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, 2000
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Commission File Number 0-12516
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Dynamic Healthcare Technologies, Inc.
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Exact name of registrant as specified in its charter)
Florida 59-3389871
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(State of Incorporation) (IRS E.I.N.)
615 Crescent Executive Court, Fifth Floor, Lake Mary, Florida 32746
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(Address of principal executive offices) (ZIP Code)
(407)333-5300
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(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----
As of October 26, 2000, there were 19,293,511 shares outstanding, par value $.01
per share, of the issuer's only class of common stock.
This report consists of fifteen (15) pages.
1
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See attached statements following this item number.
2
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- --------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,818,209 $ 1,845,323
Accounts receivable, net 8,590,441 6,867,849
Unbilled receivables 2,989,547 3,800,236
Contracts receivable - current 155,344 355,725
Prepaid expenses 546,502 623,758
Other current assets 171,076 239,271
------------------- --------------------
Total current assets 14,271,119 13,732,162
Property and equipment, net 4,107,481 3,803,978
Capitalized software development costs, net 9,266,284 4,391,984
Goodwill, net 1,255,483 949,821
Contracts receivable - non-current 741,444 786,670
Other assets 18,114 34,166
------------------- --------------------
$ 29,659,925 $ 23,698,781
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,041,799 $ 3,617,210
Deferred revenue 6,577,199 6,145,870
Advance billings 1,387,119 1,147,675
Line of credit 700,000 1,950,000
Deferred lease incentives - current 190,231 190,231
Other 297,143 413,085
------------------- --------------------
Total current liabilities 12,193,491 13,464,071
Deferred lease incentives - non-current 792,632 649,960
Other 752,538 702,695
------------------- --------------------
Total liabilities 13,738,661 14,816,726
------------------- --------------------
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, 1999,
and September 30, 2000; $.16 per share annual dividend). 1,811,327 1,811,327
Common stock ($.01par value; authorized 40,000,000 shares;
issued and outstanding 18,814,887 shares as of December 31, 1999
and 19,271,294 shares as of September 30, 2000). 188,149 192,713
Warrants 3,000 3,000
Additional paid-in capital 45,135,109 45,666,221
Deficit (31,216,321) (38,548,486)
------------------- --------------------
15,921,264 9,124,775
Less: note receivable arising from the exercise of stock options -- (242,720)
------------------- --------------------
Total shareholders' equity 15,921,264 8,882,055
------------------- --------------------
$ 29,659,925 $ 23,698,781
=================== ====================
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Computer system equipment sales and support $ 512,208 $ 306,299 $ 3,686,928 $ 879,805
Application software licenses 1,625,244 1,692,844 7,988,926 5,198,802
Software support 2,954,384 2,938,022 8,807,543 8,764,031
Services and other 2,410,052 1,242,997 6,787,015 4,385,628
------------ ------------- ------------ -------------
Total operating revenues 7,501,888 6,180,162 27,270,412 19,228,266
------------ ------------- ------------ -------------
Operating expenses:
Cost of products sold 832,427 634,679 5,294,497 1,617,744
Software amortization 538,553 348,986 1,516,872 1,498,469
Client services expense 2,413,262 2,471,770 7,228,343 7,618,477
Software development costs 1,103,042 1,328,527 3,370,704 3,679,099
Sales and marketing 1,407,807 1,083,958 5,473,919 3,311,413
General and administrative 884,246 1,067,285 2,974,780 3,024,999
Restructuring costs 523,569 5,725,007 523,569 5,725,007
------------ ------------- ------------ -------------
Total operating expenses 7,702,906 12,660,212 26,382,684 26,475,208
------------ ------------- ------------ -------------
Operating income (loss) (201,018) (6,480,050) 887,728 (7,246,942)
------------ ------------- ------------ -------------
Other income (expense):
Interest expense and financing costs (81,395) (69,276) (229,937) (154,864)
Loss on fixed asset sales (11,663) (164) (22,496) (30,767)
Interest income 28,169 46,169 85,504 100,407
------------ ------------- ------------ -------------
Total other income (expense) (64,889) (23,271) (166,929) (85,224)
