FORM 10-KA NO. 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1994 or
___Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from _____________to______________
Commission File Number 0-12516
Dynamic Healthcare Technologies, Inc.
(Exact name of registrant as specified in its charter)
Nebraska 47-0643468
(State of Incorporation) (IRS E.I.N.)
101 Southhall Lane, Suite 210, Maitland, Florida 32751
Address of principal executive offices) (ZIP Code)
(407) 875-9991
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by
non-affiliates, based on the average bid and asked prices as of
March 31, 1995, was $5,087,700. A total of 5,251,819 shares of
the Company's common stock were held by persons and entities
believed to be non-affiliated on March 31, 1995, and the closing
bids and ask prices of the Company's common stock on this date
were $.8750 and $1.0625, respectively.
Indicate by checkmark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a Court.
Yes ____ No ____
As of March 31, 1995, there were 6,582,815 shares outstanding of
the issuer's only class of common stock.
This report consists of sixty-two (62) pages.
The index to exhibits appears on page twenty-two (22).
Documents Incorporated by Reference
(1) Portions of the definitive proxy statement for the Company's
1995 Annual Meeting of Shareholders, to be filed within 120
days of the end of the Company's fiscal year covered by this
report, pursuant to General Instruction G(3) to Form 10-K.
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, Inc.
PART I
Item 1. Business
Company Background
Dynamic Healthcare Technologies, Inc. ("Dynamic" or the
"Company"), was incorporated in 1977 in California as a computer
software consulting firm providing comprehensive services to the
healthcare industry. During the early 1980's, the Company moved
its operations to Nebraska, realigned its strategy and began the
development of proprietary computer information systems for the
medical industry. Its first product, a stand-alone module of a
total hospital information system, was sold in 1982 under the
name ILS-5 Clinical Laboratory Information System. The ILS-5
operated on the Prime Computer, Inc. ("Prime") 50-series hardware
platform.
The Company's initial public stock offering of 750,000 common
shares was completed in 1983. The Company's net proceeds in this
offering were approximately $2.9 million. In attempting to
develop a total hospital information system, the Company's
working capital was depleted, requiring it to seek federal
bankruptcy protection in 1985. During 1986, the Company
reorganized its operations while operating as a debtor in
possession under Chapter 11 of the Bankruptcy Code. During this
period, the Company changed its product focus to the marketing
and further enhancement of the ILS-5 laboratory system. The
Company's reorganization plan was approved and fully implemented
by the end of 1986, and all claims against the Company were fully
satisfied by the end of 1987.
In 1988 the Company began development of its ILS-5 product now
known as LabPro 2000 (LabPro) operating on the IBM AS/400
computer platform. In 1990, the ILS-5 became one of the first
laboratory systems operational on the AS/400 platform. The
Company currently has one hundred and ten ILS-5 client sites in
thirty-three states. Fifty-one of these clients operate on the
Prime 50-series hardware platform and fifty-nine operate on the
IBM AS/400 hardware platform.
The Company sold 350,000 shares of its common stock in a second
public offering in December 1991. The Company's net proceeds in
this sale were approximately $1 million. As part of the
offering, the Company also granted an option to the Underwriters
to purchase an additional 100,000 shares of common stock at the
public offering price to cover over-allotments. This option was
exercised in January 1992 and resulted in additional net proceeds
to the Company of approximately $290,000.
Prime announced during 1992 that it would discontinue its
operations, including the production and sales of the 50-series
computer systems and that ComputerVision Corporation, the
successor company to Prime, would provide hardware warranty and
maintenance services to all 50-series system users. As a direct
result of this announcement, the Company recorded a one time
charge of $2,000,000 in 1992. The Company continues to provide
support services to all its Prime based ILS-5 clients and has
developed plans to migrate these clients' ILS-5 systems to the
IBM AS/400 platform. In February 1995, all Prime clients were
notified by the Company that support services would terminate on
July 31, 1996. Management expects to obtain ongoing revenues
from this customer base from migration sales and continued
support services and to obtain operational cost efficiencies
from limiting support platforms. As such, the discontinuance
of support services to Prime based ILS-5 clients is not expected
to have significant detrimental impact on future operations.<PAGE>
On August
23, 1994, the Company, through its newly formed
wholly-owned subsidiary (then Dynamic Healthcare Technologies,
Inc.), acquired Dynamic Technical Resources, Inc. (DTR). The
transaction was consummated by acquiring all the outstanding
common stock of DTR in exchange for approximately 600,000 common
shares of the Company. The acquisition was accounted for using
the purchase method. DTR's primary business was professional and
technical consulting, support and maintenance services, document
imaging solutions and niche software products. As a result of
the merger, the Company services a total of approximately 200
customers.
At the commencement of the third quarter 1994, the Company
appointed a prior outside director of the Company as the new
Chief Executive Officer (CEO). Upon completion of the merger
with DTR, the former management of DTR and the Company's newly
appointed CEO comprised the "new management".
This "new management", during their preliminary review of the
Company's operations, internal controls and financial accounting,
discovered what was initially believed to be misapplication and
errors in the application of generally accepted accounting
principles in the Company's method of recognizing income in its
previously issued financial statements. This information was
promptly communicated to the audit committee of the Board of
Directors, who acted to authorize an independent internal
investigation. As a result of the completion of the
investigation, and concurrence by the Company's then current
auditors, Deloitte & Touche LLP, the previously issued financial
statements for the years ended December 31, 1992 and 1993
required restatement. In addition, the interim previously
reported financial statements for the quarterly periods ended
March 31, June 30, and September 30, 1994 required restatement.
The Company has filed an amended Form 10-KA for December 31, 1993
to restate the financial statements for the years ended December
31, 1992 and 1993. In addition, the Company filed amended Forms
10-QA that includes the restated financial statements for the
quarterly periods ended March 31, June 30, and September 30,
1994. The restatements were filed with the Securities and
Exchange Commission in January 1995.
As a result of the material nature of the changes reflected in
the restated financial statements, information learned during the
restatement process, and subsequent discoveries by the Company's
current management of inaccurate statements reported in the
Company's previously issued annual reports and Management's
Discussion and Analysis sections of Forms 10-Q and 10-K, the
Company engaged special legal counsel to further the internal
investigation and to assist management in preparing a detailed
plan of action. The recommendations of the special counsel,
which were ratified by the Company's Board of Directors, were to
dismiss the auditors Deloitte & Touche LLP, appoint new auditors
and to resolve any outstanding issues with the DTR shareholders
arising from the change in valuation utilized for the acquisition,
as a result of the restated financial statements.
Additionally, each individual that served in a management
capacity and a significant number of other individuals employed
prior to the acquisition of DTR no longer are employed by the
Company. This prompted the Board to relocate the Company's
headquarters to Florida (the domicile of DTR) and to rely heavily
on the operational support systems of the former DTR to avoid
business disruptions between the Company, its customers and
suppliers. The Company foresees that it will be placing
continued reliance upon the operational support systems of the
former DTR to maintain customer and supplier relationships and
avoid business disruptions. The Company will pursue any and all
recoveries available to the Company as a result of improprieties
that may have been perpetrated by members of prior management and
the prior auditors.
During March 1995, the Company issued 610,000 shares of common
stock as an adjustment to the consideration and purchase price as
it relates to the merger with DTR. This issuance represents full
settlement of all issues with the DTR shareholders as a result of
valuation utilized for the acquisition and the restatement of
financial statements. The DTR shareholders represent the core
executive management of the Company. The Company received a
general release from the DTR shareholders.
The Market
The Company participates in a variety of markets within the
healthcare information systems industry. The primary segments in
which the Company participates include, laboratory information
systems, document imaging solutions, anesthesia information
systems, professional and technical consulting, support and
maintenance services, and niche software products.
The Company's research shows that the current annual market for
healthcare information systems is $ 7.6 billion. Of this, $ 5
billion is sold to hospitals, $ 800 million to physicians'
clinics, $ 800 million to managed care organizations and $ 1
billion to the federal government. It is predicted that this
market will reach $ 15 billion per year by the turn of the
century. Major changes taking place in the healthcare delivery
system are also dramatically changing and expanding information
systems technology. The emerging healthcare information
infrastructure will be a composite of information technologies in
a variety of multi-vendor environments.
A typical community hospital, clinic, or ancillary service center
of the past has now become a part of a large and diverse regional
network. Fully capitated managed care, which the Company
believes to be the predominant form of healthcare reimbursement
in the future, is forcing the healthcare infrastructure to adopt
vertically integrated delivery systems. These new and complex
organizations allow providers to share resources and work
together to achieve more efficient methods of delivering care.
The marketing focus of these new organizations is to "capture"
their patients at birth and offer them a lifetime of health
services. Their information systems must span hospital
divisions, managed care business lines, physician group
practices, ancillary departments, and in many cases, a variety of
payer organizations. Emerging from these massive changes is an
estimated $ 15 billion per year market for software, services,
and systems integration oriented to "patient centered computing"
according to market research reports.
Products and Services
The Company's product and services strategy is to provide its
clients with the hardware platforms, software products,
technologies and services that leverage their investment in
existing systems, and to quickly bring to market, solutions that
support their new and diverse environments and business
strategies.
Clinical Products Include:
LabPro 2000 Clinical Laboratory Information System ("LabPro"
formerly "ILS-5"). LabPro, developed by the Company, provides an
integrated information system for use in the clinical laboratory.
It provides support for diagnostic and therapeutic decision
making with an emphasis on flexibility. Introduced in 1982, the
system was designed to enhance a laboratory's capabilities
throughout the entire process of ordering and testing, and
producing patient and management reports. LabPro is currently
serving 110 private and hospital laboratories, and addresses the
unique needs and concerns of each laboratory. Many sections and
functions of the laboratory are addressed with result-oriented,
cost effective solutions. As new services and special
information needs arise, LabPro can be tailored to meet these
changing needs by use of modular software and user definable
parameters. The system can, in many situations, be fully
integrated with current laboratory workflow to produce improved
information handling and enhance decision making. It enables the
laboratory to increase staff productivity, improve the efficiency
and quality of patient care, monitor and control the flow of
specimens through the laboratory, access necessary information
when needed, interface to automated laboratory instruments and
other information systems ensuring integrity of information
throughout the institution, and complies with pertinent internal
and external regulation.
The Company releases and installs new enhancements periodically.
LabPro has been installed in small rural community hospitals and
large urban medical centers, as well as private reference
laboratories, hospital-based reference laboratories, networked
multi-hospital sites, and group practice clinics.
The key to optimal functionality in the laboratory is
information generating and collecting accurate information and
accessing that information to reach conclusions and make decisions.
To help reach optimal functionality, LabPro processes
information through each of the following system functions:
* Admissions, Discharge, Transfer, and Patient Demographics
* Order Entry
* Bar Coding and Collection System
* Result Entry
* Section Management
* Quality Control
* Workload Testing Volume
* Results Inquiry and Reporting
* Continuous Quality Improvement Management
In addition to the core system, the Company provides various
specialty software modules to complement LabPro. These modules
may be incorporated into the system as the needs of the
laboratory grow and change. Some of these optional modules are:
Laboratory Management:
* Generates monthly and annual billable test volumes,
determines workstation and section statistics, provides
revenue management
* Provides performance statistics to evaluate laboratory
efficiency
* Monitors periodic fluctuations in patient admissions
* Tracks physician activity and priority usage of
laboratory services
* Captures personnel productivity and turnaround statistics
Advanced Microbiology:
* On-line workstation for culture identification and
processing
* User-defined sensitivity panels and dosage interpretation
schemes
* Epidemiology functions to track infection trends
* Data capture and manipulation for infection control
* Specialized patient report formats
Transfusion Service Manager:
* Integrated use of bar coding
* Blood product inventory control system
* On-line storage of patient blood bank histories
* User defined formats for transfusion labels and product
tags
* Production of management and quality assurance statistics
* Complete regulatory compliance
Anatomic Surgical Information Retrieval System (ANSIRS):
* Optical disk archival storage and WordPerfect integration
* Workflow orientation
* GYN QA reports to monitor screening statistics and
specimen quality
* On-line case review and sign off, clinical result inquiry
and complete patient history
* Tracking and reporting to Tumor Registry
* Diagnoses correlation through extensive QA reporting
Systems are installed by the Company's internal team of medical
technologists using customized installation plans. They provide
the laboratory with comprehensive training and documentation to
ensure efficient utilization of all products purchased. Once the
system is fully installed, the Company's National Support Center
provides seven day, twenty-four hour telephone and on-line
support and remote diagnostics.
Monitrax (TM) (Anesthesia Information System):
The Company is in the final stages of the development cycle,
Beta-site version (test site) with respect to a new product
offering. This new product "Monitrax" is a computerized
point-of-care system developed in cooperation with
anesthesiologists, nurses and clinicians. It is pen-based, which
means entry of information is made with a pen connected to a
small, lightweight, character recognition pad. Precious space is
saved in the OR anesthesia area by using this technology. Every
surgical case produces large quantities of information that can
be used to make patient care decisions during the perioperative
process, as well as during the remainder of the patient's stay.
Monitrax puts all that information at the fingertips of the
clinician. Monitrax operates in a personal computer, local area
network (PC-LAN) environment.
The Company introduced Monitrax at the American Society of
Anesthesiologists conference in October 1994. Monitrax is a
joint development effort by the Company and Bridger Systems, Inc.
(Bridger) of Bozeman, MT, who designed and manufactured the
specialized pen-based software tool set, and who has licensed the
Company to the use of certain software.
The Company will pay royalty fees to Bridger upon the licensing
of Monitrax to the Company's customers. Additionally, the
Company has an option to acquire the Monitrax software from
Bridger upon the occurrence of certain events.
Image Solutions (IBM Medical RecordsPlus/400):
The Company entered into an agreement with IBM Corporation to
provide customer maintenance, support, and program product
enhancements to the IBM Medical RecordsPlus/400 document imaging
software product. The Company is responsible for providing
defect maintenance, support and product enhancements, and offers
customers a wide range of additional services including telephone
and remote diagnostic assistance, problem resolution,
implementation, training and consulting services. IBM continues
to maintain ownership and market the product subject to paying
licensing fees to the Company. The Company also markets the
product under the terms of its "National Solution Provider"
Business Partner agreement with IBM.
The average hospital stay often results in 100 pages of chart
information. A 400-bed hospital can generate more than 15,000
pages of information every day and these records are often
retained 35 years.
Paper records take up valuable space that could be devoted to new
services. In fact, many hospitals and clinics now rent warehouse
space to store records, which means added operations and
personnel costs. It also means retrieval delays, a frustrated
staff and reduced productivity.
The Company offers an advanced management solution with Medical
RecordsPlus/400. Based on IBM's ImagePlus (TM) image processing
system, this system gets its information from scanned or faxed
documents - or directly from existing hospital systems.
