10-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended June 30, 2001 ----------------- 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, 5th Floor, Lake Mary, FL 32751 -------------------------------------------------------------- ----- (Address of principal executive offices) (ZIP Code) (407) 333-5300 --------------- (Registrant's telephone number, including area code) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- As of August 13, 2001, there were 6,571,640 shares outstanding, par value $.01 per share, of the issuer's only class of common stock. This report consists of twenty three (23) pages. Page 1 of 23 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements See attached statements following this item number. Page 2 of 23

See notes to financial statements. Page 3 of 23

Page 4 of 23

See notes to financial statements. Page 5 of 23 DYNAMIC HEALTHCARE TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 2001 (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. 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. 2000 Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (B) NOTE RECEIVABLE - OFFICER: On August 8, 2000, Mr. Christopher Assif, the Company's then President of Internet Solutions Products for Dynamic, exercised employment options to acquire 49,334 common shares for $4.92 per share; on a reverse split adjusted basis, 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 (9.0%) per annum. On June 15, 2001, the Company amended the employment agreement with Mr. Assif, now the Company's CEO and a member of its board of directors. As part of his revised employment agreement, Mr. Assif voluntarily reduced his base salary and management incentive compensation bonus by $150,000 annually. As part of the consideration for this reduction, the Company amended and restated the promissory note. The promissory note was amended to convert it from a recourse to non-recourse note and reduce the rate of interest to six percent (6.0%) per annum. This note may be prepaid in whole or in part at any time without penalty or premium. As a result of the changes to the terms of the note receivable from a recourse to a non-recourse note, the underlying options are required to be treated as variable beginning June 15, 2001, in accordance with Financial Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB Opinion No. 25. Accordingly, any differences between the exercise price of the options and market price of the Company's common stock is recorded as compensation expense at each reporting period. There has been no compensation expense recorded to date for these options as the exercise price has been above the market price. (C) LINE OF CREDIT: As of June 30, 2001, the Company had paid off borrowings against its Line of Credit Agreement with Silicon Valley Bank, and borrowings available under the Line of Credit were $1,500,000. Interest is to accrue at the Bank's prime rate plus 2.5% which as of June 30, 2001 was 9.25%. Future borrowing capacity is contingent upon maintaining a monthly tangible net worth of $1,500,000. The Company's tangible net worth as of June 30, 2001 was $1,959,753. On July 25, 2001, the Company renegotiated a new Line of Credit Agreement with Silicon Valley Bank, which expires on July 24, 2002. The new line of credit is intended to provide for up to $2,500,000 of borrowings based on a maximum advanced ratio equal to 80% of qualified accounts receivable with a requirement to maintain a defined Quick Asset Ratio of 1.00 to 1.00. The tangible net worth requirement was eliminated. Interest is to accrue at a minimum finance rate of $7,000 a month or the Bank's prime rate plus 3.0%, which as of July 31, 2001 was 9.75%, and is due monthly in arrears. Page 6 of 23 (D) LOSS PER SHARE: Loss per share is computed on the basis of the weighted average shares outstanding. Diluted loss per share is computed on the basis of the weighted average shares outstanding plus potential common shares which would arise from the exercise of stock options, warrants and conversion of the Series C preferred stock. Diluted loss per share for the six months ended June 30, 2001 and 2000 does not include potential common shares, as their effect would be anti-dilutive. Potential common shares excluded from weighted average shares due to their anti-dilutive effect include:

(E) REALIGNMENT COSTS: During the second quarter 2001, the Company adopted a formal plan to reallocate and eliminate selected mid-level management and duplicate staff positions in the Company. In connection with the plan, a total of thirty-six employees were terminated and the Company incurred a non-recurring charge in the amount of $465,204 related to termination and severance benefits. At June 30, 2001, $363,754 was paid and $101,450 of the remaining accrued severance and termination benefits will be paid by December 31, 2001. Termination benefits as of and for the three months ended June 30, 2001 are summarized as follows:

(F) REVERSE STOCK SPLIT: On June 28, 2001, the Company completed a one for three reverse stock split with respect to its common stock. All common share information, included in the accompanying financial statements, has been retroactively adjusted to give effect to the reverse stock split. (G) RECENT ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 41 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30,2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for, purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. Page 7 of 23 SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill and reassess the useful lives of other existing recognized intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of June 30, 2001, the net carrying amount of goodwill is $644,159. Amortization expense during the six-month period ended June 30, 2001 was $204,777. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. Page 8 of 23 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 NT, UNIX and AS/400 based diagnostic workflow solutions for pathology, laboratory and radiology departments in approximately 640 client sites throughout North America. The Company has designed, developed and deployed advanced Internet and image, voice and Web-enabled information systems for its clients that address a broad range of requirements. Dynamic's information systems contribute to higher quality and more cost-effective delivery of care and make it possible to have access to information across the entire continuum of care. The Company provides support for all of its systems and also offers integration and other consulting services to its clients. The Company's client base includes many of the world's leading healthcare organizations such as Memorial Sloan-Kettering Cancer Center, The Mayo Foundation, The University of North Carolina Hospitals, LabCorp, Valley Health System, St. Mary's Health System, Parkland Memorial Hospital, and Columbia Presbyterian Medical Center, New York Hospital and Northwest Radiology Network. 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 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 processing 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 in a secure manner. Page 9 of 23 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 client 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 client. 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, reduced by capitalized software development costs. Software development costs are expensed until such time as technological feasibility is established and then are capitalized in compliance with Statement of Financial Accounting Standards No. 86 "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Software amortization is separately stated. Sales and marketing costs include direct and indirect salaries, commissions, joint marketing costs, advertising, trade show costs, user group cost and travel and entertainment expenses related to the sale and marketing of the Company's products and services. General and administrative expenses include salaries and expenses for corporate administration, financial, legal and human resources. The sales cycle for the Company's systems is typically six to eighteen months from initial contact to contract signing. The product delivery cycle is variable. Based on the client's implementation plan, product delivery may take two or more years, particularly with enterprise-wide electronic healthcare record solutions involving significant and continuing client service requirements. Accordingly, the product delivery cycle depends upon the combination of products purchased and the implementation plan defined by the client in the master sales agreement. Each client contract is separately negotiated. The installation schedules for clinical information systems, or departmental electronic healthcare record implementations, typically require six to twelve months. Under its standard master sales agreement, the Company generally receives a partial payment upon execution of the agreement, a hardware installment payment upon delivery of hardware, installation progress payments upon the completion of defined milestones and final payment, which may vary with each contract. The Company has determined that it operates in a single reporting segment. Page 10 of 23 The following table sets forth, for the three-month and six-month periods ended June 2000 and 2001, certain items in the Company's statements of operations as a percentage of total operating revenues:

This Management's Discussion and Analysis of Financial Condition and Results of Operations presents a review of the financial condition of the Company at December 31, 2000 and June 30, 2001, and the results of operations for the three and six months ended June 30, 2000 and 2001. This discussion and analysis is intended to assist in understanding the financial condition and results of operations of the Company. Accordingly, this section should be read in conjunction with the financial statements and the related notes contained herein. Page 11 of 23 RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000) Revenues. During the quarter ended June 30, 2001 the Company's revenues were $6,344,000 a decrease of $122,000 from revenues for the same period of 2000. Revenues from new system implementations declined slightly principally due to a 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 $73,000, reflecting the decrease in new system implementations, while software support revenues decreased by $49,000. Computer system equipment sales and support revenues increased by $52,000 to 3.3% of total revenues for the second quarter of 2001, compared to 2.4% for the second quarter of 2000. Management attributes the increase directly to client add-on sales during the quarter requiring hardware. Application software license revenue during the second quarter of 2001, decreased by $248,000 over the same period one year ago, from $1,996,000 to $1,748,000, and service and other revenues increased by $123,000 to $1,511,000 from $1,388,000. The decrease in software license revenue and the increase in service and other revenue principally resulted from the focus on implementation of contract work in progress. Software support revenues decreased by $49,000 to $2,877,000 for the second quarter of 2001, compared to $2,926,000 for the same period one year ago. As of June 30, 2001, the recurring annualized billable support base was $12.4 million. An additional $1.2 million of annualized software support revenue is anticipated to be generated from delivery of the Company's existing new systems backlog. Cost of Products Sold. Cost of products sold as a percent of total revenues for the second quarter of 2001 increased to 7.6% from 7.0% for the same period in 2000. Hardware revenues during the second quarter of 2001 similarly increased to 3.3% from 2.4% of total revenues for the second quarter 2000, directly increasing third party hardware and support cost as a percent of revenue for the Company's product lines. Software Amortization. Software amortization decreased during the second quarter of 2001 to $329,000 from $569,000 amortized during the second quarter of 2000. During October 2000 the Company discontinued marketing of several products for strategic reasons and wrote-off the related capitalized software development costs. As a result of the product restructuring, overall recurring amortization for software was reduced. Client Services Expense. Client services expense for the six months ended June 30, 2001 decreased $424,000 to $4,723,000 from $5,147,000 for the six months ended June 30, 2000, decreasing as a percentage of sales from 39.5% to 37.6%. The Company previously reported a decrease in duplicative staffing and a reallocation of various resources in connection with the realignment plan completed in 2001. Product installation, delivery and support services were standardized along all product lines as the Company focuses on revenue generating functions. Software Development Costs. Software development expense reported for the second quarter of 2001 decreased by $14,000 to $1,110,000 compared to $1,124,000 reported for the second quarter of 2000. This decrease reflects $372,000 in reduced and reallocated resources to various departments as a result of the realignment discussed below and other departmental decrease in costs of $222,000. These decreases were offset by a $580,000 reduction in capitalized software development costs. Although development efforts continue as part of the Company's overall strategy, the focus has been less on enhancements to existing product lines and more towards completion of the Company's e-Business initiatives. Costs incurred in connection with the Company's e-Business initiatives were not capitalized since the development of the products have not yet reached technological feasibility. Sales and Marketing. Sales and marketing costs for the second quarter of 2001 as a percentage of total revenues, increased to 19.7% from 17.7% for the same period of 2000. This represents an increase of $108,000 from $1,142,000 to $1,250,000 in sales and marketing expenses. This increase includes a $156,000 increase in sales commissions as a result of an increase in the relative sales bookings offset by a $48,000 decrease primarily due to the annual Health Information Management Systems Society Show (HIMSS) convened in February 2001 rather than April as it occurred in 2000. General and Administrative Expenses. General and administrative expenses for the second quarter of 2001 increased by $59,000. This increased expense includes a $70,000 decrease in direct salaries and wages as a result of the reduction in administrative personnel and management positions, offset by an increase of $129,000, associated with travel and entertainment, legal, supplies and other business activities relating to the Company's qualification period with NASDAQ. Page 12 of 23 Realignment Cost. During the second quarter 2001, the Company adopted a formal plan to reallocate and eliminate selected mid-level management and duplicate staff positions in the Company. In connection with the plan, a total of thirty-six employees were terminated and the Company incurred a non-recurring charge in the amount of $465,204 related to termination and severance benefits. At June 30, 2001, $363,754 was paid and $101,450 of the remaining accrued severance and termination benefits will be paid by December 31, 2001. Other Income (Expense). The Company incurred $42,000 of net other expense for the second quarter of 2001 compared to $47,000 of net other expense reported for the second quarter of 2000. Net interest expense increased by $13,000 principally due to the write off of loan amortization costs associated with the line of credit during the second quarter of 2001 as compared to second quarter 2000. (SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000) Revenues. During the six months ended June 30, 2001 the Company reported revenues of $12,552,000 a decrease of $496,000 or 3.8% from revenues of $13,048,000 for the same period in 2000. Revenues from new system implementations declined slightly principally due to a 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 $449,000, reflecting this decrease in new system implementations, while software support revenues decreased modestly by $47,000. Computer system equipment sales and support revenues