------------ ------------- ------------ -------------
Earnings (loss) before income taxes (265,907) (6,503,321) 720,799 (7,332,166)
------------ ------------- ------------ -------------
Income taxes - - - -
------------ ------------- ------------ -------------
Net earnings (loss) ($265,907) ($6,503,321) $ 720,799 ($7,332,166)
============ ============= ============ =============
Net earnings (loss) ($265,907) ($6,503,321) $ 720,799 ($7,332,166)
Preferred stock dividends (40,000) (40,000) (120,000) (120,000)
------------ ------------- ------------ -------------
Earnings (loss) available for common shareholders ($305,907) ($6,543,321) $ 600,799 ($7,452,166)
============ ============= ============ =============
Weighted average number of common shares
outstanding - basic 18,681,205 19,155,473 18,506,082 18,976,130
Dilutive effect of options and warrants - - 328,867 -
------------ ------------- ------------ -------------
Weighted average number of common and potential
common shares outstanding - diluted 18,681,205 19,155,473 18,834,949 18,976,130
------------ ------------- ------------ -------------
Earnings (loss) per common share basic and diluted $ ( 0.02) $ ( 0.34) $ 0.03 $ (0.39)
============ ============= ============ =============
</TABLE>
See notes to condensed financial statements.
4
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<TABLE>
<CAPTION>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 720,799 ($7,332,166)
Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating
activities:
Depreciation and amortization 2,652,147 7,618,313
Employer 401k contributions not requiring cash 239,929 258,182
Loss on disposal of property 22,496 30,767
Changes in assets and liabilities:
Accounts receivable (1,487,076) 1,722,592
Unbilled receivables (1,319,415) (810,689)
Contracts receivable 857,937 (245,607)
Other 775,978 (163,005)
Accounts payable and accrued expenses (720,920) 575,411
Deferred revenue (510,816) (431,329)
Advance billings (401,721) (239,444)
------------ -------------
Net cash provided (used) by operating activities 829,338 983,025
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (1,797,784) (1,622,403)
Purchases of property and equipment (224,831) (434,742)
Proceeds from disposal of property and equipment 40,309 1,000
------------ -------------
Net cash used in investing activities (1,982,306) (2,056,145)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings/(repayments) on line of credit 1,144,000 1,250,000
Borrowings/(repayments) under notes payable (81,099) (60,397)
Proceeds from issuance of common stock 296,905 154,774
Payment of preferred stock dividends (120,000) (120,000)
Borrowings/(repayments) on long-term debt and capital lease obligations (112,576) (124,143)
------------ -------------
Net cash provided (used) by financing activities 1,127,230 1,100,234
------------ -------------
Net increase (decrease) in cash and cash equivalents (25,738) 27,114
Cash and cash equivalents, beginning of period 1,962,426 1,818,209
------------ -------------
Cash and cash equivalents, end of period $ 1,936,688 $ 1,845,323
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 77,491 $ 97,885
============ =============
Income taxes paid/(received) $ -- $ --
============ =============
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITY:
Computer and communications equipment acquired under capital lease
obligations $ -- $ 243,687
============ =============
Common stock issued in exchange for note receivable from an officer $ -- $ 242,720
============ =============
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
(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 except for the effects of the restructuring charge in 2000
discussed in Footnote E. Certain prior period balances have been reclassified
to conform to the Year 2000 presentation. Quarterly results of operations are
not necessarily indicative of annual results. These statements should be read
in conjunction with the audited consolidated financial statements and the notes
thereto included in the Dynamic Healthcare Technologies, Inc. 1999 Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
(B) NOTE RECEIVABLE - OFFICER:
On August 8, 2000, Mr. Cris Assif, the Company's President of Internet
Solutions, exercised an employment option to acquire 148,000 common shares of
the Company for $1.64 per share through the issuance of a promissory note in the
amount of $242,720 payable to the Company on or before August 8, 2003. Interest
on the recourse note is payable annually in arrears and accrues at the rate of
nine percent (9%) per annum. This note may be prepaid in whole or in part at
any time without penalty.