With the IBM Applications System/400 (TM) as host, Medical
RecordsPlus/400 provides easy records access to physicians,
medical records personnel, nurses, pharmacists and claims
processors.
Dynamic Decision Support (DDS):
The Company, through the merger with DTR, acquired (by exclusive
license) the software assets of InforMED, Inc. The software
operates on the IBM AS/400 hardware. The applications were
designed specifically for the health industry and are currently
installed and operating at hospitals interfaced to various
hospital information system vendor systems. The Company will pay
InforMED licensing fees until a certain ceiling has been paid.
Such fees shall be paid as a percent of license revenues received
by the Company and shall continue until the earlier of the fourth
(4th) anniversary of the agreement or the payment of the
aggregate amount.
DDS Applications Include:
Dynamic General Ledger communicates with existing patient
accounting, accounts payable and payroll systems. Flexible in
design, Dynamic General Ledger accommodates any number of
entities, maintains up to five years of historical data at a
summary level, and provides consolidated reporting.
Dynamic Budgeting and Forecasting System allows users to prepare
and maintain up to five different budget scenarios for the
current year, and up to five future years. The Revenue
Forecasting Module (RFM) allows hospitals to forecast patient
utilization statistics and gross revenues. Historical data is
maintained for up to five prior years and is used to predict future
patient utilization statistics. An executive summary
allows managers to focus on the top revenue producing services in
each department.
The Dynamic Expense Forecasting Module (EFM) is used to develop
budgets for hospital expenses based on the patient utilization
data computed using the RFM.
Standard Cost Accounting System allows hospitals to prepare and
maintain cost information by product (treatment profile) and by
service item/procedure. Cost data for individual service items
can be developed using engineered standards relative value units
(RVU's) or micro costing techniques. Additionally, Cost
Accounting provides a patient care unit (PCU) based "Executive
Level" costing function which allows managers to focus on the key
elements of cost while grouping miscellaneous items into a single
summary line.
Productivity Management System is used to query and report
payroll and labor cost information.
Major Suppliers
LabPro can be operated on two hardware platforms: the IBM AS/400
line of mid-range computer systems and the Prime 50-Series family
of super minicomputers. The Prime based LabPro was introduced in
1982 and the IBM AS/400 based LabPro has been available since
1989. During 1992, Prime announced that it was discontinuing its
operations including the production and sale of the 50-Series
hardware platform. Hardware warranty and maintenance services
for the 50-Series machines are now being provided by
ComputerVision Corporation, the successor company to Prime. The
Company continues to provide software support services to its
Prime based LabPro clients while it carries out its plan to
provide a cost effective conversion option for those clients'
systems to the Company's IBM AS/400 platform on or before July
31, 1996.
The Company no longer actively markets Prime based LabPro
systems, and plans to completely abandon this platform once all
its Prime clients have converted to the AS/400 platform. During
the fourth quarter of 1992, the Company recorded a $2 million
provision for estimated losses and write-downs associated with
the discontinuance of this product line.
The Company primarily offers its LabPro and Image Product
Solutions on the IBM AS/400. IBM provides direct hardware
maintenance for the AS/400 system. The AS/400 provides the
Company's clients with flexibility and growth opportunities
through fully compatible upgrades. If IBM's AS/400 products
should become unavailable, the Company's business would be
adversely affected. Other product solutions of the Company
operate on IBM Compatible Personal Computers (PC). These PC's
can be purchased from a variety of vendors.
The Company maintains only a minimal amount of computer equipment
inventory since equipment configurations of systems sold by the
Company vary from client to client and delivery schedules from
its vendors are typically 60 days or less from the date of order.
Sources of Revenue
Hardware - Computer system equipment sales and support accounted
for 26.8% of total operating revenues during 1994 as compared to
40.9% and 41.1% during 1993 and 1992, respectively. Customers
may purchase equipment from the Company or directly from the
equipment manufacturer. The Company is an IBM "National Solution
Provider" business partner and as such is an authorized
remarketer of the IBM AS/400 hardware components. In addition,
the Company is an authorized remarketer of personal computer
equipment for IBM, Hewlett Packard, Compaq and others. Computer
system equipment purchases occur in connection with new system
sales and when existing clients upgrade and/or add to their
existing hardware configurations. The Company also received
hardware support revenue from one of its vendors in 1994, 1993
and 1992 for providing hardware troubleshooting services to some
of its clients.
Application Software - Application software license revenues
accounted for 26.5% of total operating revenues during 1994 as
compared to 36.9% and 36.5% during 1993 and 1992, respectively.
Software license and sub-license revenues occur with new system
sales and when existing clients add application software products
to their existing systems. The Company directly licenses a
variety of software product offerings which are solely owned by
the Company. Additionally, the Company sub-licenses software
product offerings subject to joint marketing agreements and
sub-licensing agreements which are owned by others.
Maintenance and Support - Software support and maintenance
services accounted for 46.7% of total operating revenues during
1994 as compared to 22.2% and 19.4% in 1993 and 1992,
respectively. Software support and maintenance service revenues
are derived from the Company's customers who contract for these
services. The Company offers software support and maintenance
services for the software products that it licenses and
sub-licenses to customers, as well as to customers of certain
other healthcare information system companies in which the
Company has the specific software/hardware, application
knowledge, and available and trained resources. In most
instances, these services commence at the time or the customer
installs the software products or has placed them in a production
environment. The contracts may include continuous (24) hour
seven (7) day a week telephone and dial up modem remote
diagnostic support or some lesser specified level of service.
Customers may, in certain instances, contract to receive periodic
updates and enhancements to the licensed software products.
Joint Marketing and Sub-License Agreements - The Company believes that
its ability to sell information systems solutions and
services to healthcare institutions is enhanced by forming
alliances with other healthcare information system vendors which
offer products, solutions and services complimentary to those of
the Company. Examples of these types of products might be
information systems for other ancillary departments within the
hospital such as pharmacy, medical records or nursing. They also
include large hospital information system products that do not
offer a fully featured laboratory system product, a document
imaging solution or anesthesia information system.
Joint Marketing Costs accounted for .2% of total operating
expenses during 1994 as compared to 3.7% and 0% during 1993 and
1992, respectively. The Company entered into the first agreement
of this type with GTE Health Systems, Inc. (GTEHS) in 1992 to
market the Company's LabPro System to current and prospective
GTEHS clients. The Company's second agreement of this type was
entered into with IBAX (TM) Healthcare Systems during 1993 to
market the Company's LabPro system to current and prospective
IBAX Series 3000 and 4000 system clients. The Company entered
into a third agreement of this type during March 1994 with First
Coast Systems, Inc. (FCS) to market the Company's LabPro System
to FCS's current and prospective APACS Hospital Information
System clients. All of these companies', hospital information
systems operate on the IBM AS/400. During 1994, GTEHS was
acquired by Shared Medical Systems, Inc., and IBAX was acquired
by HBO & Company. As a result of these mergers, both of the
agreements have been terminated. The agreement with FCS
continues to be in effect.
In 1994, the Company entered into an agreement with the IBM
Corporation to provide customer maintenance, support, and program
product enhancements for IBM's "Medical RecordsPlus/400" imaging
software product. Medical RecordsPlus/400 is a document imaging
software product that offers physicians, medical record
personnel, nurses, pharmacists, claims processors, and other
healthcare professionals, access to a central electronic medical
record. Based on IBM's ImagePlus Workfolder Application
Facility/400 (R) product, it is able to receive information from
scanned paper documents, or directly from existing hospital
information systems. Document images are archived permanently
and can be retrieved by multiple authorized users within a
healthcare network. The system benefits customers by creating
on-line access to information thereby streamlining workflow
procedures. The Company will be responsible for providing
maintenance, support and product enhancements and will offer
customers a wide range of additional services including telephone
and remote diagnostic assistance, problem resolution,
implementation, training and consulting services. Under the
terms of the agreement, IBM, a market leader in document image
solutions, will continue to maintain ownership and market the
product. The Company will also market the product. The Company
will be paid a license fee by IBM. It will be based on a
percentage of total license fees charged to all IBM customers for this product.
The Company entered into an agreement with Bridger Systems, Inc.
(Bridger) during 1994 for the development of and exclusive
software license for Monitrax. Monitrax is a new perioperative
information management system which automates the entire
anesthesia care process. Monitrax allows for the collection and
presentation of patient, surgical and anesthesia data through
every phase of the perioperative process, produces a complete
anesthesia record and allows easy entry of vital signs,
medications, inhaled agents, fluids and notes. This system
utilizes a pen-based technology for its primary user interface.
Monitrax contains pre-operative, intra-operative, Post Anesthesia
Care Unit (PACU), and post-operative modules. It creates
administrative reports, monitors quality standards, and provides
a patient oriented database which can be queried for clinical
research and patient outcomes. The Company will, on an exclusive
basis, license, install and support Monitrax to its customers.
The Company will pay royalties to Bridger as a percent of license
fees charged to customers. In addition, the Company has the
option to acquire all right, title and ownership interest in and
to Monitrax subject to the occurrence of certain events.
The Company entered into an agreement with Healthcare
Communications, Inc. (HCI) to sell and sub-license their
Cloverleaf (R) integration engine technology. Cloverleaf (R) is
a data interchange system which solves the complex problems of
multiple hardware platforms, vendors and standards existing in
the same environment. It allows the connection of disparate
applications via an open architecture concept, and provides the
means to move data freely among them.
Under the terms of the agreement, the Company will sell
Cloverleaf (R), will provide first level maintenance support to
those licensed users, and may participate in the product
implementation process. HCI will provide second level
maintenance support.
The Company entered into a marketing agreement with Home Care
Information Systems, Inc. (HCIS). Under the terms of the
agreement, the Company and HCIS will work cooperatively to sell
the HCIS home health software to the Company's client base, and
HCIS will provide training, implementation, and support services.
HCIS is a leading supplier of software and services to the home
health market. Their software includes specialized modules for
home care as well as hospice providers; complete clinical systems
with an option for portable data collection devices; electronic
claims and remittances; scheduling; inventory; and a full range
of accounting packages. The software is available on a variety
of hardware platforms including networked and stand-alone PC's,
the IBM AS/400 (R) and the IBM RISC/6000 (R).
The Company entered into a marketing agreement with ShowCase
Corporation for the distribution and sub-license of their
ShowCase VISTA Pro product. This product provides tools to
enable database queries to be incorporated into the Company's
AS/400 software products as well as enable the Company's
customers to construct their own database queries.
The Company has an agreement with First Data Bank (FDB) to sell
and sub-license their National Drug Data File (NDDF) and their
American Hospital Formulary System (AHFS). Both of these are
pharmacy drug data base and informational files which incorporate
drug product information, indications, complications and other
clinical information used by pharmacists and other clinicians in
their use of advanced information systems. The Company in some
instances incorporates the delivery and periodic updates of this
data for use with other vendors software product solutions and in
other cases offers a stand alone version to its customers.
Major Clients
Columbia Healthcare Corporation (Columbia) (formerly -
Humana/Galen) accounted for 2%, 11% and 26% of the Company's
total revenues during 1994, 1993 and 1992, respectively.
Columbia has been a client of the Company's since 1983. The
Company and Columbia executed a perpetual license agreement
during 1990 for various LabPro software products. The agreement
allows Columbia to install the Company's Laboratory Information
Systems, including several enhancements modules, in any of
Columbia's United States hospitals. During 1993, Humana split up
its operations and transferred its interest in its contract with
the Company to Galen Healthcare, Inc., a for-profit healthcare
provider that owns and operates 79 U.S. hospitals. In 1993,
Galen merged with Columbia Healthcare Corporation.
Humana/Galen's interest in the contract has been transferred to
Columbia. The Company received the final of three annual
installment payments of approximately $650,000 for this license
agreement during the third quarter of 1992.
No other customer accounted for more than 10% of the Company's
total revenues during 1994,1993 or 1992.
Backlog
The Company had contracts which it believed to be firm for the
delivery of systems and services ("backlog"), totaling
approximately $ 3.7 million on March 24, 1995. In addition, the
Company as of March 25, 1995 has contracts for the delivery of
software support services billable at an annual rate of $ 3.3
million.
Competition
The Company's competition comes from multiple sources as the
Company participates in various segments of the healthcare
information systems industry. The nature of the competition often
depends on the market segment in which the Company is
competing, as well as, on the size of the system sale and the
size of the healthcare institution involved. Competitors include
large hospital information system ("HIS") vendors selling
laboratory, image, anesthesia, other departmental information
software products to existing clients or as an adjunct to the HIS
sale, laboratory information system ("LIS") vendors offering
fully-featured systems, and LIS vendors selling networked
microcomputer systems, image system ("IS") vendors offering
fully-featured systems, and anesthesia information system ("AIS")
vendors offering fully-featured systems. Additionally, in the
professional and technical consulting segment, the Company
competes with the national big six firms as well as a few
national and regional healthcare specialty consulting firms.
Hospital information system vendors, including Medical
Information Technology, Inc., HBO & Company, First Data
Corporation, Cerner Corporation and Shared Medical Systems, Inc.,
occasionally compete with the Company. These vendors often have
an advantage over the Company when a hospital is searching for a
complete HIS solution, and are often in a position to offer
substantial discounts for the purchase of an ancillary LIS, IS,
or AIS system. Nevertheless, the Company has developed and
installed interfaces between its systems and many of these HIS
systems.
The Company also competes with other LIS vendors that offer
fully-featured systems on computer platforms such as Digital
Equipment Corporation's VAX systems, Hewlett Packard systems, and
IBM Corporation's RS/6000 and AS/400 systems. These companies
include Cerner Corporation, Sunquest Information Systems,
Dynacor, Inc., 3M Health Information Systems, Citation
Corporation, Advanced Laboratory Systems, Inc., Antrim
Corporation, and Soft Computer Consultants. Dynacor, Inc. is the
only other laboratory system vendor known to the Company to
offer an IBM AS/400 based Laboratory Information System. Cerner,
Sunquest, Citation and Dynacor compete with the Company in the
majority of new accounts and are considered by the Company to be
its principal competitors. Some of these companies have a larger
installed base and greater financial resources than does the
Company.
The Company primarily markets its image solutions in conjunction
with IBM, and in many instances as a joint proposal to customers.
IBM is a market leader in document image solutions. There are
HIS vendors as well as other specialty image vendors who offer
fully-featured image systems.
The Company has not entered the active marketing and sales of its
Monitrax product, as development is in the final stages and beta
validation sites need to be implemented. A variety of vendors
offer AIS that are fully-featured.
Product Development
The Company's expenditures relative to the enhancement of
existing software products and the development of new software
products continues to be one of the Company's most significant
investments. As has been true for the last several years, the
enhancement of existing products continues to be the Company's
largest development activity. Other development projects during
the last three years include, but were not limited to:
* The conversion of several enhancement modules from the
Prime 50-Series platform to the IBM AS/400 platform,
* The redesign of the Company's Anatomic Surgical
Information Retrieval System (ANSIRS) on a networked
PC-based stand-alone system.
