SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 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, Lake Mary, Florida 32746
(Address of principal executive offices) (ZIP Code)
(407) 333-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports require
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of October 18, 1999, there were 18,785,546 shares outstanding, par value $.01
per share, of the issuer's only class of common stock.
This report consists of twenty (20) pages.
The index to exhibits appears on page seventeen (18).
1
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
See attached statements following this item number.
2
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Balance Sheets
December 31, 1998 September 30, 1999
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,962,426 $ 1,936,688
Accounts receivable, net 6,847,498 8,334,574
Unbilled receivables 2,578,078 3,897,493
Contracts receivable - current 1,150,754 144,643
Other current assets 1,313,364 685,313
Total current assets 13,852,120 14,998,711
Property and equipment, net 5,167,436 4,358,680
Capitalized software development costs, net 9,247,578 9,528,490
Goodwill, net 1,663,032 1,357,370
Contracts receivable - non-current 615,645 763,819
Other assets 58,469 21,615
$30,604,280 $31,028,685
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,231,540 $ 3,510,620
Deferred revenue 6,729,436 6,218,620
Advance billings 1,828,351 1,426,630
Line of Credit 856,000 2,000,000
Deferred lease incentives - current 190,231 190,231
Other 271,735 290,375
Total current liabilities 14,107,293 13,636,476
Deferred lease incentives - non-current 982,862 840,190
Other 888,358 788,619
Total liabilities 15,978,513 15,265,285
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 September 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 18,770,448
shares as of September 30, 1999). 182,713 187,704
Warrants 3,000 3,000
Additional paid-in capital 44,699,416 45,111,259
Accumulated deficit (32,070,689) (31,349,890)
Total shareholders' equity 14,625,767 15,763,400
$30,604,280 $31,028,685
See notes to condensed financial statements.
</TABLE>
3
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
Operating revenues
Computer system equipment
<S> <C> <C> <C> <C>
sales and support $ 731,630 $ 512,208 $ 2,143,405 $ 3,686,928
Application software licenses 2,763,124 1,625,244 4,857,690 7,988,926
Software support 2,921,019 2,954,384 8,842,348 8,807,543
Services and other 1,903,570 2,410,052 4,836,413 6,787,015
Total operating revenues 8,319,343 7,501,888 20,679,856 27,270,412
Costs and expenses:
Cost of products sold 972,501 832,427 2,398,149 5,294,497
Client services expense 2,686,527 2,413,262 8,349,269 7,228,343
Software development costs 1,534,654 1,641,595 4,620,633 4,887,576
Sales and marketing 2,135,101 1,407,807 7,406,936 5,473,919
General and administrative 999,547 884,246 3,163,097 2,974,780
Realignment costs -- 523,569 -- 523,569
Total costs and expenses 8,328,330 7,702,906 25,938,084 26,382,684
Operating income (loss) (8,987) (201,018) (5,258,228) 887,728
Other income (expense):
Interest expense and financing
costs (21,928) (81,395) (46,724) (229,937)
Interest income and other 57,979 28,169 231,176 85,504
Loss on disposal of fixed assets(127,420) (11,663) (144,865) (22,496)
Total other income (expense) (91,369) (64,889) 39,587 (166,929)
Earnings (loss) before
income taxes (100,356) (265,907) (5,218,641) 720,799
Income tax -- -- -- --
Net earnings (loss) $ (100,356)$ (265,907)$ (5,218,641)$ 720,799
Net earnings (loss) available
for common shareholders $ (127,911)$ (305,907)$ (5,246,196)$ 600,799
Earnings (loss) per common share:
Basic $ (0.01)$ (0.02)$ (0.29)$ 0.03
Diluted $ (0.01)$ (0.02)$ (0.29)$ 0.03
Weighted average number of
common shares outstanding:
Basic 18,190,530 18,681,205 18,085,578 18,506,082
Diluted 18,190,530 18,681,205 18,085,578 18,834,949
See notes to condensed financial statements.