(C) LINE OF CREDIT:
On October 30, 2000 the Company renegotiated a new one year line of credit with
Silicon Valley Bank (the "Bank"), as a result of a breach of the quarterly net
income covenant, subject to the Bank's customary collateral examination. The
new line of credit is intended to provide for up to $3,000,000 of borrowings
based on a maximum advance ratio equal to 85% of qualified receivables,
$3,000,000 as of September 30, 2000, and an annual interest rate equal to the
Bank's prime rate plus two and one half percent, twelve percent (12%) as of
September 30, 2000, and removes all prior covenants in favor of a minimum
tangible net worth covenant of no less than $3,000,000. The Company's tangible
net worth as of September 30, 2000 was $3,540,250.
(D) CAPITAL LEASES:
During the third quarter 2000, the Company entered into a lease agreement for
the purchase of $243,687 of computer and communications equipment. Future
minimum lease payments under non-cancelable capital leases are included in other
liabilities, and are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30:
---------------------------
<S> <C>
2001 $280,318
2002 93,042
2003 77,535
---------
Total future minimum lease payments 450,895
Less: Amount representing interest (45,140)
---------
Present value of minimum lease payments 405,755
Less: Current portion 250,732
---------
Long term capital lease obligation $155,023
=========
</TABLE>
Included in fixed assets are the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- ------------------
(UNAUDITED)
<S> <C> <C>
Capital lease property $ 523,049 $ 766,736
Less: Accumulated depreciation (102,388) (161,146)
------------------- ------------
$ 420,661 $ 605,590
=================== ============
</TABLE>
6
<PAGE>
(E) RESTRUCTURING COSTS:
During the third quarter 2000, the Company adopted a formal plan to abandon
specific products, and, as a result, recorded restructuring charges of
$5,725,007. In connection with the Company's strategic decision to focus
marketing efforts on the Company's clinical suite of products (CoPathPlus,
RadPlus and e-Premier) and its e-Business initiatives (CoMed Internet).
SurgiPlus, DynamicVision and PACSPlus will no longer be actively marketed by the
Company. Historical revenues from the discontinued products were approximately
$247,000 and $416,000 for the three months ended September 30, 2000 and 1999,
respectively, and $875,000 and $1,908,000 for the nine months ended September
30, 2000 and 1999, respectively. The abandoned product charges consist of the
write-off of net capitalized software costs of $4,998,234 and a write-off of
prepaid licenses of $130,624. In addition, employee severance and termination
costs, associated with positions eliminated as a result of the abandoned product
offerings, in the amount of $399,735 and a reserve for contract losses of
$196,414 were accrued and expensed during the third quarter of 2000. A total of
32 employees were terminated in connection with the abandoned product offerings.
Termination benefits as of and for the three months ended September 30, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
NO. OF TOTAL SEVERANCE
TERMINATED BENEFITS AND TERMINATION
DEPARTMENT EMPLOYEES ACCRUED BENEFITS
-------------------- ---------- ---------------- ----------------
<S> <C> <C> <C>
Client Services 13 $ 90,271 $ 90,271
Software Development 16 209,643 209,643
Sales and Marketing 3 99,821 99,821
---------- ---------------- ----------------
32 $ 399,735 $ 399,735
========== ================ ================
</TABLE>
(F) EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share is computed on the basis of the weighted average
shares outstanding. Diluted earnings per share is computed on the basis of the
weighted average shares outstanding plus potential common stock which would
arise from the exercise of stock options and warrants and conversion of the
Series C preferred stock if dilutive.