decreased by $37,000 to 4.3% of total revenues for the six month period ended 2001, compared to 4.4% for the six months ended 2000. Management attributes the slight decrease to the clients' procurement of needed hardware directly from the manufacturer. Application software license revenue during the six months ended June 30, 2001 decreased by $259,000 over the same period one year ago, from $3,506,000 to $3,247,000, and similarly service and other revenues decreased by $154,000 to $2,989,000 from $3,143,000. These decreases principally result from the decreased implementation of new systems. Software support revenues modestly decreased by $46,000 to $5,780,000 for the six months ended June 30, 2001, compared to $5,826,000 for the same period one year ago. During 2000 the Company discontinued support for customers operating our offering of MUMPS radiology products, this decrease is due primarily to customers not converting to our client server offering. Management expects support revenues to continue to grow with the implementation of new systems. As of June 30, 2001, the recurring annualized billable support base was $12.4 million, and an additional $1.2 million of annualized software support revenue is anticipated to be generated from delivery of the Company's existing new systems backlog. Cost of Products Sold. Cost of products sold as a percent of total revenues for the six months ended June 30, 2001 increased to 8.2% from 7.5% for the same period in 2000. Hardware and application software license revenues during the first six months of 2001 similarly decreased to 30.2% from 31.3% of total revenues for the first six months of 2000, due to the decrease in new system implementations. Client Services Expense. Client services expense for the six months ended June 30, 2001 decreased $424,000 to $4,723,000 from $5,147,000 for the six months ended June 30, 2000, decreasing as a percentage of sales from 39.5% to 37.6%. The Company previously reported a decrease in duplicative staffing and a reallocation of various resources in connection with the realignment plan completed in 2001. Product installation, delivery and support services were standardized along all product lines as the Company focuses on revenue generating functions. Software Development Costs. Software development costs for the six months ended June 30, 2001 decreased to 17.4% of total operating revenues from 18.0% incurred during the six months ended June 30, 2000. The $183,000 decrease in software development expense reported for the six months ended June 30, 2001 of $2,168,000, compared to $2,351,000 reported for the six months ended June 30, 2000, reflects a $1,054,000 reduction in capitalized software development costs offset by other reductions in total software departmental costs of $871,000 through the reduction and reallocation of personell to various departments. Although development efforts continue as part of the Company's overall strategy, the focus has been less on enhancements to existing product lines and more towards completion of the Company's e-Business initiatives. Cost incurred in connection with the Company's e-Business initiatives were not capitalized since the development of the products have not yet reached technological feasibility. Page 13 of 23 Sales and Marketing. Sales and marketing costs for the six months ended June 30, 2001 as a percentage of total revenues, increased to 21.4% from 17.1% for the same period of 2000. This increase of $460,000 from $2,227,000 to $2,687,000 in sales and marketing expenses results principally from the increase of $317,000 in sales commissions paid as a result of an increase in the relative sales bookings. The remaining $143,000 increase is primarily due to increased marketing activity to promote the Company's new CoMeD product and market awareness of existing products. General and Administrative. General and Administrative expenses for the six months ended June 30, 2001 increased $297,000 to $2,255,000 from $1,958,000 for the six months ended June 30, 2000. The increase in expense are associated with direct increases in travel and entertainment, bad debt, legal, supplies, and the Company's business activities specifically relating to compliance with NASDAQ. Realignment Cost. During the second quarter 2001, the Company adopted a formal plan to reallocate and eliminate selected mid-level management and duplicate staff positions in the Company. In connection with the plan, a total of thirty-six employees were terminated and the Company incurred a non-recurring charge in the amount of $465,204 related to termination and severance benefits. At June 30, 2001, $363,754 was paid and $101,450 of the remaining accrued severance and termination benefits will be paid by December 31, 2001. Other Income (expense). The Company incurred $64,000 of net other expense for the six months ended June 30, 2001 compared to $62,000 of net other expense reported for the six months ended June 30, 2000. The net increase of $2,000 in other expense is principally due to the $32,000 increase in other income and expense and a reduction of $30,000 for loss on disposal of fixed assets that occurred during the six months ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES ---------------------------------- As of June 30, 2001 the Company had cash and cash equivalents of $893,094, availability under the line of credit of $1,500,000, and a working capital deficit of $792,000. In addition, the