</TABLE>
4
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1999
<S> <C> <C>
Net earnings (loss) $ (5,218,641)$ 720,799
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 2,365,490 2,652,147
Noncash issuance of common stock pursuant
to employee benefit plan 283,593 239,929
Loss on disposal of fixed assets 144,865 22,496
Changes in assets and liabilities:
Accounts receivable (1,305,176) (1,487,076)
Unbilled receivable (437,820) (1,319,415)
Contracts receivable 1,265,507 857,937
Other (248,805) 663,402
Accounts payable and accrued expenses 544,127 (720,920)
Deferred revenues (143,468) (510,816)
Advance billings (285,612) (401,721)
Net cash provided (used) by operating activities(3,035,940) 716,762
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (2,520,541) (1,797,784)
Purchases of property and equipment (987,754) (224,831)
Proceeds from disposal of property and equipment 24,593 40,309
Other (44,968) --
Net cash used by investing activities (3,528,670) (1,982,306)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee common
stock options 135,471 296,905
Borrowings/(repayments) on line of credit -- 1,144,000
Borrowings/(repayments) on long-term debt (166,578) (81,099)
Proceeds from issuance of Series C Preferred
Stock and Warrants 1,814,327 --
Preferred stock dividends paid (27,555) (120,000)
Net cash flows provided (used) by
financing activities 1,755,665 1,239,806
Net (decrease) in cash and cash equivalents (4,808,945) (25,738)
Cash and cash equivalents, beginning of period 6,465,685 1,962,426
Cash and cash equivalents, end of period $ 1,656,740 $ 1,936,688
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 46,724 $ 77,491
Income taxes paid/(received) $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITY:
Furniture and fixtures acquired under
capital lease obligations $ 492,495 $ --
See notes to condensed financial statements.
</TABLE>
5
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(A) Unaudited Financial Statements:
The accompanying 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 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) Reporting Entity:
On September 23, 1999 the Company's wholly owned subsidiary, Collaborative
Medical Systems Corporation, was merged with and into the Company pursuant
to the Articles and Plan of Merger unanimously approved by the Company's
Board of Directors on September 21, 1999.
(C) Line of Credit:
The Company maintains 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 April 23, 2000.
Interest thereon is payable monthly in arrears at the Bank's prime rate
(8.25% as of September 30, 1999), and borrowings thereunder are based on
advance ratios tied to receivables. The availability of borrowing is
contingent on the Company's compliance with a minimum quick ratio (as
defined) of 1.25 to 1, and maintaining profitable operations in excess of
any increase in the carrying value of capitalized software development
costs. As of September 30, 1999, there was $2,000,000 borrowed against
this line of credit.
(D) Realignment Costs:
During the third quarter of 1999 the Company announced a realignment plan
that included the formation of three product line business units and the
appointment of three general managers from within the Company. In
connection with the plan, a total of seventeen employees were terminated.
Termination benefits as of and for the three months ended September 30, 1999 are
summarized as follow:
<TABLE>
# of Total
Termiated Benefits Benefits Realignment
Department Employees Paid Accrued Costs
<S> <C> <C> <C> <C>
Client Services 6 $ 27,374 $ 994 $ 28,368
Software Development 6 55,114 -- 55,114
Sales and Marketing 4 192,043 -- 192,043
General and Administrative 1 239,611 8,433 248,044
Total 17 $ 514,142 $ 9,427 $ 523,569
</TABLE>
6
(E) Earnings Per Share:
The computation of the net earnings (loss) available for common shareholders,
and the weighted average number of common and common equivalent shares
outstanding assuming full dilution, are summarized as follow:
<TABLE>
Three Months Ended Nine Months Ended
September 30,(Unaudited) September 30,(Unaudited)
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net earnings (loss) $ (100,356)$ (265,907)$ (5,218,641)$ 720,799
Dividends on preferred stock (27,555) (40,000) (27,555) (120,000)
Earnings (loss) available for
common shareholders $ (127,911)$ (305,907)$ (5,246,196)$ 600,799
Weighted average number of
common shares outstanding 18,190,530 18,681,205 18,085,578 18,506,082
Dilutive effect of options and
warrants using average
market price -- -- -- 328,867
Weighted average number of common
and common equivalent shares
outstanding assuming full
dilution 18,190,530 18,681,205 18,085,578 18,834,949
</TABLE>
7
Item 2. Management's discussion and analysis of financial condition and
results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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, were reduced to approximately $6.4
million for the second quarter of 1999 compared to $8.1 million in the first
quarter of 1998.