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") is a provider
of Internet and image-, voice-, and web-enabled information systems for clinical
services departments and facilities. The Company's product line is a suite of
solutions for anatomic pathology, radiology, laboratory, surgical services and
health information management. In 1999, the Company launched a strategic
initiative to move into the e-Health arena by converging its traditional
clinical applications with emerging Internet technologies. The resulting
e-Health solutions enable physicians, clinicians, and departmental staff both
inside and outside the healthcare facility, to use the Company's systems over
the Internet, thereby extending their reach to remote hospitals, outreach
service locations, reference labs, physician offices and homes. The Company's
e-Health solution set positions the Company to participate in the business to
business (B2B) marketplace and transitions the Company toward delivering
software and services on a "fee-per-use" basis through an Application Solution
Provider (ASP) model.
The Company is a leader in providing diagnostic workflow and collaborative
solutions in acute care hospitals, ambulatory care centers, reference
laboratories and imaging centers. The Company currently serves more than 650
customers, most located in the United States. Key customers include
Massachusetts General Hospital, University of North Carolina Hospitals,
University of Pittsburgh Medical Center Health System, University of Illinois at
Chicago Medical Center, Memorial Sloan-Kettering Cancer Center, Advocate Health
Care, Borgess Health Alliance, The Mayo Clinic and Medical College of Virginia.
The Company's systems automate ordering, scheduling, specimen and procedure
tracking, data / image acquisition from diagnostic equipment, store and archive
results. For years, the Company has provided the processing backbone for
clinical information within the key clinical departments of pathology, radiology
and laboratory, and has provided electronic integration with diagnostic images
and voice dictation.
7
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The Company is expanding its e-Health initiatives with a new service offering
entitled "CoMed" as part of its commitment to changing the way clinicians'
access and use information for the benefit of their patients and communities.
CoMed has been designed to automate the daily workflow and communication needs
of healthcare participants and improve the delivery of patient care within
healthcare communities. CoMed is a secure, members only web site providing
physicians and other clinicians access to the most current pathology, radiology
and laboratory results - the most important diagnostic components of today's
medical record. CoMed will also be a place where physicians can obtain current
relevant medical reference material, initiate e-commerce, participate in virtual
communities and with other physicians in discussion forums, as well as obtain
the wealth of lifestyle and business information available on the World Wide
Web.
A key differentiator of CoMed is that it is designed to support the local
healthcare brands of integrated delivery networks, thereby positioning them to
sponsor the implementation and subscription to the product. CoMed is intended
to help healthcare delivery channels communicate effectively with their client
population, to improve health outcomes, to increase revenues through new
referrals, and decrease administrative costs by eliminating paper pushing and
faxes. CoMed enhances connectivity to other lab, radiology and health plan
oriented systems, creates virtual private communities and delivers value added
Internet content and context to physicians located throughout these integrated
delivery networks. CoMed intends to leverage the Company's existing installed
base of prestigious hospitals, laboratories, and diagnostic imaging centers as
well as the related clinical transaction volume and aggregate patient database,
providing a significant opportunity to extend its reach to physicians and other
clinicians as a result of these relationships and the existing knowledge base.
Today, physicians have a need and are demanding Internet access to clinical
information including test results, comparative studies, and treatment plans to
provide more efficient and effective patient care. CoMed will enable timely
information exchange and collaboration among healthcare participants, minimize
administrative costs associated with healthcare business-to-business
transactions, reduce unauthorized and non-reimbursed patient care, decrease the
waiting time and delivery costs for diagnostic test results and provide access
to online medical and other content. Internet transactions are far less costly
than manual chart pulls, pushed faxes, report distribution, couriered or mailed
charts. In addition to the direct cost reductions associated with these
improved efficiencies, Internet-connected providers make more prudent clinical
decisions. CoMed will allow convenient access to information supporting
analysis across multiple cases, to relevant medical reference material, and to
historical patient data anytime, anywhere and on a securitized basis.