Company has experienced positive cash flow from operations for eleven consecutive quarters. Accounts receivable as of June 30, 2001 decreased by $1,542,000 from the balance on December 31, 2000, principally as a result of the increased collection activities for support renewals and decreases in new system installations. Unbilled receivables increased by $1,118,000 due principally to the timing of billable milestones on implementations and the increase of contract work in progress. During the first half of fiscal year 2001 the Company capitalized $56,000 of software development costs and purchased $272,000 of additional property and equipment. Development efforts capitalized during the first half of 2001 included enhancements to the Company's existing product line and the advancement of workflow integration with our CoPathPlus system. Property purchases were made primarily for office equipment at levels similar to the prior year with the exception of purchasing a new trade show booth. Accounts payable and accrued expenses decreased $328,000 to $2,734,000 as of June 30, 2001 from $3,061,000 as of December 31, 2000. The lower level of system implementations resulted in a lower level of accrued third party product costs. Deferred revenue as of June 30, 2001 increased by $64,000 to $5,993,000 from $5,929,000 reported as of December 31, 2000. The Company has a concentration of calendar year annual client support contracts with January 1 and July 1 start dates, which typically results in quarterly volatility to the deferred revenue balance. Advanced billings as of June 30, 2001 increased by $796,000 to $1,993,000 from the 2000 year end balance of $1,197,000. The increase in sales bookings for the first quarter of 2001 resulted in a higher level of client contract deposits received. The Company's line of credit with Silicon Valley Bank was renegotiated on July 25, 2001 and expires in July 24, 2002. The new line of credit is intended to provide for up to $2,500,000 of borrowings based on a maximum advanced ratio equal to 80% of qualified accounts receivable. Borrowings as of August 13, 2001 were $0. Future borrowing capacity is contingent on the Company's compliance with a minimum quick asset ratio (as defined) of 1.00 to 1.00. Due to the cyclical nature of the Company's operations, the Company faces the risk of non-compliance with the quick asset ratio requirement, which could result in the reduction or removal of the Company's available line of credit. Management believes that existing cash and funds available under its existing line of credit, together with funds expected to be generated by operations will be sufficient to meet operating requirements. However, the Company's ability to meet its future working capital requirements is dependent on the Company's ability to continue to generate positive cash flow from operations and to have availability under its existing line of credit or to obtain suitable additional financing. The Company actively continues to review competitive alternatives for debt or equity financing. Page 14 of 23 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 believes that the realignment plan adopted in April 2001 to eliminate and reallocate resources will be accretive in future periods both in cash and operational savings. In connection with the plan, a total of thirty-six employees were terminated and the Company incurred a non-recurring charge in the amount of $465,204 related to termination and severance benefits. At June 30, 2001 $363,751 was paid and $101,450 of the remaining accrued severance and termination benefits will be paid by December 31, 2001.The Company is also seeking to sublease approximately 30,000 square feet of excess office space in Florida. INFLATION AND CHANGING PRICES -------------------------------- The Company believes that the general state of the economy and inflationary trends have only a limited effect on its business. Historically, inflation has not had a material effect on the Company. Changing prices of computer hardware could have a material effect on the cost of the materials sold and the related selling 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, 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate changes primarily as a result of its variable rate line of credit used to finance the Company's short-term working capital needs and general corporate purposes. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earning and cash flows and to lower its overall borrowing costs. The Company's market risks associated with its line of credit borrowings outstanding is that the interest rate under the line of credit agreement is based on the prime rate plus (3.0%) (9.75% as of June 30, 2001). The line of credit agreement expires on July 14, 2002. Fair value of the line of credit as of June 30, 2001 was equal to its carrying value of $-0-. RECENT ACCOUNTING PRONOUNCEMENTS ---------------------------------- In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 41 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30,2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill and reassess the useful lives of other existing recognized intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of June 30, 2001, the net carrying amount of goodwill is $644,159. Amortization expense during the six-month period ended June 30, 2001 was $204,777. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. Page 15 of 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities Holders The Company's Annual Meeting of Shareholders was held on June 7, 2001, in lake Mary, Florida. Seven directors were elected to the Company's Board. A listing of those directors follows:

A proposal to ratify the appointment of BDO Seidman, LLP, as the Company's independent certified public accounts for the fiscal year ending December 31, 2001 passed by a vote of 17,906,658 to 96,191 with 123,107 votes abstaining. Page 16 of 23 A proposal to adopt and approve a capital restructuring proposal whereby, at the discretion of the Board of Directors, the Articles of Incorporation will be amended to effect a reverse stock split at a ratio not to exceed one-for-three, while maintaining the number of authorized shares, and the par value per share, of the common stock of the Company (the "Recapitalization Plan") passed by a vote of 13,162,513 to 4,845,491 with 117,952 abstaining. A proposal to increase the authorized common shares available to fulfill the employer matching contribution to the employee 401K plan by 500,000 shares passed by a vote of 16,344,811 to 1,549,341 with 231,804 votes abstaining. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 1: Articles of Amendment to the Articles of Incorporation with respect to the revisions to Series C Preferred Stock. Exhibit 2: Articles of Amendment to the Articles of Incorporation with respect to the reverse stock split. (b) Reports on Form 8-K: On May 2, 2001, the Company filed a form 8-K and announced it's earnings for the first quarter ended March 31, 2001. The press release also reports that Paul S. Glover stepped down from his position as Vice President of Finance and that Brian Greco was appointed to fill the vacancy created thereby. In addition, the press release provides information regarding the Company's meeting with analysts. On June 15, 2001, the Company filed a form 8-K and announced a one-for-three reverse stock split effective at the close of business on June 28, 2001. The common stock is expected to begin trading on a post-split basis on June 29, 2001. Pursuant to the provisions of the Articles of Amendment approved by the Company's shareholders at the 2001 Annual Shareholder's Meeting, the Company's authorized capital stock following the reverse stock split shall continue to consist of 40 million shares of common stock and 10 million shares of preferred stock. On June 28, 2001, the Company filed a form 8-K and announced revenue and earnings guidance for the balance of fiscal year 2001 and fiscal year 2002. Page 17 of 23 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: August 14, 2001 /S/CHRISTOPHER ASSIF ------------------ --------------------- Christopher Assif Chief Executive Officer Date: August 14, 2001 /S/BRIAN GRECO ------------------ --------------- Brian Greco Vice President of Finance and Secretary Page 18 of 23 FORM 10-Q DYNAMIC HEALTHCARE TECHNOLOGIES, INC. INDEX TO EXHIBITS Description of Exhibit Page Number ------------------------ ------------ Exhibit 1: Articles of Amendment to the Articles of Incorporation 20 With respect to the revisions to Series C Preferred Stock Exhibit 2: Articles of Amendment to the Articles of Incorporation 22 With respect to the reverse stock split Page 19 of 23 FORM 10-Q DYNAMIC HEALTHCARE TECHNOLOGIES, INC. EXHIBIT 1 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF DYNAMIC HEALTHCARE TECHNOLOGIES, INC. Pursuant to Sections 607.1003 and 607.1006 of the Florida Business Corporation Act Pursuant to the provisions of Sections 607.1003 and 607.1006 of the Florida Business Corporation Act, Dynamic Healthcare Technologies, Inc., a Florida corporation (the "Corporation"), adopts the following Articles of Amendment to its Articles of Incorporation ("Articles of Amendment"): ARTICLE I NAME ---- The name of the corporation is Dynamic Healthcare Technologies, Inc. ARTICLE II AMENDMENT --------- The following Section 2(d) shall be added to Section 2 of Article VI of the Corporation's Articles of Incorporation immediately following Section 2(c) of Article VI: " (d) In the event of the conversion of the Series C Preferred Stock in accordance with Section 6 hereof or upon the occurrence of a Change of Control (as defined below), each share of Series C Preferred Stock shall entitle the holder thereof the right to receive an amount equal to the greater of: (i) $0.125, or (ii) an accumulated contingent dividend of $0.08 per annum per share, as calculated on each share of Series C Preferred Stock from January 1, 2001 through the date of such event. A "Change of Control" for purposes of this Section 2(d) shall mean the occurrence of any of the following events: (1) Thirty percent (30%) or more of the Corporation's voting stock shall be acquired by any person, entity or affiliated group; (2) Any merger, consolidation or business combination pursuant to which Corporation is not the surviving corporation or thirty percent (30%) or more of the Corporation's voting stock shall be owned or controlled by any person, entity or affiliated group; Page 20 of 23 (3) A liquidation or dissolution of the Corporation; or (4) The sale of all or substantially all of the Corporation's assets." Section 6(c)(ii) of Article VI of the Corporation's Articles of Incorporation is hereby deleted in its entirety and is hereby amended to read as follows: "(ii) "Additional Stock" as used herein shall mean any shares of Common Stock issued (or deemed to have been issued) or