During the third quarter of 1999 the Company announced a realignment plan that
included the formation of three product line business units and the appointment
of three general managers from within the Company. This realignment was
designed to provide a single focus to the development, marketing, sales and
support of the Company's information systems. It also established specific cost
8
reductions, revenue improvement and customer satisfaction objectives for each
business unit and anticipated future cost efficiencies. In connection with the
plan, a total of seventeen employees were terminated and the Company incurred
$524,000 of one time termination benefits. However, as a result of the
realignment, base quarterly operating expenses, as previously defined, were
further reduced to approximately $5.7 million as the Company enters the fourth
quarter of 1999.
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
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 system, or departmental electronic
healthcare record implementations, typically requires six to twelve months.
Under its standard master sales agreement, the Company generally receives a
partial payment upon execution of the agreement, a hardware installment payment
upon delivery of hardware, installation progress payments upon the completion of
defined milestones and final payment upon system acceptance.
9
The following table sets forth, for the three and nine month periods ended
September 30, 1999 and 1998, certain items in the Company's statements of
operations as a percentage of total operating revenues:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
Operating revenues:
Computer system equipment sales
<S> <C> <C> <C> <C>
and support 8.8 % 6.8 % 10.4 % 13.5 %
Application software licenses 33.2 % 21.7 % 23.5 % 29.3 %
Software support 35.1 % 39.3 % 42.7 % 32.3 %
Services and other 22.9 % 32.2 % 23.4 % 24.9 %
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of products sold 11.7 % 11.1 % 11.6 % 19.4 %
Client services expense 32.3 % 32.2 % 40.4 % 27.0 %
Software development costs 18.4 % 21.9 % 22.3 % 18.0 %
Sales and marketing costs 25.7 % 18.8 % 35.8 % 20.1 %
General and administrative expense 12.0 % 11.8 % 15.3 % 10.9 %
Realignment Costs -- 6.9 % -- 1.9 %
Total operating expenses 100.1 % 102.7 % 125.4 % 97.3 %
Operating income (loss) (0.1)% (2.6)% (25.4)% 3.3 %
Other income (expense) (1.1)% (0.9)% 0.2 % (0.7)%
Net earnings (loss) (1.2)% (3.5)% (25.2)% 2.6 %
</TABLE>
Results of Operations
(Three months ended September 30, 1999 compared to three months ended
September 30, 1998)
Revenues. During the quarter ended September 30, 1999, the Company reported
revenues of $7,502,000, a decrease of $817,000 from revenues reported for the
third quarter of 1998. New system sales in general declined as customers focused
on year 2000 remediation efforts. This resulted in a decline in computer system
equipment revenues of $219,000 and application software license revenues of
$1,138,000 for the third quarter 1999 compared to the same period in 1998.
However, service revenues for the third quarter of 1999 of $2,410,000
represented increases in all of the Company's product lines by an aggregate of
$506,000, which also principally resulted from customer remediation focus as
customers pushed to go live on implementations in process prior to year end.
This included increases in pathology, imaging, radiology and laboratory service
revenues of $192,000, $114,000, $104,000 and $96,000, respectively. Laboratory
information system revenues declined by $710,000 from $2,321,000 to $1,611,000.
During the third quarter of 1998 significant laboratory system revenues were
earned as a result of a sales migration plan offered during the second quarter
of 1998. There were no such revenues recognized during the third quarter of
1999. Pathology information system revenues also declined by $389,000 from
$3,909,000 reported for the third quarter of 1998 as compared to $3,520,000 for
the third quarter of 1999. During the third quarter of 1998 the Company
recognized revenues from the first two multi-site installations of CoPathPlus.
There were no such revenues recognized during the third quarter of 1999. The
Company did experience an increase in revenues in both radiology information
systems and imaging systems product lines of $158,000 and $175,000,
respectively, principally due to increased service revenues as previously
mentioned.
Software support revenues for the third quarter of 1999 compared to similar
revenues for the third quarter of 1998 modestly increased by $33,000.
Successful installations continue to result in a growing customer support base.
However, during the third quarter of 1998 the Company established a plan to
10
discontinue support to laboratory customers still operating on the prime
computer platform and various decisions support applications upon expiration of
existing contracts. This represents approximately $358,000 of annual support
base. As of September 30, 1999, recurring annualized billable support base was
$12.2 million, and an additional $2.5 million of annualized software support
base is anticipated to be generated from delivery of the Company's existing new
systems backlog.