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, and direct
research and development expenses, 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 most instances, product delivery for new clinical
information systems requires three to six months. However, product delivery can
8
<PAGE>
span 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
three to six 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 nine month periods ended
September 30, 1999 and 2000, certain items in the Company's statements of
operations as a percentage of total operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1999 2000 1999 2000
------- -------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues:
Computer system equipment sales and support 6.8 % 5.0 % 13.5 % 4.6 %
Application software licenses 21.7 % 27.4 % 29.3 % 27.0 %
Software support 39.3 % 47.5 % 32.3 % 45.6 %
Services and other 32.2 % 20.1 % 24.9 % 22.8 %
------- -------- ------- -------
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
------- -------- ------- -------
Operating expenses:
Cost of products sold 11.1 % 10.3 % 19.4 % 8.4 %
Software amortization 7.2 % 5.6 % 5.6 % 7.8 %
Client services expense 32.2 % 40.0 % 26.5 % 39.6 %
Software development costs 14.7 % 21.5 % 12.4 % 19.1 %
Sales and marketing costs 18.8 % 17.5 % 20.1 % 17.2 %
General and administrative expense 11.8 % 17.3 % 10.9 % 15.7 %
Restructuring costs 6.9 % 92.6 % 1.9 % 29.8 %
------- -------- ------- -------
Total operating expenses 102.7 % 204.8% 96.8 % 137.6 %
------- -------- ------- -------
Operating income (loss) (2.6)% (104.8)% 3.3 % (37.6)%
Other income (expense) (0.9)% (0.4)% (0.7)% (0.5)%
------- -------- ------- -------
Net earnings (loss) (3.5)% (105.2)% 2.6 % (38.1)%
======= ======== ======= =======
</TABLE>
RESULTS OF OPERATIONS
(THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999)
Revenues. During the quarter ended September 30, 2000 the Company reported
revenues of $6,180,000 a decrease of $1,322,000 from revenues for the same
period in 1999. Revenues from new system implementations declined significantly
principally due to general market slowdown caused by reduced capital procurement
by healthcare providers. Combined revenues from computer system equipment
sales, application software licenses, and services and other revenues declined
by $1,306,000, reflecting this decrease in new system implementations, while
software support revenues decreased modestly by $16,000. The Company's
radiology system revenues decreased by $703,000, from $1,946,000 recognized
during the third quarter of 1999 to $1,243,000 recognized during the third
quarter of 2000. Pathology revenues for the third quarter of 2000 decreased by
$323,000 to $3,197,000 from $3,520,000 during the same period of 1999.
Similarly, laboratory information system revenues for the third quarter of 2000
also decreased by $118,000 to $1,494,000 from $1,612,000 during the third
quarter of 1999. In addition, Records Plus product line revenues decreased by
$169,000 from $416,000 reported for the third quarter of 1999 to $247,000 for
the third quarter of 2000.
Computer system equipment sales and support revenues decreased by $206,000 to
5.0% of total revenues for the third quarter of 2000, compared to 6.8% for the
third quarter of 1999. Management attributes the decrease to the decreased
implementation of new systems by customers focused on year 2000 remediation and
system validation efforts.
9
<PAGE>
Application software license revenue during the third quarter of 2000, increased
modestly by $68,000 over the same period a year ago, from $1,625,000 to
$1,693,000.
Service and other revenues decreased by $1,167,000 to $1,243,000 from $2,410,000
is principally resulted from the decreased implementation of new systems during
2000.
Software support revenues decreased by $16,000 to $2,938,000 for the third
quarter of 2000, compared to $2,954,000 for the same period one year ago.