rights, warrants, options or other exchangeable securities convertible into Common Stock (including shares of Common Stock held in the Corporation's Treasury) by the Corporation after July 29, 1998; but shall not include securities of the Corporation issuable pursuant to any Corporation employee benefit plan or employment contract to which the Corporation is a party, or any shares of Common Stock issued or issuable as a result of the exercise or conversion of rights, warrants, options, or other exchangeable securities convertible into Common Stock that were outstanding as of July 29, 1998. " ARTICLE III DATE OF ADOPTION ---------------- The Articles of Amendment were adopted on the 30th day of March, 2001. ARTICLE IV MANNER OF ADOPTION ------------------ The Board of Directors of the Corporation reviewed, considered, and pursuant to unanimous action by written consent in accordance with Section 607.0821 of the Florida Business Corporation Act duly adopted the Articles of Amendment, effective March 30, 2001, and declared the Articles of Amendment to be advisable and presented the same to the holders of all of the Corporation's outstanding Series C 8% Redeemable Convertible Preferred Stock ("Preferred Stock") for approval. Thereafter, the holders of all of the Corporation's outstanding Preferred Stock duly approved the Articles of Amendment on March 30, 2001 by written consent in accordance with Section 607.0704. The holders of all of the Corporation's outstanding Preferred Stock were the only holders of the Corporation's capital stock entitled to vote on the Articles of Amendment and the vote cast in favor of the Articles of Amendment by such shareholders was sufficient for approval of the Articles of Amendment. Accordingly, the Articles of Amendment has been authorized by all appropriate action under the Florida Statutes. IN WITNESS WHEREOF, Dynamic Healthcare Technologies, Inc. has caused these Articles of Amendment to be signed by Cris Assif, its President and Chief Executive Officer, on this 30th day of March, 2001. DYNAMIC HEALTHCARE TECHNOLOGIES, INC. By: /s/ Christopher Assif ----------------------- Cris Assif, President and CEO Page 21 of 23 FORM 10-Q DYMANIC HEALTHCARE TECHNOLOGIES, INC. EXHIBIT 2 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF DYNAMIC HEALTHCARE TECHNOLOGIES, INC. Pursuant to Sections 607.1003 and 607.1006 of the Florida Business Corporation Act Pursuant to the provisions of Sections 607.1003 and 607.1006 of the Florida Business Corporation Act, Dynamic Healthcare Technologies, Inc., a Florida corporation (the "Corporation"), adopts the following Articles of Amendment to its Articles of Incorporation: ARTICLE I NAME ---- The name of the Corporation is Dynamic Healthcare Technologies, Inc. ARTICLE II AMENDMENT --------- The first paragraph of Article VI of the Articles of Incorporation shall be deleted in its entirety and shall be replaced with the following: "The Corporation is authorized to issue Forty Million (40,000,000) shares of Common Stock at $.01 par value per share. The Corporation is authorized to issue Ten Million (10,000,000) shares of Preferred Stock, at $.01 par value per share, in such series and variations in the relative rights and preferences, including voting rights, if any, between such series as the Board of Directors shall determine. Upon filing of these Articles of Amendment each three shares of Common Stock, $.01 par value per share, of the Corporation then issued and outstanding or held in the treasury of the Corporation automatically shall be combined into one (1) share of Common Stock of the Corporation. There shall be no fractional shares issued. Fractional shares shall be rounded to the next whole share." ARTICLE III DATE OF ADOPTION ---------------- The amendment was adopted on the 7th day of June, 2001. Page 22 of 23 ARTICLE IV MANNER OF ADOPTION ------------------ The Board of Directors of the Corporation reviewed, considered, and at a meeting duly called and held on May 11, 2001, the Board of Directors unanimously duly adopted the foregoing amendment ("Recapitalization Amendment"), and declared the Recapitalization Amendment to be advisable and recommended and presented the same to the Corporation's stockholders for approval. On June 7, 2001, at a duly called meeting of the Board of Directors at which a quorum was present, the Board of Directors voted to effect the Recapitalization Amendment, subject to receipt of requisite shareholder approval thereof. Thereafter, at the annual stockholders meeting the Corporation's stockholders duly approved the Recapitalization Amendment on June 7, 2001. The number of votes cast in favor of the Recapitalization Amendment by the stockholders of the Corporation was sufficient for approval of the Recapitalization Amendment. Accordingly, the Recapitalization Amendment has been authorized by all appropriate action under the Florida Statutes. ARTICLE V EFFECTIVE TIME -------------- These Articles of Amendment shall become effective on June 28, 2001, at 5:01 p.m. Eastern Standard Time. IN WITNESS WHEREOF, Dynamic Healthcare Technologies, Inc. has caused this Recapitalization Amendment to its Articles of Incorporation to be signed by Christopher Assif, its Chief Executive Officer, on this 13 day of June, 2001. DYNAMIC HEALTHCARE TECHNOLOGIES, INC. By: /s/Christopher Assif --------------------- Christopher Assif, Chief Executive Officer Page 23 of 23

DYNAMIC HEALTHCARE TECHNOLOGIES INC 10-Q