Cost of Products Sold. Cost of products sold as a percentage of total revenues
for the third quarter of 1999 decreased from 11.7% to 11.1% compared to the
third quarter of 1998. This decrease is substantially attributed to the decline
in computer system equipment revenues during the third quarter of 1999 compared
to the third quarter of 1998. As previously mentioned, system implementations
for the third quarter 1999 were influenced by a general customer-wide focus on
year 2000 remediation efforts. This resulted in a shift from new system
implementations to completion of in process installations and incidental
services. As such, third party product deliveries, which are typically on the
front end of system installations, declined as a percentage of total revenues
and service revenues increased.
Client Services Expense. Client services expense for the third quarter 1999
decreased $273,000 to $2,413,000 from $2,686,000 for the third quarter 1998,
decreasing as a percentage of revenues from 32.3% to 32.2%. As a result of
both the functional restructuring and cost streamlining plan begun during the
second quarter of 1998, and the realignment plan completed in the third quarter
of 1999, the Company achieved a modest reduction in client services expenses.
Software development costs. Software development costs for the third quarter
1999 increased to 21.9% of total operating revenues from 18.4% incurred during
the third quarter 1998, and increased by $107,000 to $1,642,000 from $1,535,000.
However, the Company capitalized less during the third quarter of 1999 and
amortized more. During the third quarter of 1998 the Company capitalized
$734,000 or 39.7% of total software development costs, while during the third
quarter 1999 the Company capitalized only $501,000 or 31.2% of total software
development costs, a decrease of $233,000. In addition the Company amortized
$539,000 of software development costs during the third quarter of 1999 compared
to $420,000 during the third quarter of 1998, an increase of $119,000. Together
these impacts represent a $244,000 reduction in aggregate software development
expenditures, and reflects the impact of re-deploying personnel from development
activities to installation of systems consistent with the release of new
products for general availability. In addition, this resulted in a reduction in
the carrying value of capitalized software development costs as amortization for
the third quarter 1999 exceeded capitalized costs for the period by $38,000.
The Company does however intend to continue to invest in new development efforts
as part of the Company's overall growth strategy.
Sales and Marketing. Sales and marketing costs for the third quarter 1999 as a
percentage of total revenues, decreased to 18.8% from 25.7% for the third
quarter of 1998, principally as a result of the functional restructuring and
cost streamlining plan begun during the second quarter of 1998, and the
realignment plan completed in the third quarter of 1999. Through these
initiatives the Company reduced third quarter 1999 sales and marketing expenses
by $727,000 compared to the third quarter of 1998.
General and Administrative Expenses. General and administrative expenses for
the third quarter of 1999 decreased by $115,000, and decreased to 11.8% of total
revenues from 12.0% incurred during the third quarter of 1998. In September
1998 the Company, in connection with consolidating three previously existing
facilities, relocated its corporate headquarters to Lake Mary, Florida. During
the third quarter 1999 as compared to the third quarter of 1998, the Company
experienced a rent expense reduction of $25,000 and a reduction in telephone
expenses of $127,000, principally from consolidating facilities, which more than
offset the $47,000 increase in depreciation expense.
Other Income (Expense). Net other expense of $65,000 resulted for the third
quarter of 1999 as compared to approximately $91,000 for the third quarter of
1998, an improvement of $26,000. Net interest income decreased by $30,000, and
interest expense increased by $59,000, during the third quarter of 1999
principally due to the cash used by operating and investing activities during
the first three quarters of 1998. However, the Company had incurred an
aggregate loss on sale of fixed assets in connection with the office
consolidation activities completed during the third quarter of 1998 of $127,000,
and a residual loss during the third quarter of 1999 of $12,000, a $115,000
comparative improvement.
11
(Nine months ended September 30, 1999 compared to nine months ended
September 30, 1998)
Revenues. During the nine months ended September 30, 1999 the Company reported
revenues of $27,270,000 an increase of $6,590,000 or 32% from revenues of
$20,680,000 for the same period 1998. The Company's radiology system revenues
increased by $3,809,000, from $3,923,000 recognized during the first nine months
of 1998 to $7,732,000 recognized during the first nine months of 1999.
Pathology revenues for the nine months ended September 30, 1999 increased by
$2,557,000 to $11,328,000 from $8,771,000 during the same period of 1998.