During 1999, the Company discontinued 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 systems. As of September 30, 2000, the recurring annualized billable
support base was $12.1 million. An additional $2.0 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 third quarter of 2000 decreased to 10.3% from 11.1% for the same period in
1999. Computer system equipment sales and support revenues during the third
quarter of 2000 similarly decreased to 5.0% from 6.8% of total revenues for the
third quarter 1999, due to the significant decrease in new system
implementations.
Software Amortization. Software amortization for the third quarter of 2000
decreased by approximately $190,000 from $539,000 during the third quarter of
1999 to $349,000. During the third quarter of 2000 the Company abandoned
marketing of DynamicVision and PACSPlus for strategic reasons, which lowered the
recurring amortization.
Client Services Expense. Client services expense for the third quarter 2000
increased $59,000 to $2,472,000 from $2,413,000 for the third quarter 1999,
however, two significant transitions within client services have occurred.
First, the Company decreased staffing in connection with the cost reduction
plans previously completed. In addition, during late 1999 and continuing
through the first quarter of 2000, the Company transitioned various development
personnel to support and new system implementation roles, consistent with the
maturing of the recent new product releases.
Software Development Costs. Software development expense reported for the third
quarter of 2000 increased by $226,000 to $1,329,000, compared to $1,103,000
reported for the third quarter of 1999. The Company's e-Business initiatives
development costs have not been capitalized. In addition, development efforts
continue as part of the Company's overall growth strategy, including
enhancements to existing product lines.
Sales and Marketing. Sales and marketing costs for the third quarter 2000 as a
percentage of total revenues, decreased to 17.5% from 18.8% for the same period
of 1999. This decrease of $324,000 from $1,408,000 to $1,084,000 in sales and
marketing expenses results from the sales realignment and cost reduction
programs completed in 1999.
General and Administrative. General and administrative costs increased by
$183,000 to $1,067,000 for the third quarter 2000 compared to $884,000 for the
third quarter of 1999, and increased as a percentage of total revenues to 17.3%
from 11.8%. Management for the Company's e-Business initiatives is being
charged to general and administrative costs and the restructured organization
allocates a higher percentage of overhead burdens to the general and
administrative department as a result of the department constituting a higher
percentage of Company-wide salaries and wages.
Restructuring Costs. During the third quarter 2000, the Company adopted a
formal plan to abandon specific products, and, as a result, recorded
restructuring charges of $5,725,007. In connection with the Company's strategic
decision to focus marketing efforts on the Company's clinical suite of products
(CoPathPlus, RadPlus and e-Premier) and its e-Business initiatives (CoMed
Internet). SurgiPlus, DynamicVision and PACSPlus will no longer be actively
marketed by the Company. Historical revenues from the discontinued products
were approximately $247,000 and $416,000 for the three months ended September
30, 2000 and 1999, respectively. The abandoned product charges consist of the
write-off of net capitalized software costs of $4,998,234 and a write-off of
prepaid licenses of $130,624. In addition, employee severance and termination
costs, associated with positions eliminated as a result of the abandoned product
offerings, in the amount of $399,735 and a reserve for contract losses of
$196,414 were accrued and expensed during the third quarter of 2000. A total of
32 employees were terminated in connection with the abandoned product offerings.
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(NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999)
Revenues. During the nine months ended September 30, 2000 the Company reported
revenues of $19,228,000 a decrease of $8,042,000 or 29.5% from revenues of
$27,270,000 for the same period 1999. Revenues from new system implementations
declined significantly due to general market slowdown caused by reduced capital
procurement by healthcare providers. Combined revenues from computer system
equipment sales, application software licenses, and services and other revenues
declined by $7,999,000, reflecting this decrease in new system implementations,
while software support revenues decreased modestly by $43,000. The Company's
radiology system revenues decreased by $3,372,000, from $7,731,000 recognized
during the first nine months of 1999 to $4,359,000 recognized during the first
nine months of 2000. Pathology revenues for the nine months ended September 30,
2000 decreased by $2,665,000 to $8,663,000 from $11,328,000 during the same
period of 1999. Similarly, laboratory information system revenues for the nine
months ended September 30, 2000 also decreased by $813,000 to $5,331,000 from
$6,144,000 during the first nine months of 1999. Revenues from the Records Plus
product line decreased by $1,033,000 from $1,908,000 to $875,000, comparing the
nine months ended 1999 to the same period of 2000, respectively.