* The Laboratory Data Repository which aids decision
support through database linkages, laboratory data
storage, query and reporting utilizing standard SQL
database concepts,
* The joint development of Monitrax, the new anesthesia
information system. This is a pen-based point-of-care
system developed in cooperation with anesthesiologists,
nurses and clinicians. The entire perioperative process
is automated with this technology. A clinical database
is captured for future query and analysis.
Actual expenditures for software development activities were
$2,123,000, $1,927,000 and $1,943,000 for the years ended
December 31, 1994, 1993 and 1992, respectively. These amounts
represent total expenditures for research and development
activities and ignore the accounting impact of the capitalization
of software development costs.
Government Regulation
The healthcare facilities that comprise the primary market for
the Company's products must comply with various federal, state
and local statutes and regulations. One of the Company's LabPro
products, the Transfusion Service Manager, is considered to be a
"medical device" by the FDA. This subjects the Company to FDA
registration, compliance with Current Good Manufacturing
Practices, ("CGMP"), adverse event reporting, and other medical
device reporting and registration regulations. It is possible
that in the future, some or all of the Company's other software
systems may be subject to approval or inspection by the Food and
Drug Administration. In such event, there can be no assurance
that the Company will be able to secure the required Food and
Drug Administration approval for its products in a timely manner.
Delays in obtaining necessary governmental approval could have a
material adverse impact on the introduction of the Company's
future software systems. The Company is now devoting the
resources necessary to comply with FDA regulations for its
products and it plans to continue this practice in the future.
Patents and Trade Secrets
The Company does not have patent protection for any of its
systems and it has chosen not to seek copyright protection for
any of its application software products. The Company relies on
trade secrets laws, internal access controls, and the
confidentiality and proprietary information provisions of its
systems sales contracts to protect its systems. In addition, the
Company's policy and procedure manual requires all employees and
contractors to execute standard confidentiality and trade secret
agreements, as well as conform to the written policies in effect.
The Company has applied for a trademark with the United States
Patent and Trademarks office for the Monitrax Anesthesiology
Information System.
Employees
The Company had ninety-five full time employees on March 24,
1995, as compared to eighty-four on March 1, 1994. None of the
Company's employees are covered by collective bargaining
agreements. The Company requires all employee to execute a
standard employee confidentiality and trade secret agreement. In
addition, each employee if furnished with the Company's standard
policy manual and is expected to comply with all of its
provisions. The Company believes that employee relations are
good.
Item 2. Properties
The Company's corporate offices were relocated during the 4th
quarter of 1994 from Lincoln, NE to Longwood, FL which is near
Orlando. The Longwood location consists of approximately 9,000
square feet of office space under lease which expires January 31,
1996. Due to the Company's need for a larger facility the
Company has leased new office space in Maitland, FL which is near
Orlando, and which will replace the Longwood office space in
approximately May 1995. The Company has negotiated a termination
settlement to be released from the Longwood lease for an
aggregate payment of $30,000. The new corporate offices in
Maitland, FL consist of approximately 14,600 square feet of
office space, with additional space that is under option, under a
lease that expires in 1999. The Company's Lincoln, NE offices
consist of approximately 23,200 square feet of office space under
a lease which expires in 1997. The Company has entered into a
formal plan of restructure which includes the planned closing of
the Lincoln location. As of April 1, 1995, the Company has been
released from approximately 8,550 square feet for an aggregate
termination charge of $26,000. The Company is working closely
with Lincoln real estate agents to either sub-lease or be
released from the remaining space. The Company believes that the
current spaces under lease will be sufficient to meet the
Company's needs for the foreseeable future. If additional space
is required, the Company believes it will be able to obtain such
space. The Company owns no real property. The building in Longwood,
FL is owned by the Company's CEO and the Company's
President and COO. The Company believes that it is paying fair
market rent for this space.
Item 3. Legal Proceedings
The Company has instituted an action against James A. Terrano,
the Company's former President and Chief Executive Officer, in
the District Court of Lancaster County, Nebraska, alleging that
Mr. Terrano made fraudulent and negligent representations to the
Company's Board of Directors which resulted in the Company's
acceptance of a handwritten memorandum modifying Terrano's
employment agreement, breached his fiduciary duty to the Company
and breached his obligations under his employment agreement with
the Company. The Company is seeking to recover damages in the
amount of $46,278.19 in addition to a declaratory judgment
determining that no severance pay is due Mr. Terrano and that the
handwritten memorandum is invalid and unenforceable and does not
modify the employment agreement.
In another matter, the Company is a defendant in an action filed
by the Company's former Vice President, in the District Court of
Lancaster County, Nebraska, alleging that the Company did not
lawfully terminate her for cause, and therefore, the Company is
in breach of her employment agreement. The former employee is
seeking severance payment. The Company is vigorously contesting
this case.
These cases are in the early stages of discovery and it is not
possible to evaluate the likelihood of a favorable or unfavorable
outcome of either case at this time.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security
holders during the fourth quarter of 1994.<PAGE>
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
(a) The information called for by this item is
incorporated herein by reference from pages 55-57 of
Exhibit 13 to this Form 10-K.
(b) As of August 28, 1995, there were 1662 shareholders
of record of the Company's Common Stock.
(c) The Company has declared no cash dividends on its
common stock since its inception and plans to
continue to invest all earnings back into the Company
in the foreseeable future.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by
reference from page 28 of Exhibit 13 to this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required by this item is incorporated herein by
reference from page 29 through page 38 of Exhibit 13 to this Form
10-K.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by
reference from page 39 through page 57 of Exhibit 13 to this Form
10-K.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On February 14, 1995 the Registrant's Board of Directors acting
upon the recommendation of the Registrant's Audit Committee,
current officers and special legal counsel Crosby, Guenzel,
Davis, Kessner & Kuester of Lincoln, Nebraska, approved a
resolution to dismiss the Registrant's independent accountant
Deloitte & Touche, LLP (hereafter, "Deloitte").
The recommendation to dismiss Deloitte was based upon; (1)
information learned during the process of restating the financial
results for the years ended December 31, 1992 and 1993 and the
nine months ended September 30, 1994, (2) the magnitude of the
restatements set forth in amendments to the Registrant's 1994
Forms 10-Q and Form 10-K for December 31, 1993, filed with the
Securities and Exchange Commission on January 23, 1995, (3)
discoveries by the Company's current officers subsequent to an
independent investigation conducted during the fourth quarter of
1994, and (4) the conclusions of special legal counsel's
investigation. All of the aforementioned information question
whether Deloitte conducted the 1993 and 1992 audits in accordance
with generally accepted auditing standards (hereafter, "GAAS").
The Company believes that the magnitude and nature of the revenue
restatements indicates more than a mere oversight, error or
mistake. Upon initial examination by a special independent
accounting firm, it was reported to the Registrant's Audit
Committee that twenty three (23) contracts had some element of
revenue recognition by the Registrant before the appropriate
stage for recognition as determined by generally accepted
accounting principles (hereafter, "GAAP"). The actual
restatements affected thirty seven (37) contracts and aggregated
$901,867 prior to December 31, 1993. These restatements
question: (1) Whether sufficient audit procedures were employed
by Deloitte; (2) Whether due professional care was exercised by
Deloitte; (3) Whether Deloitte adequately planned and
supervised their engagements with the Registrant.
Current management has determined that certain former officers,
among other things, were materially involved in the confirmation
process. The confirmation process comprised a substantial
portion of the audit support gathered by Deloitte with respect to
revenue recognition and the outstanding balance of unbilled
receivables. This intervention should have been readily
discerned by Deloitte, if it in fact was undetected, and should
have resulted in extending the scope of work performed by
Deloitte to accumulate sufficient relevant data to afford a
reasonable basis for Deloitte's audit conclusions. Preliminary
examinations and discussions with Deloitte do not indicate that
adequate substantive procedures were performed.
The aforementioned former officers maintained complete discretion
over revenue recognition, and periodically reported the financial
position and results of operations to the Board. Acceptable
accounting practices normally require that revenue be recognized
only after transactions are processed through a thorough system
of internal controls and accounting procedures designed to ensure
that GAAP is followed, with officer discretion limited to
questions of interpretation. Deloitte was aware, or should have
been aware, of the inherent unreliability of the Company's
control environment, and accordingly should have expanded the
scope of its audit procedures. The Board became aware of the
misapplications of GAAP contained in the financial statements
provided to it and to others following the independent
investigation.
After inquiries by management, general counsel and special
counsel, no information has come to the Registrant's attention
that is contrary to the preliminary conclusions set forth above
regarding possible improprieties by Deloitte. In management's
opinion, the environment of the current investigation created an
impairment of Deloitte's independence under the AICPA's Code of
Professional Conduct. This independence impairment warranted
Deloitte's dismissal to ensure timely compliance with the
Registrant's reporting requirements by engaging successor
independent accountants.
Deloitte has rendered an unqualified opinion on the restated
financial statements for the years ended 1993 and 1992. There
were no disagreements with Deloitte on any matter of accounting
principles or practices, financial statement disclosure or
auditing scope of procedure, which disagreement(s), if not
resolved to the satisfaction of Deloitte, would have caused it to
make reference to the subject matter of the disagreements in
connection with its report covering the restated financial
statements for the years ended December 31, 1993 and 1992 nor for
the Registrant's restated quarterly reports for the first, second
and third quarters of 1994.
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by
reference from the Company's Proxy Statement for its 1995 Annual
Meeting of Shareholders.
Item 11. Executive Compensation
The information required by this item is incorporated herein by
reference from the Company's Proxy Statement for its 1995 Annual
Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item is incorporated herein by
reference from the Company's Proxy Statement for its 1995 Annual
Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference from the Company's Proxy Statement for its 1995 Annual
Meeting of Shareholders.
<PAGE>
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) The following documents are filed as a part of this
report:
1. Financial Statements
-Independent Auditors' Report on the consolidated
financial statements as of and for the year ended
December 31, 1994.
-Independent Auditors' Report on the financial
statements as of and for the years ended December
31, 1993 and 1992.
-Balance Sheets as of December 31, 1994 and 1993.
-Statements of Operations for the years ended
December 31, 1994, 1993 and 1992.
-Statements of Shareholders' Equity for the years
ended December 31, 1994, 1993 and 1992.
-Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992.
-Notes to Financial Statements.
The Financial Statements listed above are all incorporated by
reference to pages 39 through 61 of Exhibit 13 to this Form
10-KA.
2. Financial Statement Schedules
Index Schedule No. Page No.
Independent Auditors' Report on
Financial Statement Schedules as of
and for the Year Ended December 31,
1994. --- 18
Independent Auditors' Report on
Financial Statement Schedules as of
and for the Years Ended December 31,
1993 and 1992. --- 19
Valuation and Qualifying Accounts II 20
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes thereto.
3. Exhibits
Exhibit 11: Statement regarding computation of per
share earnings.
Exhibit 13: 1994 Annual Report to Security Holders.
(b) The following reports on Form 8-K were filed by the
Registrant during the quarter ended December 31,
1994:
Item Reported Date of Report
Financial Statements of Business
Acquired October 14, 1994
New Officer, New Director and
Resignation of Director December 8, 1994
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dynamic Healthcare Technologies, Inc.:
We have audited the consolidated financial statements of Dynamic
Healthcare Technologies, Inc. (formerly Terrano Corporation) and
subsidiary as of and for the year ended December 31, 1994 and
have issued our report thereon dated March 31, 1995. Such
consolidated financial statements and our report thereon are
included elsewhere in this 1994 annual report on Form 10-KA. In
connection with our audit of the aforementioned consolidated
financial statements, we have also audited the related 1994
information in the consolidated financial statement schedule as
listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion on the 1994 information in this
financial statement schedule based on our audit. In our opinion,
the 1994 information in such financial statement schedule, when
considered in relation to the basic 1994 consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/S/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Orlando, Florida
March 31, 1995
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Terrano Corporation:
We have audited the balance sheet of Terrano Corporation as of
December 31, 1993, and the related statements of operations,
shareholders' equity, and cash flows for the years ended December
31, 1993 and 1992, and have issued our report thereon dated March
16, 1994 (January 11, 1995 as to notes I and J); such financial
statements and report are included elsewhere in this 1994 annual
report on Form 10-KA. Our audits also included the 1993 and 1992
information in the financial statement schedule of Terrano
Corporation listed in Item 14. This financial statement schedule
is the responsibility of the Company's management. Our
responsibility is to express an opinion on the 1993 and 1992
information in the financial statement schedule based on our
audits. In our opinion, the 1993 and 1992 information included
in such financial statement schedule, when considered in relation
to the basic 1993 and 1992 financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
/S/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Orlando, Florida
March 16, 1994
(January 11, 1995 as to Allowance for Doubtful Accounts
Receivable information)
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Schedule II
<TABLE>
<S> <C> <C> <C> <C>
Description Balance Charged Write-offs, Balance
At To Costs Retirements At End
Beginning and and of
of Year Expenses Collections Year
Year Ended December 31, 1992:
Allowance for
Doubtful
Accounts
Receivable $ 80,000 $ 137,438 $ 17,438 $ 200,000
Accumulated
Amortization
of Capitalized
Software
Development
Costs $ 883,336 $ 555,436 $ 979,804 $ 458,968
Year Ended December 31, 1993:
Allowance for
Doubtful Accounts
Receivable $ 200,000 $ 29,389 $ 39,717 $ 189,672
Accumulated
Amortization of
Capitalized
Software
Development
Costs $ 458,968 $ 384,569 $ - $ 843,537
Year Ended December 31, 1994:
Allowance for
Doubtful Accounts
Receivable $ 189,672 $ 179,409 $ 119,081 $ 250,000
Accumulated
Amortization of
Capitalized
Software
Development
Costs $ 843,537 $ 505,613 $ 76,055 $1,273,095
</TABLE>
<PAGE>
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Dynamic Healthcare Technologies, Inc.