Similarly, laboratory information system revenues for the nine months ended
September 30, 1999 also increased by $231,000 to $6,144,000 from $5,913,000
during the first nine months of 1998. Revenues from the Records Plus product
line increased by $212,000 from $1,696,000 to $1,908,000, comparing the nine
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 nine 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 nine months ended
September 30, 1999 compared to the same period a year ago.
Computer system equipment sales and support revenues increased by $1,544,000 to
13.5% of total revenues for the nine months ended September 30, 1999 compared to
10.4% for the nine months ended September 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 nine months ended September 30,
1999, increased by $3,131,000 over the same period a year ago, from $4,858,000
to $7,989,000, and similarly service and other revenues increased by $1,951,000
to $6,787,000 from $4,836,000. These increases principally result from the
increased implementation of new system sales.
Software support revenues modestly decreased by $35,000 to $8,807,000 for the
nine months ended September 30, 1999, compared to $8,842,000 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 grow
with the implementation of new system sales. As of September 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 nine months ended September 30, 1999 increased to 19.4% from 11.6% for the
same period in 1998. Hardware and application software license revenues during
the first nine months of 1999 similarly increased to 42.8% from 33.9% of total
revenues for the first nine months of 1998, due to the significant increase in
new system implementations.
Client Services Expense. Client services expense for the nine months ended
September 30, 1999 decreased $1,121,000 to $7,228,000 from $8,349,000 for the
nine months ended September 30, 1998, decreasing as a percentage of sales from
40.4% to 27.0%. 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 nine months
ended September 30, 1999 decreased to 18% of total operating revenues from 22.3%
incurred during the nine months ended September 30, 1998. The $267,000 increase
in software development expense reported for the nine months ended September 30,
1999 of $4,888,000, compared to $4,621,000 reported for the nine months ended
September 30, 1998, resulted from a variety of impacts. First a $723,000
reduction in capitalized software development costs from $2,521,000 capitalized
during the nine months ended September 30, 1998 to $1,798,000 capitalized during
the nine months ended September 30, 1999 increased the expense. In addition,
software amortization during the nine months ended September 30, 1999 of
12
$1,517,000 increased by $296,000 compared to the $1,221,000 amortized during the
nine months ended September 30, 1998, also increasing the expense. However, a
real reduction in total software development departmental costs incurred during
the nine months ended September 30, 1999 of $752,000, as compared to the
departmental costs incurred during the nine months ended September 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.
Sales and Marketing. Sales and marketing costs for the nine months ended
September 30, 1999 as a percentage of total revenues, decreased to 20.1% from
35.8% for the same period of 1998. This decrease of $1,933,000 from $7,407,000
to $5,474,000 in sales and marketing expenses is despite an increase in sales
commissions incurred for the first nine months of 1999 of $470,000 from
$842,000 incurred during the nine months ended September 30, 1998 to $1,312,000
incurred during the nine months ended September 30, 1999, resulting from
increased sales closings. This translates to a base sales and marketing cost
reduction of approximately $2,403,000, 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 nine months ended September 30, 1999 decreased by $188,000 and decreased to
10.9% of total revenues from 15.3% incurred during the nine months ended
September 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. General
and administrative costs for the nine months ended September 30, 1999 compared
to the same period in 1998, include reductions in salaries and professional
services of $302,000, telephone expenses of $65,000, supplies of $55,000 and
mail delivery costs of $49,000.
Other Income (Expense). The Company incurred $167,000 of net other expense for
the nine months ended September 30, 1999 compared to $40,000 of net other income
reported for the nine months ended September 30, 1998. Net interest
income was $184,000 during 1998 as compared to net interest expense during 1999
of $144,000 due to the cash used by operating and investing activities during
1998, and increased borrowings on the line of credit during 1999. In addition,
the Company incurred approximately $145,000 in losses on sale of fixed assets in
connection with the office consolidation completed in 1998.
Liquidity and Capital Resources
As of September 30, 1999 the Company had cash equivalents of $1,937,000, line of
credit draws of $2,000,000, working capital of $1,362,000, and a working capital
ratio of 1.1 to 1.
Accounts receivable as of September 30, 1999 increased by $1,487,000 and
unbilled receivables increased by $1,319,000 from similar account balances on
December 31, 1998, principally as a result of the increased new system
installations in progress.