Computer system equipment sales and support revenues decreased by $2,807,000 to
4.6% of total revenues for the nine months ended September 30, 2000 compared to
13.5% for the nine months ended September 30, 1999. Management attributes the
decrease to the decreased implementation of new systems by customers focused on
year 2000 remediation and system validation efforts.
Application software license revenue during the nine months ended September 30,
2000, decreased by $2,790,000 over the same period a year ago, from $7,989,000
to $5,199,000, and similarly service and other revenues decreased by $2,401,000
to $4,386,000 from $6,787,000. These decreases principally result from the
decreased implementation of new systems.
Software support revenues modestly decreased by $43,000 to $8,764,000 for the
nine months ended September 30, 2000, compared to $8,807,000 for the same period
one year ago. During 1999 the Company discontinued 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 systems. As of September 30, 2000, the
recurring annualized billable support base was $12.1 million, and an additional
$2.0 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, 2000 decreased to 8.4% from 19.4% for the
same period 1999. Hardware and application software license revenues during the
first nine months of 2000 similarly decreased to 31.6% from 42.8% of total
revenues for the first nine months of 1999, due to the significant decrease in
new system implementations.
Client Services Expense. Client services expense for the nine months ended
September 30, 2000 increased $390,000 to $7,618,000 from $7,228,000 for the nine
months ended September 30, 1999, increasing as a percentage of sales from 26.5%
to 39.6%. 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. During late 1999 and
continuing through the first quarter of 2000 the Company transitioned various
development personnel to support and new system implementation roles, consistent
with the maturing of the recent new product releases.
Software Development Costs. Software development costs for the nine months
ended September 30, 2000 increased to 19.1% of total operating revenues from
12.4% incurred during the nine months ended September 30, 1999. The $308,000
increase in software development expense reported for the nine months ended
September 30, 2000 of $3,679,000, compared to $3,371,000 reported for the nine
months ended September 30, 1999, results principally from resources committed to
the development of the Company's e-Business initiatives, which have not been
capitalized. In addition development efforts continue as part of the Company's
overall growth strategy, including enhancements to existing product lines.
Sales and Marketing. Sales and marketing costs for the nine months ended
September 30, 2000 as a percentage of total revenues, decreased to 17.2% from
20.1% for the same period of 1999. This decrease of $2,163,000 from $5,474,000
to $3,311,000 in sales and marketing expenses results principally from cost
reductions attributed to the sales realignment programs completed in 1999.
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Restructuring Costs. During the third quarter 2000, the Company adopted a
formal plan to abandon specific products, and, as a result, recorded
restructuring charges of $5,725,007. In connection with the Company's strategic
decision to focus marketing efforts on the Company's clinical suite of products
(CoPathPlus, RadPlus and e-Premier) and its e-Business initiatives (CoMed
Internet). SurgiPlus, DynamicVision and PACSPlus will no longer be actively
marketed by the Company. Historical revenues from the discontinued products
were approximately $875,000 and $1,908,000 for the nine months ended September
30, 2000 and 1999, respectively. The abandoned product charges consist of the
write-off of net capitalized software costs of $4,998,234 and a write-off of
prepaid licenses of $130,624. In addition, employee severance and termination
costs, associated with positions eliminated as a result of the abandoned product
offerings, in the amount of $399,735 and a reserve for contract losses of
$196,414 were accrued and expensed during the third quarter of 2000. A total of
32 employees were terminated in connection with the abandoned product offerings.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
As of September 30, 2000 the Company had cash and cash equivalents of
$1,845,000, line of credit draws of $1,950,000, working capital of $268,000, and
a working capital ratio of 1.02 to 1. In addition, the Company has been cash
positive from operations for eight consecutive quarters.