Commission File No. 0-12516
IRS E.I.N. 47-0643468
By /S/PAUL S. GLOVER Date November 14, 1995
Paul S. Glover,
Vice President of Finance, CFO
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/S/THOMAS J. MARTINSON Chairman of the Board November 14, 1995
Thomas J. Martinson
/S/DAVID M. POMERANCE CEO, Secretary November 14, 1995
David M. Pomerance & Director
/S/MITCHEL J. LASKEY President, COO, November 14, 1995
Mitchel J. Laskey Treasurer & Director
/S/PAUL S. GLOVER Vice President of November 14, 1995
Paul S. Glover Finance, CFO
/S/JERRY L. CARSON Director November 14, 1995
Jerry L. Carson
/S/KENNETH C. COON Director November 14, 1995
Kenneth C. Coon
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
Description of Exhibits Page Number
Exhibit 11 Statement regarding computation
of per share earnings. 23
Exhibit 13 Annual Report to Shareholders of
Dynamic Healthcare Technologies,
Inc. for the fiscal year ended
December 31, 1994. 25
<PAGE>
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
EXHIBIT 11
Statement Regarding
Computation of
Per Share Earnings
<PAGE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
COMPUTATION OF WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
AND
EARNINGS PER SHARE FOR THE YEARS ENDED
DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
Years Ended December 31,
<S> <C> <C> <C>
1994 1993 1992
Earnings (loss) available
for common shareholders:
Net earnings (loss) $(4,307,500) $ 245,684 $(2,118,121)
Weighted average common and
common equivalent shares
outstanding:
Primary:
Weighted average number
of common shares
outstanding 5,536,202 5,275,160 5,266,329
Dilutive effect of options
and warrants using average
market price - 87,465 -
Weighted average common and
common equivalent shares
outstanding 5,536,202 5,362,625 5,266,329
Net earnings (loss) per
share - primary $ (0.78) $ 0.05 $ (0.40)
Fully diluted:
Weighted average number
of common shares out-
standing 5,536,202 5,275,160 5,266,329
Dilutive effect of options
and warrants using the
greater of average market
price or period end market
price - 107,070 -
Weighted average common
and common equivalent
shares outstanding
assuming full dilution 5,536,202 5,382,230 5,266,329
Net earnings (loss)
per share - fully
diluted $ (0.78) $ 0.05 $ (0.40)
</TABLE>
<PAGE>
FORM 10-KA NO. 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
EXHIBIT 13
Annual Report to Shareholders
of Dynamic Healthcare Technologies, Inc.
for the Fiscal Year Ended December 31, 1994
<PAGE>
OUTSIDE FRONT COVER
Dynamic Healthcare Technologies, Inc.
1994 Annual Report
<PAGE>
INSIDE FRONT COVER
Dynamic Healthcare Technologies, Inc. (Dynamic) is a software
developer, systems provider, and marketer of laboratory,
anesthesiology, document imaging, and other niche products
in the healthcare information systems industry. Our company's
product and services strategy is to provide our customers with
the hardware platforms, software products, technologies and
services that leverage their investments in existing systems,
and to quickly bring to market, solutions that support their
new and diverse environments and business strategies.
Dynamic was formed in August, 1994 through the merger of
Terrano Corporation with Dynamic Technical Resources, Inc.
Contents
Financial Summary
To Our Shareholders
Healthcare in the Nineties - An Evolving Industry
Management's Discussion and Analysis
Financial Statements and Notes
Independent Auditors' Report
Board of Directors and Officers
Shareholders Information
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1994
(In thousands except per share data and current ratio)
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Operating Revenues $6,987 $9,688 $8,411 $8,687 $6,606
Loss from Discontinuance
of Product Line - - 2,000 - -
Restructuring Charge 686 - - - -
Net Earnings (Loss) (4,308) 246 (2,118) 1,070 814
Per Common Share (0.78) 0.05 (0.40) 0.22 0.17
Working Capital (2,871) 918 1,215 2,561 1,160
Current Ratio .50 1.27 1.45 2.44 1.58
Total Assets 7,000 6,803 5,940 6,803 4,744
Long-Term Debt 723 - - - 10
Shareholders' Equity 502 3,462 3,210 5,024 2,719
</TABLE>
The Company has declared no cash dividends since its inception.
<PAGE>
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
THREE YEARS ENDED DECEMBER 31, 1994
Overview
During the year ended December 31, 1994 the Company began an
important restructuring. Operating performance had
significantly deteriorated and financing problems were generated
at a time when the Company's laboratory product line sales were
declining. A new vision was needed to provide financial
stability, improve customer satisfaction and advance product
development.
At the commencement of the third quarter 1994 the Company's
Board of Directors elected a new Chief Executive Officer (CEO),
who previously had been an outside member of the Company's Board
of Directors. Shortly thereafter (August 23, 1994) the Company
through its newly formed wholly owned subsidiary (Dynamic
Healthcare Technologies, Inc.) merged with Dynamic Technical
Resources, Inc. (DTR). The Chairman and CEO of DTR was then
elected President and Chief Operating Officer of the Company.
During the preliminary review of the Company's operations, after
the merger, current management became aware of operating problems
in the lab product line operating in the Lincoln, NE facility.
The problems consisted of staff duplication, product quality
control problems, product delivery delays, outstanding
contractual obligations, product development cycle issues and
poor customer satisfaction. As a result of these findings,
current management committed to a plan of restructure. The
restructure plan includes an employee elimination program to
reduce the workforce and eliminate duplication, staff and
equipment relocation, staff training, delivery of outstanding
customer commitments, product quality and stabilization, product
release level updates, development plans and delivery schedules.
The plan also includes complete re-engineering of the lab product
line, including a decision to close the Lincoln, Nebraska
facility, and relocation of sales, marketing, accounting,
administration to Orlando, Florida, and the organization of a
national support center in Orlando, Florida to support and
maintain all software products of the Company.
The restructure plan was implemented during the fourth quarter
1994 and is continuing. Significant Company resources have been
and are being deployed and consumed in the execution of the
restructure plan. The Company considers the preservation of its
customer base, from which the Company has and expects to continue
to derive a significant percentage of its revenues, to be a high
priority toward establishing long-term stability. Management
believes that the completion of this restructuring will result in
increased customer satisfaction and thereby a preservation of its
customer base.
While dealing with the restructuring, management had to also
contend with a restatement of prior period financial statements.
This required renegotiation of bank financing arrangements due to
defaults in the loan covenants, resulting directly from the
restatements and the eminent need for restructuring. As a result
of the completion of an internal investigation, the Company
determined that the previously reported financial statements for
the years ended December 31, 1992 and 1993 required restatement,
primarily because revenue had been recognized for certain sales
of software components that the Company determined had not been
delivered to customers. In addition, the interim financial
statements previously reported for the quarterly periods ended
March 31, 1994, June 30, 1994 and September 30, 1994 required
restatement. The restated financial statements were filed with
the Securities and Exchange Commission during January 1995 for
the years ended December 31, 1992 and 1993 and the interim
quarterly periods ended March 31, June 30, and September 30,
1994.
The Company, as a result of the material nature of the restated
financial statements, information learned during the restatement
process, and subsequent discoveries by the Company's current
management of inaccurate information reported in the Company's
previously issued annual reports and Management's Discussion and
Analysis sections of Forms 10-Q and 10-K, engaged special legal
counsel to further the internal investigation and to assist
management in preparing a detailed plan of action. The
recommendations of the special counsel, which were ratified by
the Company's Board of Directors, were to dismiss the Company's
then auditors Deloitte & Touche LLP, appoint new auditors, and
resolve any outstanding issues with the DTR shareholders as a
result of the impact of these circumstances on the valuation
utilized in the acquisition to determine the consideration given.
Additionally, each individual that served in a management
capacity and a significant number of other individuals employed
prior to the acquisition of DTR no longer are employed by the
Company. This prompted the Board to relocate the Company's
headquarters to Florida (the domicile of DTR) and to rely heavily
on the operational support systems of the former DTR to avoid
business disruptions between the Company and its customers and
suppliers. The Company foresees that it will be placing
continued reliance upon the operational support systems of the
former DTR to maintain customer and supplier relationships and
avoid business disruptions. The Company will pursue any and all
recoveries available to the Company as a result of improprieties
that may have been perpetrated by members of prior management and
the prior auditors.
In response to these financing and operational issues new
management responded with a commitment to turn the Company
around. An immediate Three Point Plan was developed: (1)
Streamline operations and thereby reduce costs, eliminate
redundancy and improve productivity. (2) Focus attention on
increasing revenues through restructuring sales and marketing
efforts and improving product deliverables. and, (3) Provide
better customer service and satisfaction.
However, the Company needed new financing. Significantly
collateralized by the Three Point Plan, management renegotiated
the Company's bank financing, increasing the funding
available from $ 1.5 million to currently $ 3.5 million while
maintaining the interest rate competitive at bank prime plus 1%
(9.5% at December 31, 1994). On March 20, 1995, the Company and
the Bank entered into a letter agreement whereby the terms of
payment under the Revolving Credit and Security Agreement will be
modified to reflect a maturity date of April 30, 1996 in lieu of
the current demand provision, subject to the Company being able
to accomplish: (1) the closing and funding of a $1,000,000
equity or debt injection, subordinated to the Bank debt and on
terms and conditions acceptable to the Bank; and (2) the
modification and expansion, on terms acceptable to the Bank, of
existing financial covenants based upon Company-prepared
projections of financial condition deemed reasonable by the Bank
and tested on a quarterly basis. The Company is actively and
aggressively seeking from a number of capital markets, funds and
private investors a capital infusion in the form of equity and/or
debt. The Company believes that this infusion is necessary to
accomplish its current plans of operation, product research and
development, and completion of the restructure plan. Future
working capital requirements are dependent on the Company's
ability to restore and maintain profitable operations and to
obtain favorable financing arrangements.
As the Company refinances and restructures operations it has
continued to develop new products. The Company entered some new
market segments during 1994 which should contribute to the
Company's revenues in the future. The major new endeavors
include, the development of Monitrax, a new anesthesia
information system which uses a pen-based technology, image
solutions, an agreement with IBM Corporation to provide support
and enhancements for the IBM Medical RecordsPlus/400 software
product, Dynamic Decision Support products, and various joint
marketing and sub-license agreements. In addition, the Company
through the merger with DTR is in the professional and technical
consulting market. Many of these new endeavors are in their
formative stages. All will need continued management
involvement and capital resources to reach marketability and
market penetration.
As of March 31, 1995 the Three Point Plan has resulted in the
following improvements:
1) Procedures have been established for capturing supplemental
support revenue to enable the Company to increase the
revenues from the maintenance and support department.
2) Servicing of customers is now the responsibility of a new
national support center.
3) All products and services have a single 800 number for their
initial support. Automated support systems are in place and
will help provide a better level of support to customers.
In addition, the national support center will provide top
management with more timely information in which to identify
customer issues and new selling opportunities.
4) The product design, coding, testing, packaging and
distribution processes have been merged into a single
responsibility area. In addition, product testing and
validation is being done by product manufacturing so the
responsibility for quality is shifting to where it belongs.
5) The ability to deliver items for which the Company has
obligated itself and to generate cash by converting unbilled
accounts receivable into billed accounts has been improved.
6) An entire new process for distribution of version updates
via smaller, more frequent and less risk adverse technical
change notices has commenced. The implementation of
customer support systems once reprocessed will provide for a
faster time frame, with better quality and at less cost as
the processes are examined and re-packaged. A more
pre-packaged installation approach with the ability to
customize if desired will be employed.
Management although temporarily preoccupied with the various
legal, accounting and financing issues will focus on the
generation of liquidity, by focusing on the business of the
business. The Three Point Plan of streamlining operations,
increasing revenues and attaining better customer satisfaction
will be the keys to tomorrow's results.
The following table sets forth, for the periods indicated,
certain items in the Company's consolidated statements of
operations as a percentage of total operating revenues:
<TABLE>
Years Ended December 31,
<S> <C> <C> <C>
1994 1993 1992
Operating revenues:
Computer system equipment
sales and support 26.8% 40.9% 44.1%
Application software
licenses 26.5 36.9 36.5
Software support and
maintenance 46.7 22.2 19.4
Total operating revenues 100.0% 100.0% 100.0%
Costs and expenses:
Cost of equipment sold 22.1 32.6 33.9
Client services expense 37.2 14.8 14.7
Software development costs 25.4 14.7 16.5
Sales and marketing 24.3 17.3 19.7
Joint marketing costs .3 3.7 0.0
General and administrative 31.8 14.3 16.1
Loss from discontinuance
of product line 0.0 0.0 23.8
Restructuring costs 9.8 0.0 0.0
Total costs and expenses (150.9) 97.4 124.7
Operating income (loss) (50.9) 2.6 (24.7)
Acquisition contingency (8.7) (0.0) (0.0)
Other expense (2.0) (0.1) (0.5)
Net earnings (loss) before
income taxes (61.6) 2.5 (25.2)
Income taxes 0.0 0.0 0.0
Net earnings (loss) (61.6)% 2.5% (25.2)%
</TABLE>
YEAR ENDED DECEMBER 31, 1994
Total operating revenues decreased by 27.9% to $6,987,000 in
1994 as compared with $9,688,000 in 1993. The reduction was
comprised of significantly less revenue from sales of computer
system equipment and support as well as from a reduction in
application software licenses, although, there was a major
increase in software support and maintenance revenues. The
Company sold significantly less new customer LabPro laboratory
information systems (LIS) during 1994 as compared to 1993 and
was further impacted as more new customers either purchased their
hardware from sources other then the Company or operated the
systems on a co-resident machine already existing at the customer
location.
Computer system equipment sales and support revenues decreased
by 52.7% in 1994 to $1,873,000 as compared to 1993. This
reduction was caused by fewer new customer sales coupled with
increased sales in which the Company's customers either operate
the software on an IBM AS/400 in a co-resident environment with
that of another vendor's software or where the customer has
purchased the computer system directly from IBM or an IBM
authorized dealer. Computer system equipment sales and support
will continue to be a less significant component of the Company's
total operating revenue.
Application software license revenue decreased by 48.3% to
$1,849,000 as compared to 1993. This reduction was primarily
caused by fewer new customer sales as well as customer discounts
necessary to contract new business in a more competitive
environment. The Company continues to sell some add-on modules
to its LIS customers. Application software license revenues are
expected to become a more significant component of the Company's
total operating revenue as the Company's newer software products
and solutions are brought to market. These would include
Monitrax the new anesthesia information system, IBM Medical
RecordsPlus/400 the document image solution, Dynamic Decision
Support products, and other niche software and sub-license
revenues earned from joint marketing agreements.
Software support and maintenance revenues increased by 52.0% to
$3,265,000 as compared to 1993. The increase is primarily
related to additional Company customers who have successfully
completed the installation process of their application software
products and have commenced their software support and
maintenance services. In addition, the software support and
maintenance revenues of the acquired DTR in the amount of
$529,000 for the eighteen (18) weeks after the merger are
included as part of this increase. The Company presently
supports software products that it develops as well as software
products that it sub-licenses or joint markets for and with its
business partners.
Cost of equipment sold decreased by 51.0% to $1,547,000 as
compared to 1993 primarily as a direct result of a reduction in
computer system equipment sales. Hardware margins declined in
1994 by approximately 3% as compared to 1993. As a percentage
of total revenues, cost of equipment sold was 22.1% in 1994 and
32.6% in 1993. This reflects both the continued competitive
marketplace for hardware and the resulting lower margins
available to remarketers, and the Company's commitment to
enhancing its software product line upon which anticipated
marginal revenues are larger.
Client services expense is the Company's cost of installing,
maintaining, and providing training support for its software
products. It also, includes the cost of services for the
Company's professional and technical consulting engagements.