Contracts receivable as of September 30, 1999 decreased by $858,000 to $908,000
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 principally from collections of monthly installment receivables from
radiology information system customers.
During the first nine months of fiscal 1999 the Company capitalized $1,798,000
of software development costs and purchased $225,000 of additional property and
equipment. Development efforts during the first nine months 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 September 30, 1999 decreased by $510,000 to $6,219,000
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.
13
Advanced billings as of September 30, 1999 declined by $402,000 to $1,426,000
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.
During the first nine months of 1999 the Company received $297,000 in proceeds
from the exercise of director and employee options, and paid $120,000 in
preferred stock dividends.
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.
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.
14
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 fourth quarter 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 September 30, 1999 it had completed
approximately 97% of the deployment efforts relating to Year 2000 versions of
all Company Software Products. The projects comprising the remaining 3% of
these efforts are in process and are expected to be completed during the fourth
quarter 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. Management believes that all of the current
releases of the Company Software Products are Year 2000 compliant.
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.
15
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 Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 2: Articles and Plan of Merger
(b) Reports on Form 8-K:
None
16
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: October 28, 1999 /S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, CEO and Treasurer
Date: October 28, 1999 /S/PAUL S. GLOVER
Paul S. Glover
Vice President of Finance,
CFO and Secretary
17
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Index to Exhibits
Description of Exhibit Page Number
Exhibit 2: Articles and Plan of Merger 19
18
FORM 10-Q
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Exhibit 2
ARTICLES AND PLAN OF MERGER
OF COLLABORATIVE MEDICAL SYSTEMS CORP.,
a Florida corporation,
WITH AND INTO
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.,
a Florida corporation
To the Department of State
State of Florida
Pursuant to the provisions of the Florida Business Corporation Act, the domestic
parent corporation and the domestic wholly-owned subsidiary corporation herein
named do hereby adopt the following Articles and Plan of Merger.
1. The name of the subsidiary corporation , which is a business
corporation organized under the laws of the State of Florida, is
Collaborative Medical Systems Corp. ("CoMed").
2. The name of the parent corporation, which is a business corporation
organized under the laws of the State of Florida and is to be the
surviving corporation, is Dynamic Healthcare Technologies, Inc.
("DHT").
3. The number of outstanding shares of CoMed is 100, all of which are of
one class and all of which are owned by DHT.
4. The following is the Plan of Merger for merging CoMed, with and into
DHT, as approved by the Board of Directors of CoMed on September 21,
1999, and by the Board of Directors of DHT on September 21, 1999.
a. DHT, which is a corporation of the State of Florida and is the
owner of all of the issued andoutstanding shares of common
stock of CoMed, which is a corporation of the State of Florida,
hereby merges CoMed with and into DHTpursuant o the provisions
of the Florida Business Corporation Act.
b. The separate existence of CoMed shall cease upon the effective
date of the merger pursuant to the provisions of the Florida
Business Corporation Act and DHT shall continue its existence
as the surviving corporation pursuant to the provisions of the
Florida Business Corporation Act.
c. The issued shares of CoMed shall not be converted in any
manner, but each said share which is issued as of the effective
date of the merger shall be surrendered and extinguished.
d. The shareholders of the subsidiary, CoMed, may be entitled if
they comply with the provisions of the Florida Business
Corporation Act regarding rights of dissenting shareholders, to
be paid the fair value of their shares.
e. The Board of Directors and the proper officers of DHT are
hereby authorized, empowered, and directed to do any and all
acts and things, and to make, execute, deliver, file, and/or
record any and all instruments, papers, an documents which
shall be or become necessary, proper, or convenient to carry
out or put into effect any of the provisions of this Plan of
Merger or of the merger herein provided for.
5. DHT, as the holder of all of the outstanding shares of CoMed, has
waived the mailing of the copy of the Plan of Merger to itself.
19
6. Shareholder approval was not required pursuant to the Florida
Business Corporation Act with respect to the shareholders of DHT.
7. The merger herein provided for shall become effective in the State of
Florida upon filing of these Articles and Plan of Merger.
Executed on September 21, 1999.
COLLABORATIVE MEDICAL SYSTEMS, CORP.
a Florida corporation
/S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, CEO and Treasurer
DYNAMIC HEALTHCARE TECHNOLOGIES,
INC., a Florida corporation
/S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, CEO and Treasurer
20
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