Accounts receivable as of September 30, 2000 decreased by $1,723,000 from
similar balances as of December 31, 1999, principally as a result of decreased
system implementations in progress. However, unbilled receivables as of
September 30, 2000, increased by $811,000 as compared to the unbilled receivable
balance as of December 31, 1999 due principally to the timing of billing
milestones in implementations in progress.
Contracts receivable as of September 30, 2000 increased by $246,000 to
$1,142,000 as compared to the balance of $896,000 on December 31, 1999, due
principally to one large system installation completed during the quarter with
deferred payment terms, less scheduled collections on existing contracts.
During the first three quarters of fiscal 2000 the Company capitalized
$1,622,000 of software development costs and purchased $678,000 of additional
property and equipment. Development efforts during the first three quarters of
2000 included enhancements to the Company's existing product line. Property
purchases were made principally to build the data center to support the
Company's e-Business initiatives. During the third quarter approximately
$244,000 of the e-Business property purchases were financed under a three year
capital lease, and portal development of the e-Business initiative has been
effectively financed by subordinating payment to the subcontracted development
partner to future revenue from the product. Management expects capitalized
development costs to decrease significantly as a result of the restructuring.
Deferred revenue as of September 30, 2000 decreased by $431,000 to $6,146,000
from $6,577,000 reported as of December 31, 1999. The Company has a
concentration of calendar year annual customer support contracts with January 1
start dates, which typically results in quarterly changes to the deferred
revenue balance.
Advanced billings as of September 30, 2000 declined by $239,000 to $1,148,000
from the 1999 year end balance of $1,387,000. The decline in new systems sales
bookings and implementations during 2000 resulted in a lower level of customer
contract deposits and advance payments received.
On October 30, 2000 the Company renegotiated a new one year line of credit with
Silicon Valley Bank (the "Bank"), as a result of a breach of the quarterly net
income covenant, subject to the Bank's customary collateral examination. The
new line of credit is intended to provide for up to $3,000,000 of borrowings
based on a maximum advance ratio equal to 85% of qualified receivables,
$3,000,000 as of September 30, 2000, and an annual interest rate equal to the
Bank's prime rate plus two and one half percent, twelve percent (12%) as of
September 30, 2000, and removes all prior covenants in favor of a minimum
tangible net worth covenant of no less than $3,000,000. The Company's tangible
net worth as of September 30, 2000 was $3,540,250.
During the first nine months of 2000 the Company received $155,000 in proceeds
from the exercise of director and employee options, and paid $120,000 in
dividends on the Series C Preferred Stock.
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 achieve profitable operations or to obtain suitable
additional financing.
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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, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
----------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize
all derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, we have not entered into derivative contracts and do not expect to
have any derivative or hedging activities in the future. Accordingly SFAS 133
is not expected to affect our financial statements.
During the fourth quarter of 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The provisions of SAB No. 101 are required to be adopted no later
than the fourth quarter of the fiscal year beginning after December 15, 1999.
Management believes that SAB No. 101 does not materially alter the Company's
revenue recognition methods.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44), Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of various
modification to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
Management believes that the impact of FIN 44 will not have a material effect on
the Company's financial position or results of operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information required by this item is incorporated by reference to footnote
(B) of the condensed financial statements included in Part I herein.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The information required by this item is incorporated by reference to footnote
(C) of the condensed financial statements included in Part I herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERs
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
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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 31, 2000 /S/MITCHEL J. LASKEY
------------------ ----------------------
Mitchel J. Laskey
President, CEO and Treasurer
Date: October 31, 2000 /S/PAUL S. GLOVER
------------------ -------------------
Paul S. Glover
Vice President of Finance,
CFO and Secretary
15
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