The costs associated with the support of software products
sub-licensed and joint marketed by the Company are also included.
The increase of 80.1% to $2,601,000 in 1994 as compared to 1993
in client services expense is primarily comprised of two factors.
Firstly is the inclusion of the acquired DTR costs of $415,000
for the eighteen (18) weeks after the merger. Secondly and more
material, were the staffing levels and resultant costs and
operational inefficiencies that existed in the Company's
laboratory product line. As detailed elsewhere, this product
line in undergoing a restructuring and re-engineering process
that will align its operational processes, staffing levels and
other costs more directly to the product line revenue.
Software development costs increased 24.5% to $1,775,000, or
25.4% of total revenues in 1994 compared to $1,437,000, or 14.7%
of total revenues in 1993. The cost of producing software
product masters subsequent to establishing technological
feasibility is capitalized. All other development and research
costs are expensed. Capitalized software development costs are
amortized primarily using the straight line method over the five
year estimated economic life of the product. Actual expenditures
for software development activities, which ignore the accounting
effects of capitalization and amortization, were $2,123,000 in
1994 and $1,927,000 in 1993. Of these amounts, $854,000 and
$887,000 respectively, were capitalized. In addition, during
1994 in connection with the restructuring, current management
evaluated the net realizable value by reviewing the economic
remaining life of certain software products. As a result, the
Company took a charge to operations of approximately $121,000
by reducing the carrying value of certain software products.
Sales and marketing expense is the Company's cost of taking its
products and services to market and selling to its customers.
Sales and marketing expenses remained relatively constant in
terms of dollars expended $1,695,000 in 1994 and $1,676,000 in
1993. However, in terms of a percentage to total revenues, the
aggregate costs increased to 24.3% in 1994 as compared with 17.3%
in 1993. The increase is related to decreased revenues and to
higher fixed operating costs as it relates to sales and marketing
costs to some new market segments as a result of new software
products and services. In addition, the Company is incurring
added costs to change the image of the Company in the marketplace
and to enhance its sales force.
Joint marketing costs are the amounts paid to other computer
system vendors (business partners) as a result of joint
marketing agreements for the Company's software products and
other related systems. The costs during 1994 of $22,000 were
significantly less than $356,000 incurred during 1993 as a result
of the Company primarily marketing directly to its customers and
not relying on its business partners to market its systems. This
was caused as the Company's two largest business partners were
merged into other companies during the year and their joint
marketing agreements have both since been terminated.
General and administrative expenses increased by 60.6% to
$2,219,000 as compared to $1,382,000. This increase can be
attributed to a variety of factors. (1) The decision by the
Board of Directors to elect a new CEO and add the additional
costs thereby for the six months of actual employment during
1994. (2) The acquisition of DTR on August 23, 1994 and the
inclusion of the related consolidated costs including
amortization of goodwill. And, (3) The increase in legal and
accounting costs as a result of the merger and the issues
surrounding the required restatement of prior periods.
On November 15, 1994, the Company adopted a plan to restructure
operations which includes, the consolidation of sales, marketing,
accounting, administration and national support to the Orlando,
Florida location. In addition, it included the planned closing
of the Lincoln, Nebraska location and the re-engineering of the
laboratory product line. Accordingly, the Company in 1994 had
incurred or provided $686,000 to write down assets to the net
realizable value and to cover the costs associated with this
action. These costs have been identified as "Restructuring
Costs" in the Consolidated Statement of Operations.
The Company's Board of Directors determined that an adjustment to
the consideration given to the former DTR shareholders in
connection with the acquisition was required due principally to
breaches in the representations and warranties contained in the
applicable merger agreement. On March 5, 1995, the Board of
Directors agreed to issue an aggregate of 610,000 additional
share of common stock of the Company to be distributed among the
former shareholders of DTR on a pro-rata basis, with the same
rights, privileges and restrictions as the original consideration
received by such shareholders in connection with the acquisition.
Such former DTR shareholders, in turn agreed to release the
Company from any claims they may have against the Company, its
current officers and directors and to cooperate and assist the
Company in the event the Company elects to file a civil lawsuit
against any professional or other third parties for damages
resulting from the events and matters that led to the Company's
restated financial statements. The additional shares were issued
on March 27,1995. A charge to operations for the year ended
December 31, 1994 in the amount of $610,000 was recorded
representing market value of the additional shares at the date of
issuance. The recorded cost of the acquired enterprise was not
affected by the issuance of these additional shares.
YEAR ENDED DECEMBER 31, 1993
Total operating revenues increased by 15.2% in 1993 to
$9,688,000 compared to $8,411,000 in 1992. This improvement
was due to increases in revenues realized from the Company's
existing client base for add-on hardware and software plus
increases for software support and maintenance revenues. The
Company has a paid-up software license agreement with one of its
clients that provided approximately $650,000 of annual software
license revenues during 1992. Revenues realized from sales to
new clients was actually down slightly in 1993, mainly because
the Company received no 1993 revenue from this paid-up license
agreement.
Computer system equipment sales and support revenues increased
by 6.7% in 1993 to $3,961,000 as compared to 1992. Nearly all
of the Company's hardware sales in 1993 were IBM AS/400 and
other peripheral hardware. Prior to 1993, the Company sold new
systems on both the IBM AS/400 platform and the Prime Computer,
Inc. 50-Series platform. When selling new systems on the Prime
platform, the Company sold software and hardware with each new
system sale. On the IBM AS/400 platform, clients have the option
to purchase the IBM hardware from the Company, from other IBM
dealers or directly from IBM. For this reason, hardware revenues
have become a less significant component of total revenues for
each of the last few years and accounted for only 40.9% of total
revenues in 1993 compared to 44.1% in 1992. Since clients may
purchase hardware from a variety of sources, the Company prices
sales of its IBM AS/400 based System in such a way that the
Company does not realize significant reductions in margins if
clients purchase their IBM hardware from sources other than the
Company.
Application software license revenues increased by 16.7% in 1993
to $3,578,000. Nearly all of this software license revenue
growth was on the Company's IBM AS/400 platform. While the
Company continues to sell some add-on software modules to its
existing Prime client base, all new system sales in 1993 were on
the AS/400 platform. As a percentage of total operating
revenues, application software license revenues have been growing
since 1991 and they accounted for 36.9% of total revenues in 1993
as compared to 36.5% in 1992.
Software support and maintenance revenues increased by 31.6% in
1993 to $2,149,000 as compared to 1992. Prime platform software
support revenue increased by 7.6% to $1,541,000 in 1993, or
71.7% of the total. IBM AS/400 platform software support
revenue increased by 201.7% to $608,000 in 1993, or 28.3% of
the total. Software support revenues from the Company's Prime
client base will level off and begin to decline in future periods
as those clients convert their LabPro systems to the IBM AS/400
platform. Software support revenues from the Company's AS/400
client base should continue to grow as the Company sells new
LabPro systems and converts its Prime client base.
Cost of equipment sold increased in 1993 primarily because of
the increase in computer equipment sales. Hardware margins
declined in 1993 compared to 1992 because of the shift toward
more IBM hardware sales and less Prime based hardware sales in
1993. The Company's normal margins on IBM equipment are less
than they were on the Prime platform. As a percentage of total
revenues, cost of equipment sold was 32.6% in 1993 compared to
33.9% in 1992.
Client services expense is the Company's cost of installing,
maintaining and providing training and support for its
application software products. Client services expenses were up
16.3% to $1,437,000 in 1993 compared to $1,236,000 in 1992. As a
percentage of total revenues, client service expenses was 14.8%
in 1993 compared to 14.7% in 1992.
Software development costs increased by 2.6% to $1,425,000, or
14.7% of total revenues in 1993 compared to $1,388,000, or 16.5%
of total revenues in 1992. Cost of producing product masters
subsequent to establishing technological feasibility is
capitalized. All other development costs are expensed.
Capitalized software development costs are amortized using the
straight line method over the five year estimated economic life
of the product. Actual expenditures for software development
activities, which ignore the accounting effects of capitalization
and amortization, remained fairly stable at $1,927,000 in 1993
and $1,943,000 in 1992. Of these amounts, $887,000 and
$1,110,000, respectively, were capitalized. Aside from the
annual enhancements to existing products, the Company's largest
development projects during the last three years were the
conversion of several enhancement modules from the Prime to the
IBM AS/400 platform, the redesign of its Anatomic Surgical
Information Retrieval System and the development of its new
Laboratory Data Repository.
Sales and marketing expense is the Company's internal cost of
its sales and marketing efforts. Sales and marketing expenses
remained relatively constant at $1,676,000, or 17.3% of total
revenues, in 1993 compared to $1,655,000, or 19.7% of total
revenues in 1992.
Joint marketing costs are the amounts paid to other computer
system vendors as a result of joint marketing efforts for the
Company's LabPro system and other related systems. The Company
began selling systems under joint marketing agreements with GTE
Health Systems, Inc. and IBAX Healthcare Systems, each of whom
sell Hospital Information Systems on the IBM AS/400 platform, in
1993. Joint marketing costs were $356,000, or 3.7% of total
operating revenues in 1993. The Company plans to continue to
form alliances with other vendors who offer products that are
complementary to the LabPro because it believes its ability to
sell its products will be enhanced by doing so.
General and administrative expenses increased by 1.8% to
$1,382,000, or 14.3% of total revenues in 1993 compared to
$1,358,000, or 16.1% of total revenues in 1992. The majority of
this increase relates to increases to compensation, payroll taxes
and employee benefit expenses plus an increase in the Company's
provision for uncollectible accounts.
In 1992, the Company recorded a $2 million provision for losses
from the discontinuance of its Prime Computer, Inc. hardware
platform. The majority of the $2 million loss is for write-offs
of the unamortized portion of capitalized software development
for the Prime product line. It also included write-offs of most
of the Company's internal Prime hardware and certain estimated
future costs associated with the discontinuance of this product
line.
Liquidity and Capital Resources
The Company has negative working capital of ($2,871,000) at the
end of 1994 compared to $918,000 at the end of 1993. Cash
available had a balance of $10,000 at the end of 1994 with
$2,788,000 borrowed against its line of credit. At the end of
1992, the Company had $1,100,000 of cash with $739,000 borrowed
against its credit line. With deteriorating 1994 operating
results, management focused on converting unbilled receivables
into billed receivables. As such, unbilled receivables decreased
by 78.7% and accounts receivable more than doubled over 1993
levels.
The Company's capital has been impaired during 1994 as a result
of the Company's operations and the actions instituted to correct
and re-engineer the Company. Current management became aware of
operating problems in the lab product line operating in the
Lincoln, NE facility. The problems consisted of staff
duplication, product quality control issues, product delivery
delays, outstanding contractual obligations, product development
cycle issues and poor customer satisfaction. As a result of
these findings, current management committed to a plan of
re-engineering which included a plan of restructure. The
restructure plan included an employee elimination program to
reduce the workforce and eliminate duplication, the complete
re-engineering of the lab product line, which included a decision
to close the Lincoln, Nebraska facility by the third quarter
1995, the relocation of sales, marketing, accounting,
administration to Orlando, Florida, and the organization of
national support center in Orlando, Florida to support and
maintain all software products of the Company. The restructure
plan commenced during the fourth quarter 1994 and continues
during 1995. Significant Company resources are being deployed
and consumed in the execution of the restructure plan. Staff
termination's, staff and equipment relocation, staff training,
delivery of outstanding customer commitments, product quality and
stabilization, product release level updates, development plans
and delivery schedules are all examples of initiatives that have
begun during the fourth quarter 1994, and from which the Company
has and expects to continue to derive a significant percentage of
its revenues. Management believes that the completion of this
restructuring will permit for increased customer satisfaction and
thereby a preservation of the Company's customer base. Many of
the costs associated with the restructuring are not classified as
restructure costs in accordance with the generally accepted
accounting policies as many of the Company's cost provide for
benefits to accrue to future periods. As a result of the
restructuring, operating costs of the Company during the fourth
quarter 1994 appear to be higher then necessary to operate in the
ordinary course of business.
The Company has made investments of $1,190,000 in property and
equipment from January 1992 through December 1994. Most of these
purchases have been for computer equipment for development,
software support and client education purposes. The Company
anticipates that it will continue to make significant investments
in property and equipment in the future, especially with regard
to computer equipment. The Company believes it is essential to
maintain at least one of every central processor type and
peripheral equipment model that it sells to its customers at its
corporate headquarters. The Company plans to continue to offer
its systems for use with the newest equipment technology
available which will require it to continue to make significant
investments in computer equipment for its own use. The Company
has no present commitments for large equipment purchases.
Between January 1, 1992, and December 31, 1994, the Company
expended $4,588,000 on software development, $2,852,000 of which
was capitalized. The Company will continue to make development
investments to keep its products competitive while it attempts
to build market share. The Company entered some new market
segments during 1994 which will require software development and
research. The major new products include, the development of
Monitrax, a new anesthesia information system which uses a
pen-based technology, image solutions, an agreement with IBM
Corporation to provide support and enhancements for the IBM
Medical RecordsPlus/400 software product, Dynamic Decision
Support products, and various joint marketing and sub-license
agreements which the Company has entered into. Many of these new
endeavors are in their formative stages. All will need continued
management involvement and capital resources to reach
marketability and market penetration. The investment in product
development requires a substantial utilization of cash, as well
as the impact to account for the amortization of these costs on
reported earnings from operations each year. In 1992, part of
the $2 million provision for losses from the discontinuance of
the Company's Prime Computer, Inc. product line, the Company
wrote off more than $1 million of unamortized software
development costs. Amortization of capitalized software
development will continue to be a significant portion of the
Company's software development expenses.
An additional impact on the Company's earnings and cash flows is
its net operating loss carry forward (NOL). The Company had
unused tax operating loss carryforwards of approximately
$9,178,000 at December 31, 1994, which can be utilized to reduce
taxable income in future periods and, therefore, substantially
reduce cash requirements for taxes. While the Company had
profitable operations for some periods reported, it has not been
required to pay significant Federal or state income tax, due to
the use of its NOL. The sale of the common stock in the
Company's December 1991 secondary offering triggered the
provisions of Section 382 of the Internal Revenue Code, which
limits the use of any unused NOL on an annual basis to a
prescribed rate multiplied by the Company's value immediately
before the completion of the offering. Based on these formulas,
the Company's use of its NOL increases approximately $800,000
per year. The Company has in excess of $8,700,000 of NOL
available for use in 1995.
The Company adopted Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes" in the first
quarter of 1993. This Statement supersedes SFAS 96 which was
previously adopted by the Company. There was no cumulative
effect of adopting SFAS 109 and the adoption did not have a
significant effect on the income tax provision for the current
year and would not have had a significant effect on the prior
periods presented.
The Revolving Credit and Security Agreement provides that the
principal amount outstanding on this line is payable upon demand.
