approximately
90% of the deployment efforts relating to Year 2000 versions of all Company
Software Products. The projects comprising the remaining 10% of these efforts
are in process and are expected to be substantially completed during the third
quarter of 1999, but the Company expects to continue efforts to remediate and
12
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. Management believes that all of the
current releases of the Company Software Products are Year 200 complaint.
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.
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.
Management presently believes that Year 2000 Issues will not pose significant
operational problems for the Company.
Inflation and Changing Prices
The Company believes inflation has not had a material effect on the Company's
operations or its financial condition. Changing prices within the marketplace
could have a material effect upon the cost of materials sold and the related
price of software and hardware sales.
Forward-Looking Statements
This report contains certain forward-looking statements, which are qualified by
the risks and uncertainties described from time to time in the Company's reports
filed with the Securities and Exchange Commission, including the Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
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.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
The Company's Annual Meeting of Shareholders was held on June 10,
1999, in Maitland, Florida. Six directors were elected to the
Company's Board. A listing of those directors follows:
<TABLE>
Number of Votes Received
Name and Principal Occupation For Against/ Abstentions Broker
Withheld non-votes
<S> <C> <C> <C> <C>
Jerry L. Carson 14,516,498 1,712,129 0 0
Executive Vice President, CFO
Evans Enterprises
Mitchel J. Laskey 14,787,214 1,431,413 0 0
President and CEO
Dynamic Healthcare Technologies, Inc.
Thomas J. Martinson 14,516,427 1,712,200 0 0
President
Martinson & Company, Ltd.
Bret Maxwell 15,063,643 1,164,984 0 0
Vice Chairman
First Analysis Corporation
David M. Pomerance 15,006,029 1,222,598 0 0
President
MMRI, Inc.
Daniel Raynor 15,081,053 1,147,574 0 0
Managing Partner
The Argentum Group
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11: Statement Regarding Computation of Per Share Earnings.
(b) Reports on Form 8-K:
A Form 8-K, dated June 16,1999, was filed by the Registrant during
the quarter ended June 30, 1999 reporting the dismissal of KPMG LLP
and the engagement of BDO Seidman, LLP as the Registrant's
independent accountant.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
(Registrant)
Date: July 15, 1999 /S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, CEO and Treasurer
Date: July 15, 1999 /S/PAUL S. GLOVER
Paul S. Glover
Vice President of Finance,
CFO and Secretary
15
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Index to Exhibits
Description of Exhibit Page Number
Exhibit 11: Statement regarding computation of per 17
share earnings
16
<TABLE>
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Exhibit 11
Computation of Weighted Average Number of Shares Outstanding and
Per Share Earnings
Three Months Ended Six Months Ended
June 30, (Unaudited) June 30, (Unaudited)
1998 1999 1998 1999
Earnings (loss) available for
common shareholders
<S> <C> <C> <C> <C>
Net earnings (loss) $ (2,199,076)$ 549,141 $ (5,118,285) $ 986,706
Preferred dividends -- 40,000 -- 80,000
Earnings (loss) available
for common shareholders $ (2,199,076)$ 509,141 $ (5,118,285)$ 906,706
Common and common equivalent
shares outstanding
Basic:
Weighted average number
of common shares
outstanding 18,035,604 18,457,709 18,032,232 18,417,069
Diluted:
Weighted average number
of common shares
outstanding 18,035,604 18,457,709 18,032,232 18,417,069
Dilutive effect of options
and warrants using average
market price -- 573,011 -- 369,304
Weighted average number of
common and common
equivalent shares outstanding
assuming full dilution 18,035,604 19,030,720 18,032,232 18,786,373
Basic earnings (loss) per share $ (0.12)$ 0.03 $ (0.28)$ 0.05
Diluted earnings (loss) per
share $ (0.12)$ 0.03 $ (0.28)$ 0.05
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,842,319
<SECURITIES> 0
<RECEIVABLES> 9,057,717
<ALLOWANCES> 330,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,063,982
<PP&E> 9,677,837
<DEPRECIATION> 5,082,050
<TOTAL-ASSETS> 31,485,466
<CURRENT-LIABILITIES> 13,963,052
<BONDS> 431,375
0
1,811,327
<COMMON> 184,807
<OTHER-SE> 13,766,189
<TOTAL-LIABILITY-AND-EQUITY> 31,485,466
<SALES> 1,668,820
<TOTAL-REVENUES> 9,925,096
<CGS> 2,311,397
<TOTAL-COSTS> 9,315,609
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23,310
<INTEREST-EXPENSE> 81,158
<INCOME-PRETAX> 549,141
<INCOME-TAX> 0
<INCOME-CONTINUING> 549,141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 549,141
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