On March 20, 1995, the Company and the Bank entered into a letter
agreement whereby the terms of payment under the Revolving Credit
and Security Agreement shall be modified to reflect a maturity
date of April 30, 1996 in lieu of the demand provision, subject
to the Company being able to accomplish: (1) the closing and
funding of a $1,000,000 equity or debt injection, subordinated to
the Bank debt and on terms and conditions acceptable to the Bank;
and (2) the modification and expansion, on terms acceptable to
the Bank, of existing financial covenants based upon
Company-prepared projections of financial condition deemed
reasonable by the Bank and tested on a quarterly basis.
On July 31, 1995 the Company announced the closing of the Private
Placement Offering issuing $775,000 of Subordinated Convertible
Notes. Management expects all of the Notes to be converted into
an aggregate of 775,000 Series A Shares.
On September 28, 1995 the Company accepted a Letter of Intent
from an institutional investor for the proposed purchase of
2,812,500 shares of Series B Preferred Stock of the Company for
$2,250,000. Pursuant to the Letter of Intent, the Company's
Board authorized a new class of Nine Percent (9%) Cumulative
Convertible Series B Preferred Stock ("Series B Preferred Stock")
to be placed with the institutional investor. The Series B
Preferred Stock has substantially the same terms as the Nine
Percent (9%) Cumulative Convertible Series A Preferred Stock
("Series A Preferred Stock").
On October 20, 1995 the Company accepted a Loan Commitment from
the Bank. The loan commitment enables the Company to refinance
its current demand line of credit to a Term Note, payable in
equal monthly payments of accrued interest and principle due
using a 17 1/2 year amortization schedule upon a minimum principal
payment of $500,000 from the sale of $2,250,000 of Preferred
Stock. The Note would mature on March 30, 1998.
The Company's current Refinancing Plan is designed to extend the
repayment terms with the Bank beyond 1996 by infusing additional
financing and thereby remedy the Company's current working
capital deficiency. No assurance can be given, however, that the
Company will be able to obtain extended Bank terms or additional
capital or, if available, that such additional capital will be
available on terms acceptable to the Company.
The Company believes that this infusion is necessary to
accomplish its current plans of operation, product research and
development, and completion of the restructure plan. Future
working capital requirements are dependent on the Company's
ability to restore and maintain profitable operations and to
obtain favorable financing arrangements.
Inflation and Changing Prices
The Company believes that the general state of the economy and
inflationary trends may have only a limited effect on its
business. Because the central computer hardware for the
Company's systems is provided by just one supplier, the pricing
policies of that supplier have a greater impact on the Company's
revenues, margins and earnings than do general inflationary
trends. In recent years, there have been general reductions in
the cost of computer hardware.
<PAGE>
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<S> <C> <C>
1994 1993
ASSETS
Current assets:
Cash and cash equivalents $ 10,173 $ 1,100,142
Accounts receivable, net of
allowance for doubtful accounts
of $250,000 and $189,672 in
1994 and 1993, respectively 2,166,813 807,817
Unbilled receivables 528,372 2,477,924
Other current assets 199,651 174,903
Total current assets 2,905,009 4,560,786
Property and equipment, net
(Note C) 1,212,969 903,004
Capitalized software development
costs, net of accumulated
amortization of $1,273,095
and $843,537 in 1994 and 1993,
respectively 1,821,917 1,595,281
Goodwill, net of accumulated
amortization of $54,787 at
December 31, 1994 1,028,050 -
Other assets 32,171 46,392
$7,000,116 $7,105,463
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit
(Note D) $ 2,788,401 $ 739,000
Accounts payable and accrued
expenses (Note J) 1,182,450 1,154,115
Deferred revenue 1,452,895 1,352,955
Advance billings 351,835 397,071
Total current liabilities 5,775,581 3,643,141
Accrued Liability - Acquisition
contingency (Note K) 610,000 -
Long term debt (Note E) 112,569 -
Total liabilities 6,498,150 3,643,141
Shareholders' equity (Note G):
Common stock, $0.01 par value;
authorized 20,000,000 shares;
issued and outstanding
5,967,819 and 5,277,760 shares
in 1994 and 1993, respectively 59,678 52,778
Additional paid-in capital 8,879,296 7,539,052
Deficit (8,437,008) (4,129,508)
Total shareholders' equity 501,966 3,462,322
$7,000,116 $7,105,463
</TABLE>
See notes to consolidated financial statements.
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<S> <C> <C> <C>
1994 1993 1992
Operating revenues
(Notes B, H and I ):
Computer system equipment
sales and support $ 1,873,393 $3,961,164 $3,712,310
Application software
licenses 1,848,522 3,577,868 3,065,867
Software support,
maintenance and other 3,265,227 2,148,675 1,632,990
Total operating
revenues 6,987,142 9,687,707 8,411,167
Costs and expenses:
Cost of equipment sold 1,547,453 3,158,671 2,850,212
Client services expense 2,600,913 1,437,204 1,235,701
Software development costs 1,774,897 1,425,083 1,388,432
Sales and marketing 1,695,486 1,675,809 1,655,205
Joint marketing costs 22,487 356,060 -
General and administrative 2,218,807 1,381,973 1,357,815
Loss from discontinuance
of product line - - 2,000,000
Restructuring costs
(Note J) 686,439 - -
Total costs and
expenses 10,546,482 9,434,800 10,487,365
Operating income
(loss) (3,559,340) 252,907 (2,076,198)
Other income (expense):
Acquisition contingency
(Note K) 610,000 - -
Interest expense and
financing costs (143,412) (18,615) (9,747)
Miscellaneous 5,252 11,392 (32,176)
Total other expense (748,160) (7,223) (41,923)
Net earnings (loss) before
income taxes (4,307,500) 245,684 (2,118,121)
Income taxes (Note F) - - -
Net earnings (loss) $(4,307,500) $ 245,684 $(2,118,121)
Weighted average number
of shares outstanding 5,536,202 5,362,625 5,266,329
Earnings (loss) per share
Primary and fully
diluted $ (0.78) $ 0.05 $ (0.40)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<S> <C> <C> <C>
Additional
Common Paid-In
Stock Capital Deficit
Balance, January 1,
1992 $ 51,659 $7,229,905 (2,257,071)
Common stock issued
in public offering
(Note G) 1,000 292,738 -
Exercise of stock
options 54 9,974 -
Net loss - - (2,118,121)
Balance, December 31,
1992 (restated) 52,713 7,532,617 (4,375,192)
Exercise of stock
options 65 6,435 -
Net earnings - - 245,684
Balance, December 31,
1993 (restated) 52,778 7,539,052 (4,129,508)
Common stock issued
to effect merger 6,000 1,194,000 -
Exercise of stock
options 822 135,142 -
Employee stock
purchase plan 78 11,102 -
Net loss - - (4,307,500)
Balance December 31,
1994 $ 59,678 $8,879,296 $(8,437,008)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<S> <C> <C> <C>
1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(4,307,500) $ 245,684 $(2,118,121)
Adjustments to reconcile
net earnings (loss) to net
cash provided by (used in)
operating activities:
Loss from discontinuance
of product line - - 1,795,659
Depreciation and
amortization 1,036,740 677,441 851,769
Acquisition contingency 610,000 - -
Changes in assets and
liabilities
Accounts receivable (1,096,151) (634,020) 286,377
Unbilled receivables 1,949,552 - -
Other current assets (17,844) 19,891 (100,928)
Accounts payable and
accrued expenses (95,206) 80,360 (173,046)
Deferred revenue 99,940 291,140 468,250
Advance billings (45,236) - -
Total adjustments 2,441,795 (434,812) 3,128,081
Net cash provided by
(used in) operating
activities (1,865,705) 680,496 1,009,960
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Dynamic
Technical Resources
(Note B) 286,586 - -
Capitalized software
development costs (796,024) (943,595) (1,112,838)
Purchases of property
and equipment (445,065) (237,238) (507,643)
Net cash used in
investing activities (954,503) (1,180,833) (1,620,481)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of
credit, net 1,874,401 239,000 500,000
Proceeds from issuance of
common stock 147,144 6,500 303,766
Decrease (increase) in
other assets 20,084 (46,392) -
Principle payments on
long-term debt and
capital lease obligations (311,390) - (10,846)
Net cash provided by
financing activities 1,730,239 199,108 792,920
Net increase (decrease) in
cash and cash equivalents (1,089,969) (301,229) 182,399
Cash and cash equivalents,
beginning of year 1,100,142 1,401,371 1,218,972
Cash and cash equivalents,
end of year $ 10,173 $1,100,142 $1,401,371
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 102,354 $ 16,284 $ 9,627
Income taxes paid
(received) $ 0 $ (3,823) $ 6,396
</TABLE>
See notes to consolidated financial statements.
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Dynamic Healthcare Technologies, Inc. develops,
markets and supports laboratory information systems, document
imaging systems, anesthesia information systems, and provides
professional and technical consulting and niche software products
to the healthcare information systems industry.
Basis of Consolidation - The consolidated financial statements
include the accounts of Dynamic Healthcare Technologies, Inc.
and its then wholly-owned subsidiary, Dynamic Healthcare
Technologies, Inc., incorporated on August 1, 1994 (collectively
the Company).
Property and Equipment - Property and equipment is stated at cost
less accumulated depreciation and amortization. The cost of
property and equipment is depreciated and amortized over the
estimated useful lives of the related assets, ranging from five
to ten years, using the straight-line method.
Software Development Costs - Costs incurred to establish the
technological feasibility of computer software products are
research and development costs and are charged to expense as
incurred. Costs of producing product masters subsequent to
establishing technological feasibility, including coding and
testing, are capitalized. Capitalization of computer software
costs cease when the product is available for general release
to customers. Costs of maintenance and customer support are
expensed when related revenue is recognized or when those costs
are incurred, whichever occurs first. Amortization of
capitalized Software Development Costs for the years ended
December 31, 1994, 1993 and 1992 were $505,613, $384,569, and
$555,436, respectively, and write downs to net realizable value
of $121,535, $0 and $1,082,354. Capitalized software development
costs are amortized using either the straight-line method over
the estimated economic life of the product (currently five years)
or the ratio of current revenues to current and anticipated
revenues for the product whichever results in the greater amount
of amortization. Unamortized capitalized costs of a computer
software product in excess of net realizable value of that asset
are expensed.
Goodwill - Goodwill is stated at cost less accumulated
amortization. Goodwill is amortized using the straight line
method over a period of seven years. The Company assesses the
recoverability of goodwill based upon projected operations over a
period which represents the approximate remaining life of
goodwill. The Company evaluates the recoverability of goodwill
based on this forecast of future operations and income, and using
a discount rate that reflects the Company's average cost of
funds.
Revenues - Revenues are derived from the sale of computer
hardware, licensing and sub-licensing of software, professional
and technical consulting services, and maintenance and support
services. Each customer contract is negotiated separately.
Application software licenses and computer system equipment
revenues are recorded when hardware and application software are
delivered. Installation and training revenues, which are
included with application software licenses revenues in the
consolidated statements of operations are recognized as the
services are performed. Software support, maintenance and other
revenues include other significant continuing obligations and
post contract support obligations which are primary separately
contracted. Services revenues are recognized as the services are
performed. Contracts for continuing support services typically
cover a specific period, and revenue therefrom is recognized
ratably over the period of the contract.
Joint Marketing Costs - Joint marketing costs include amounts
incurred as a result of joint marketing efforts of the Company's
LabPro 2000 laboratory information system and related systems
with other vendors. These vendors offer application software
products which are complementary to the Company's products.
Employee Benefit Plan - The Company has a 401(k) savings plan
covering all full-time permanent employees with at least six
months of service with the Company. Eligible employees may elect
to defer 20% of their compensation up to the maximum allowed by
the Internal Revenue Code. Company contributions are made at the
discretion of the Board of Directors and amounted to $75,545,
$52,576 and $41,202 in 1994, 1993 and 1992, respectively.
Income Taxes - Deferred income taxes are provided on items that
are recognized in different reporting periods for financial
accounting and income tax purposes using the then enacted tax
rates. The Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes," in
the first quarter of 1993. This Statement superseded SFAS No. 96
which was previously adopted by the Company. There was no
cumulative effect of adopting SFAS No. 109 and the adoption did
not have a significant effect on the income tax provision for
1993 and would not have had a significant effect on prior
periods.
Earnings Per Share - Earnings per share is computed on the basis
of the weighted average number of shares outstanding plus the
common stock equivalents which would arise from the exercise of
stock options and warrants if dillutive. Fully diluted earnings
per share do not differ significantly from primary earnings per
share.
Cash Equivalents - For purposes of the statement of cash flows,
the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
Reclassifications - Certain 1993 balances have been reclassified
to conform to the 1994 presentation.
B. ACQUISITION OF DYNAMIC TECHNICAL RESOURCES, INC.
On August 23, 1994, Dynamic Technical Resources, Inc. ("DTR"),
was merged into Dynamic Healthcare Technologies, Inc., then a
wholly owned subsidiary of the Registrant. The transaction was
consummated by acquiring all of the outstanding common stock of
DTR in exchange for approximately 600,000 common shares of the
Registrant. The acquisition has been accounted for using the
purchase method.
Amounts assigned in the accompanying consolidated balance sheets
to assets purchased and liabilities assumed as of August 23, 1994
were based upon their estimated fair values. As of the date of
acquisition of DTR there were no identifiable intangible assets
other than software development costs, which was recorded at
estimated fair value. The purchase price ($1,245,000), exceeded
the fair value of the net assets of DTR by
$1,082,837. This amount was allocated to goodwill and is being
amortized straight line over 84 months.
The estimated fair values of the assets and liabilities acquired
as of August 23, 1994 as a result of the merger are summarized as
follows:
<TABLE>
<S> <C>
Cash $ 286,586
Accounts Receivable 262,845
Other Current Assets 6,904
Total Current Assets 556,335
Property and Equipment 219,705
Capitalized Software Development Costs 57,760
Goodwill 1,082,837
Other Assets 5,863
Total Assets 1,922,500
Accounts Payable and Accrued Expenses 78,541
Line of Credit 175,000
Current Portion of Long Term Debt 156,616
Total Current Liabilities 410,157
Long Term Debt 267,343
Total Liabilities 677,500
Total Purchase Price $1,245,000
</TABLE>
Pro Forma combined condensed financial information, for the years
ended December 31, 1994 and 1993, presented below, gives effect
to the acquisition of DTR, as though it were effective at the
beginning of those periods. The pro forma information may not be
indicative of the results that would have occurred if the
acquisition and issuance of common stock had been effective on
these dates, or of the results that may be obtained in the
future.
<TABLE>
Year Ended December 31,
<S> <C> <C>
1994 1993
Total Operating Revenues $ 7,971,255 $10,775,441
Operating Income (Loss) $(3,742,807) $ 209,268
Net Income (Loss) $(4,505,279) $ 184,397
Net Income (Loss)
Per Share $ (0.77) $ 0.03
</TABLE>
C. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C> <C>
December 31,
1994 1993
Furniture and fixtures $ 264,424 $ 193,957
Equipment 2,703,884 2,186,002
Leasehold improvements 110,150 108,921
Equipment under capital
lease 74,489 -
3,152,947 2,488,880
Less accumulated
depreciation and
amortization 1,939,978 1,585,876
$ 1,212,969 $ 903,004
</TABLE>
D. LINE OF CREDIT
The Company entered into a revolving line of credit with a bank
on October 12, 1994. Under the terms of the Revolving Credit and
Security Agreement, the Company has available the lesser of
$3,500,000 or 75% of total "eligible accounts". The loan is
payable on demand. Eligible accounts are defined as accounts
receivable, less amounts aged over 90 days, plus remaining
unbilled contract amounts. The maximum permitted loan balance as
of March 31, 1995 was $3,500,000. The agreement bears interest
at the lender's prime rate plus 1% (9.5% at December 31, 1994),
and is collateralized by all assets of the Company. Restrictive
covenants require, among other things, tangible net worth of not
less than $2,355,000 on December 31, 1994, and a ratio of total
liabilities to tangible net worth of not more than 2 to 1 as of
the end of any quarter during the term of the loan. Borrowings
under this agreement at December 31, 1994 were $2,788,401.
On November 21, 1994, the Company advised the Bank that
principally as a result of the restated financial statements for
the years ended December 31, 1993 and 1992, and the three
quarters in the nine month period ended September 30, 1994, that
the Company would be in technical default of the financial
covenants and certain other events of default as defined in that
certain Revolving Credit and Security Agreement dated October 12,
1994. On January 10, 1995, the bank provided the Company a
waiver of Default to the specific conditions existing on December
31, 1994. The Company is renegotiating the financial covenants
and certain other default provisions and believes that it will be
able to continue to rely on this credit line to meet its working
capital requirements.
E. LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<S> <C> <C>
December 31,
1994 1993
Note payable -
related party $ 115,973 -
Capital lease obligations 65,168 -
181,141 -
Less: current portion (68,572) -
$ 112,569 -
</TABLE>
The note payable-related party is a deferred compensation
agreement with the Company's current President assumed in
connection with the acquisition of Dynamic Technical Resources,
Inc. and is payable in 31 remaining monthly installments of
$4,167 at an imputed interest rate of 8.25%.
The Company leases computer equipment, which may be purchased
after specified dates by payment of remaining rentals plus
bargain purchase option amounts. Rentals are payable through
various dates to August 1997 with imputed interest rates ranging
from 17% to 23%. Capital leases as of December 31, 1994 and 1993
are as follows:
<TABLE>
<S> <C> <C>
1994 1993
Equipment $ 74,489 -
Less: accumulated
depreciation (7,449) -
$ 67,040 -
</TABLE>
As of December 31, 1994, minimum annual rental commitments under
capital leases are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
1995 $ 34,883
1996 29,791
1997 13,489
Total minimum lease payments 78,163
Less: amounts representing
interest (12,995)
Net $ 65,168
</TABLE>
The Company leases certain equipment and office space under
noncancelable operating leases. The leases call for monthly
payments over terms of three to five years and include renewal
options. With respect to the equipment leases, the Company is
liable for all taxes, repairs and insurance.
The future minimum rental payments under operating leases as of
December 31, 1994 are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
1995 $ 318,291
1996 322,518
1997 297,904
1998 209,438
1999 70,625
Total $1,218,776
</TABLE>
The Company leased office space in 1994 owned by the Company's
CEO and the Company's President, COO under terms which
approximate fair market rent. During 1994, $39,089 was expensed
under this related party lease. Total rent expense on all
operating leases was $208,000, $204,000, and $215,000 for the
years ended December 31, 1994, 1993 and 1992, respectively.
F. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1994 1993 1992
Current income tax expense
(benefit) before operating
loss carry forward $(1,523,000) $ 3,000 $(395,000)
Tax effects of temporary
differences 44,000 96,000 (399,000)
Non-recognition of benefits
of operating loss carry
forward 1,479,000 - 794,000
Benefits of operating loss
carry forward - (99,000) -
$ - $ - $ -
</TABLE>
Deferred income taxes reflect the net tax effects of operating
loss and tax credit carryforwards and temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant items comprising the
Company's net deferred tax as of December 31, 1994, are as
follows:
<TABLE>
<S> <C> <C>
1994 1993
Deferred tax assets:
Operating loss carryforwards $ 3,365,000 $ 1,458,000
Tax credit carryforwards 701,000 500,000
Other 85,000 114,000
4,151,000 2,072,000
Deferred tax liabilities:
Capitalized software development
costs (729,000) (540,000)
Depreciation (46,000) -
Net deferred tax asset 3,376,000 1,532,000
Valuation allowance (3,376,000) (1,532,000)
Net deferred tax $ - $ -
</TABLE>
The net deferred tax asset is reduced by a valuation allowance
due to the uncertainty associated with the realization of the net
deferred tax asset. The valuation allowance increased $1,844,000
from the allowance of $1,532,000 at January 1, 1994.
The provision for Federal income taxes differs from the amount
computed by applying the statutory rate to net earnings (loss)
before income taxes for each of the three years in the period
ended December 31, 1994, as follows:
<TABLE>
<S> <C> <C> <C>
Amount of Tax
1994 1993 1992
Computed expected tax
expense (benefit) $(1,257,000) $ 84,000 $ (718,000)
State taxes, net of
federal benefit (222,000) 15,000 (76,000)
Acquisition consideration
not deductible for tax $ 208,000 - -
Non-recognition of
benefits of operating
loss carryforward 1,479,000 - 794,000
Benefits of operating loss
carryforward - (99,000) -
$ - $ - $ -
</TABLE>
At December 31, 1994, the Company had unused operating loss
carryforwards for tax and alternative minimum tax purposes of
approximately $9,178,000 and $8,828,000, respectively, and unused
tax credits of approximately $700,000. These operating loss
carryforwards and tax credits expire in varying amounts during
1996 through 2009. The Company's use of its tax operating loss
carryforwards increases $800,000 per year under the provisions of
the Internal Revenue Code. The Company has in excess of 8,700,000
available for use during 1995.
The sources of temporary differences and their tax effects for
the year ended December 31, 1992 are as follows:
<TABLE>
<S> <C>
1992
Loss from discontinuance
of product line $ (577,000)
Capitalization and
amortization of software
development costs 211,000
Depreciation (30,000)
Provision for bad debts (3,000)
Other -
$ (399,000)
</TABLE>
G. CAPITAL STOCK, WARRANTS AND OPTIONS
In connection with a public offering of the Company's common
stock in December, 1991, the Company granted an option to the
Underwriters to purchase 100,000 shares of common stock at the
public offering price to cover over-allotments. This option was
exercised in January, 1992 and resulted in net proceeds to the
Company of approximately $290,000.
During 1993, the shareholders approved and the Company adopted a
stock warrant and option plan for directors and management
employees whereby 250,000 shares of common stock are reserved for
issuance under the Plan. The directors' warrants are five year
warrants which vest under varying terms and are issued at an
exercise price equal to the market price of the Company's common
stock on the date of grant. The management employees' stock
options are fully vested one year after date of issuance and
expire ten years after the first anniversary. Employee options
are issued at an exercise price of no less than 85% of the market
price of the Company's common stock on the date of grant.
At December 31, 1994, the Company had stock warrants and options
outstanding to purchase shares of its common stock under a stock
warrant and option plan as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Number Presently Price Year Expiration
of Exercisable Per Granted Date
Shares Share
Directors'
Warrants: 25,500 25,500 $1.75 1990 May 1995
51,000 51,000 $3.06 1991 May 1996
5,000 5,000 $3.00 1992 June 1997
10,000 10,000 $2.25 1993 June 1998
25,500 8,500 $2.06 1993 Jan. 1998
25,500 0 $1.9375 1994 June 1999
5,000 0 $2.25 1994 June 1999
Management
Employees'
Options: - -
147,500 100,000
</TABLE>
As part of the public offering in December 1991, the Company
granted warrants to the underwriters for 35,000 shares of common
stock. These underwriter warrants are exercisable at any time
after the first anniversary of their issuance date up to and
including the fifth anniversary date. The initial exercise price
was $3.61 per share and increases to $3.84, $4.08, and $4.32 per
share on the second, third and fourth anniversaries,
respectively, of the grant. None of these warrants have been
exercised as of December 31, 1994.
The Company adopted an incentive stock option plan in 1983 for
key employees whereby 400,000 shares of common stock were
reserved for issuance under the Plan. Options granted vest 40%,
30% and 30% on the first, second and third anniversaries of their
issuance, respectively and expire ten years after the date of
grant. At December 31, 1994, the Company had granted options of
355,040 shares, of which options for 99,240 shares had been
exercised and options for 68,000 shares were exercisable at
between $1.00 and $1.9375 a share. No new options will be
granted under the terms of this Plan.
During 1993, the shareholders approved and the Company adopted a
new ten year incentive stock option plan for employees whereby
100,000 shares of common stock are reserved for issuance under
the Plan. The terms of this 1993 Plan are similar to the 1983
Plan. At December 31, 1994, the Company had granted options of
34,750 shares, no options had been exercised and options for
8,000 shares were exercisable at $2.25 a share. Under both the
1983 Plan and the 1993 Plan, the exercise price for stock options
may not be less than the market price of the Company's common
stock at date of grant.
Incentive stock option activity under the 1983 and 1993 Plans and
price information follows:
<TABLE>
<S> <C> <C>
Stock Option
Shares Price Range
Balance at January 1, 1992 331,350 $1.00 - $3.06
Exercised (5,400) $1.72 - $1.94
Granted -
Canceled (4,900) $1.72 - $1.94
Balance at December 31, 1992 321,050 $1.00 - $3.06
Exercised (6,500) $1.00
Granted 58,500 $2.25
Canceled (2,000) $1.53
Balance at December 31, 1993 371,050 $1.00 - $3.06
Exercised (56,750) $1.00 - $2.25
Granted 34,575 $1.9375
Canceled (246,125) $1.00 - $3.06
Balance at December 31, 1994 102,750 $1.00 - $2.25
</TABLE>
During 1993 the shareholders approved and the Company adopted an
Employee Stock Purchase Plan effective for a five year period
beginning January 1, 1994. The Company reserved 200,000 shares
of common stock for issuance under the Plan. The Plan operates
in one or more phases of six months each and is open for
enrollment by employees working at least 20 hours per week and
who have completed at least five months of service. Phase I
ended June 30, 1994 at which time 5,274 shares of stock were
issued at $1.65. Phase II ended December 31, 1994 at which time
2,535 shares were issued at $.98.
On July 6, 1994, the Company's Board of Directors in connection
with an employment agreement granted options to Mr. David
Pomerance, the Company's CEO, covering 250,000 shares of common
stock. The options are exercisable through July 6, 1999 in
accordance with a vesting schedule of 40% upon grant plus 20% per
year for each of three years thereafter at an exercise price
equal to the fair market value on the date of the grant of
$1.875 per share. On August 23, 1994, the Company's Board of
Directors in connection with an employment agreement granted
options to Mitchel J. Laskey, the Company's President and COO,
covering 250,000 shares of common stock under similar terms at an
exercise price equal to the fair market value on the date of the
grant of $1.6875. Both option agreements provide for
early vesting upon death or employment termination without cause.
The Articles of Incorporation authorize 10,000,000 shares of $.01
par value preferred stock, in such series and variations in the
relative rights and preferences, including voting rights, if any,
between series as the Board of Directors shall determine. No
preferred stock has been issued nor is outstanding as of December
31, 1994.
H. MAJOR CUSTOMERS AND VENDOR
Columbia Healthcare Corporation (Columbia) (formerly -
Humana/Galen) accounted for 2%, 11% and 26% of the Company's
total revenues during 1994, 1993 and 1992, respectively.
Columbia has been a client of the Company's since 1983. The
Company and Columbia executed a perpetual license agreement
during 1990 for various LabPro software products. The agreement
allows Columbia to install the Company's Laboratory Information
Systems, including several enhancements modules, in any of
Columbia's United States hospitals. During 1993, Humana split up
its operations and transferred its interest in its contract with
the Company to Galen Healthcare, Inc., a for-profit healthcare
provider that owns and operates 79 U.S. hospitals. In 1993,
Galen merged with Columbia Healthcare Corporation.
Humana/Galen's interest in the contract has been transferred to
Columbia. The Company received the final of three annual
installment payments of approximately $650,000 for this license
agreement during the third quarter of 1992.
No other customer accounted for more than 10% of the Company's
total revenues during 1994,1993 or 1992.
In the past both Prime Computer and IBM have been significant
hardware vendors to the Company. As a result of Prime Computer's
decision to discontinue its 50-Series hardware platform, IBM is
presently the Company's only significant hardware vendor.
I. RESTATEMENT
In July 1994, the Company's Board of Directors elected a new CEO
who previously had been an outside member of the Company's Board
of Directors. Shortly thereafter (August 23, 1994), the
Company's wholly owned subsidiary (Dynamic Healthcare
Technologies, Inc.) merged with Dynamic Technical Resources, Inc.
(DTR). The Chairman and CEO of DTR was then elected President
and COO of the Company. This "new management" team during their
preliminary review of the Company's operations, internal controls
and financial accounting discovered possible errors in its
previously issued financial statements. This information was
promptly communicated to the audit committee of the Board of
Directors, who then acted to authorize an independent internal
investigation on or about November 15, 1994. The investigation
was conducted by the Company's legal counsel and an independent
certified public accountant. The commencement of the preliminary
investigation was disclosed in Form 10-Q for the quarterly period
ended September 30, 1994 filed on November 22, 1994. At such
time, the Company was not certain that adjustments should be made
for prior periods. The Company issued a press release on
November 21, 1994 indicating the results of the quarter ended
September 30, 1994 and that preliminary adjustments were made to
the reported revenue for the first and second quarters of 1994.
As a result of the completion of the investigation, the Company
determined that the previously reported financial statements for
the years ended December 31, 1992 and 1993 required restatement,
primarily because revenue had been recognized for certain sales
of software components that the Company determined had not been
delivered to customers. Shortly after making this determination
the Company recalled its previously issued financial statements
for the years ended December 31, 1992 and 1993, and restated and
reissued them on Form 10-KA to the Securities and Exchange
Commission. In addition, the interim financial statements
previously issued for the quarterly periods ended March 31, 1994,
June 30, 1994 and September 30, 1994 were restated and reissued
on Forms 10-QA.
The net effects of the restatements on the previously issued
annual financial statements are summarized as follows:
<TABLE>
<S> <C> <C>
1993 1992
Increase (Decrease) in:
Operating revenues $ (525,517) $ (342,350)
Total costs and expenses (80,328) -
Operating Income (Loss) $ (445,189) $ (342,350)
Net Earnings (Loss) $ (445,189) $ (342,350)
</TABLE>
The adjustments which have been made to prior periods, in the
opinion of management, are necessary for a fair statement of the
results of operations for the periods restated. These
adjustments resulted principally from mistakes in the application
of generally accepted accounting principles with respect to
revenue recognition for software transactions.
J. RESTRUCTURING
On November 15, 1994, the Company adopted a plan to restructure
certain of its operations and to re-evaluate certain other
activities. The Company's plan includes reduction in the
workforce, restructuring of the sales compensation program,
relocation of the corporate office and the planned closing of the
Lincoln, Nebraska operation. Accordingly, the Company has
provided or incurred $686,439 to write down assets to the net
realizable value and to cover the costs associated with the
restructuring. The costs associated with this action have been
identified as "Restructuring Costs" in the Consolidated Statement
of Operations for the year ended December 31, 1994, and are
summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
Accrual Paid Accrual
November 15, or Accrual December
1994 Incurred Adjustment 31, 1994
Excess costs
attributable to
exit activities $ 254,430 $(213,930) $ 0 $ 40,500
Noncancelable lease
termination costs 206,357 (28,738) 0 177,619
Involuntary employee
termination benefits 95,060 (68,215) 0 26,845
Employee costs after
operations cease 130,592 (54,592) 0 76,000
$ 686,439 $(365,475) $ 0 $320,964
</TABLE>
The Company anticipates completion of the plan of restructure on
or before June 30, 1995. All employee groups are being
restructured and the Company plans 44 employee terminations. As
of December 31, 1994 actual involuntary termination benefits of
$68,216 have been paid to 21 terminated employees.
K. ACQUISITION CONTINGENCY
In connection with the acquisition, due principally to breaches
in the representations and warranties contained in the applicable
merger agreement, the Company's Board of Directors determined
that an adjustment to the consideration given to the former DTR
shareholders was required. On March 5, 1995, the Board of
Directors agreed to issue an aggregate of 610,000 additional
shares of common stock of the Company to be distributed among the
former shareholders of DTR on a pro-rata basis, with the same
rights, privileges and restrictions as the original consideration
received by such shareholders in connection with the acquisition.
Such former DTR shareholders, in turn, agreed to release the
Company from any claims they may have against the Company, its
current officers and directors and to cooperate and assist the
Company in the event the Company elects to file a civil lawsuit
against any professional or other third parties for damages
resulting from the events and matters that led to the Company's
restated financial statements. The additional shares were issued
on March 27, 1995. A charge to operations for the year ended
December 31, 1994 in the amount of $610,000 was recorded
representing market value of the additional shares at the date of
issuance. As a result of review by and consultation with the
staff of the Securities and Exchange Commission, the Company has
restated its 1994 consolidated financial statements to reflect an
accrual for this acquisition settlement in the amount of
$610,000. The amount of $610,000 represents the market value of
the additional shares at the date of their issuance. The
recorded cost of the acquired enterprise was not affected by the
issuance of these additional shares.
L. SUBSEQUENT EVENTS
Litigation
In February 1995, in connection with the results of the Company's
internal investigation and Mr. Terrano's resignation, the Company
instituted proceedings against Mr. Terrano, the Company's former
President, in the District Court of Lancaster County, Nebraska,
which proceedings are currently pending. The Company alleges
that Mr. Terrano made fraudulent and negligent representations to
the Company's Board of Directors which resulted in the Company's
acceptance of a handwritten memorandum modifying Mr. Terrano's
employment agreement, breached his fiduciary duty to the Company
and breached his obligations under his employment agreement with
the Company. The Company is seeking to recover damages of
approximately $46,000, in addition to a declaratory judgment
determining that no severance pay is due Mr. Terrano and that the
handwritten memorandum is invalid and unenforceable and does not
modify his employment agreement.
In another matter, the Company is a defendant in an action filed
by the Company's former Vice President, in the District Court of
Lancaster County, Nebraska, alleging that the Company did not
lawfully terminate her for cause, and therefore, the Company is
in breach of her employment agreement. The former employee is
seeking severance payment. The Company is vigorously contesting
this case.
These cases are in the early stages of discovery and it is not
possible to evaluate the likelihood of a favorable or unfavorable
outcome of either case at this time.
SEC Informal Investigation
In March 1995 the Company was informed that the Securities and
Exchange Commission was conducting an informal investigation
which the Company believes is related to the Company's previous
revenue recognition practices. Although the Company intends to
fully cooperate with the Securities and Exchange Commission's
investigation, there can be no assurance that the Securities and
Exchange Commission will not institute a formal Securities and
Exchange Commission proceeding against the Company.
Financing
On March 20, 1995, the Company and the Bank entered into a letter
agreement whereby the terms of payment under the Revolving Credit
and Security Agreement will be modified to reflect a maturity
date of April 30, 1996 in lieu of the current demand provision,
subject to: (1) the closing and funding of a $1,000,000 equity
or debt injection, subordinated to the Bank debt and on terms and
conditions acceptable to the Bank; and (2) the modification and
expansion, on terms acceptable to the Bank, of existing financial
covenants based upon Company-prepared projections of financial
condition deemed reasonable by the Bank and tested on a quarterly
basis. The Company is working with various parties on debt
and/or equity financing arrangements. The Company is confident
that it will be successful in securing financing and that the
terms and conditions will be acceptable to the Bank as set forth
above.
M. UNAUDITED QUARTERLY INFORMATION
During the fourth quarter of 1994, the Company recorded
adjustments to prior interim periods which expensed $273,297 of
previously capitalized software development costs and $68,525 of
underaccrued employee benefits. Both adjustments stem from
correction of errors originating in the first two quarters of
1994, the effects of which are summarized as follows (in
thousands, except per share data):
<TABLE>
<S> <C> <C>
Three Months Ended
(Unaudited)
1994 March 31 June 30
Operating Income (Loss) $(192) $(150)
Net Earnings (Loss) (192) (150)
Net Earnings
(Loss Per Share) (.04) (.03)
</TABLE>
Operating results as restated where applicable, are summarized as
follows (in thousands, except per share data):
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended
(Unaudited)
1994 March 31 June 30 Sept. 30 Dec. 31
Total Operating Revenues $2,254 $1,401 $1,676 $1,656
Operating Income (Loss) (198) (674) (706) (1,981)
Net Earnings (Loss) (204) (691) (737) (2,676)
Net Earnings (Loss)
Per Share ( .04) (.13) (0.13) (0.48)
Shareholders' Equity 3,298 2,652 3,133 502
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended
(Unaudited)
1993 March 31 June 30 Sept. 30 Dec. 31
Total Operating Revenues $2,364 $2,492 $2,756 $ 2,076
Operating Income (Loss) 113 118 311 (289)
Net Earnings (Loss) 116 114 305 (289)
Net Earnings (Loss)
Per Share 0.02 0.02 0.06 (0.05)
Shareholders' Equity 3,326 3,446 3,751 3,462
</TABLE>
N. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE
INDEPENDENT AUDITORS REPORT
On June 13, 1995 the Company was authorized by the Board of
Directors to issue 4,535,118 Shares of Series A Preferred Stock
$.01 par value ("Series A Shares"), with the following
attributes:
(1) Rank. The Series A Preferred Stock shall, with respect
to dividend rights and voluntary or involuntary liquidation,
winding-up, dissolution, merger and combination, rank prior to
all classes of Common Stock.
(2) Dividends. The holders of record of any outstanding
shares of Series A Preferred Stock shall be entitled to
cumulative dividends at the rate per share of nine (9%) percent
per annum payable quarterly, on March 31, June 30, September 30
and December 31 of each year.
(3) Liquidation Rights. Upon the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary,
the holders of the Series A Preferred Stock will be entitled to
receive and to be paid out of the assets of the Corporation
available for distribution a liquidation distribution in cash in
an amount equal to $.80 per share plus accrued and unpaid
dividends thereon to the date of such distribution.
(4) Conversion Rights. The holders of shares of Series A
Preferred Stock have the right at their option to convert such
shares into shares of Common Stock of the Corporation at any time
until the date five years from the date of issuance of such
shares of Series A Preferred Stock at a conversion price subject
to adjustment under certain conditions of $1.25 per share. The
value of each share of Series A Preferred Stock for conversion
purposes is $1.00 and each share would therefore be convertible
into one share of Common Stock upon payment of additional
consideration of $0.25. If any shares of Series A Preferred
Stock are called for redemption, the conversion rights pertaining
thereto will terminate at the close of business on the business
day next preceding the redemption date. The Corporation shall
make no payment or adjustment on account of any dividends accrued
and unpaid on any shares of Series A Preferred Stock surrendered
for conversion. Holders who convert their shares of Series A
Preferred Stock after the record date for a dividend and before
the payment date for such dividend will be entitled to the
dividend as if they held their shares on the record date. No
fractional shares will be issued upon conversion and, in lieu of
any fractional share, an adjustment in cash will be made based on
the then current market price of the Common Stock.
(5) Redemption. The shares of the Series A Preferred Stock
are not subject to redemption on or prior to June 30, 1998 or if
any Series B Preferred Stock is outstanding. After June 30, 1998
the Series A Preferred Stock is redeemable in whole or in part,
at any time at the option of the Corporation, at the following
redemption prices: (i) if redeemed on or before June 30, 1999 -
$.90 per share, and (ii) $.80 per share thereafter, plus an
amount in cash equal to all accrued and unpaid dividends thereon
to the date fixed for redemption. If less than all of the
outstanding shares of Series A Preferred Stock are to be
redeemed, the Corporation will redeem such shares on a pro rata
basis. There is no mandatory redemption or sinking fund
obligation with respect to the Series A Preferred Stock.
(6) Voting Rights. The holders of shares of the Series A
Preferred Stock are not entitled to any voting rights except as
required by law or as described below. In the event quarterly
dividends are in arrears for two calendar quarters the holder of
shares of the Series A Preferred Stock shall have the same voting
rights as if such shares of Series A Preferred Stock had been
converted into shares of Common Stock.
(7) Status of Converted Stock. In case any shares of Series
A Preferred Stock shall be converted pursuant hereto, the shares
so redeemed shall be cancelled.
On June 15, 1995 the Company authorized a Private Placement
Offering of Subordinated Convertible Notes.
On July 5, 1995 the Company received notification from the NASDAQ
Review Committee ("NRC") that the Company's request for temporary
exemption from the NASDAQ's capital and surplus maintenance
requirement was denied, and that the Company 's Common Stock
would be suspended from trading on the NASDAQ system. The
Company appealed the decision to the NRC based on the Company's
Refinancing Plan.
On July 31, 1995 the Company announced the closing of the Private
Placement Offering issuing $775,000 of Subordinated Convertible
Notes.
On September 13, 1995, the Company's Board of Directors
authorized the exercise price, with respect to options covering
250,000 shares of common stock to each of Mr. David Pomerance and
Mr. Mitchel Laskey issued in connection with their respective
employment agreements, be reduced to $1.00 per share.
On September 21, 1995 the NRC informed the Company of
its eligibility to be relisted under the continuing maintenance
requirements and upon timely filing of the Company's Form 10-Q
for the period ending September 30, 1995. The NRC's decision, as
cited in the Company's notification, was based on the progress
the Company's Refinancing Plan had made toward achieving
compliance with the NASDAQ's continuing capital and surplus
maintenance requirements.
On September 28, 1995 the Company accepted a Letter of Intent
from an institutional investor for the proposed purchase of
2,812,500 shares of Series B Preferred Stock of the Company for
$2,250,000. Pursuant to the Letter of Intent, the Company's
Board authorized a new class of Nine Percent (9%) Cumulative
Convertible Series B Preferred Stock ("Series B Preferred
Stock") to be placed with the institutional investor. The Series
B Preferred Stock has substantially the same terms as the Nine
Percent (9%) Cumulative Convertible Series A Preferred Stock
("Series A Preferred Stock").
On October 20, 1995 the Company accepted a Loan Commitment from
First Union National Bank of Florida ("the Bank"). The loan
commitment enables the Company to refinance its current demand
line of credit to a Term Note, payable in equal monthly payments
of accrued interest and principle due using a 17 1/2 year
amortization schedule upon a minimum principal payment of
$500,000 from the sale of $2,250,000 of Preferred Stock. The
Note would mature on March 30, 1998.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dynamic Healthcare Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of
Dynamic Healthcare Technologies, Inc. (formerly Terrano
Corporation) and subsidiary as of December 31, 1994, and
the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the 1994 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Dynamic Healthcare Technologies, Inc. and
subsidiary as of December 31, 1994, and the results of their
operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/S/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Orlando, Florida
March 31, 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Terrano Corporation:
We have audited the accompanying balance sheet of Terrano
Corporation as of December 31, 1993, and the related statements
of operations, shareholders' equity, and cash flows for the years
ended December 31, 1993 and 1992. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Terrano Corporation
as of December 31, 1993, and the results of their operations and
their cash flows for the years ended December 31, 1993 and 1992
in conformity with generally accepted accounting principles.
As discussed in Note I, the accompanying financial statements for
the years ended December 31, 1993 and 1992 have been restated.
/S/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Orlando, Florida
March 16, 1994
(January 11, 1995 as to Notes I and J)
CORPORATE INFORMATION
Board of Directors
David M. Pomerance
Chief Executive Officer
Terrano Corporation
Mitchel J. Laskey, C.P.A.
President and Chief Operating Officer
Terrano Corporation
Thomas J. Martinson, Chairman
President
Martinson & Company, Ltd.
Kenneth C. Coon
Chairman and Chief Executive Officer
Acceptance Insurance Companies, Inc.
Jerry L. Carson
Executive Vice President and Chief Financial Officer
Evans Enterprises
Officers
David M. Pomerance
Chief Executive Officer
Secretary
Mitchel J. Laskey, C.P.A.
President and Chief Operating Officer
Treasurer
Philip R. Kneeland
Vice President
Technical Operations
Mary Lu Lander
Vice President
Marketing
Matthew P. Lawton
Vice President
Sales
Linda A. Moline, R.R.A.
Vice President
Professional Services
Paul S. Glover
Vice President of Finance
Chief Financial Officer
Transfer Agent and Registrar
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
South St. Paul, Minnesota 55075
(612)450-4064
Auditors
KPMG Peat Marwick, LLP
111 North Orange Avenue, Suite 1600
Orlando, Florida 32801
(407)423-3426
Legal Counsel
Cohen, Berke, Bernstein, Brodie, Kondell & Laszlo, P.A.
Terremark Center - 19th Floor
2601 S. Bayshore Drive
Miami, Fl 33133-5460
(305)854-5900
STOCK TRADING INFORMATION
The Common Stock of Terrano Corporation is traded on the
Electronic Bulletin Board under NASDAQ symbol DHTI.
COMMON STOCK INFORMATION
The approximate number of stockholders of the Company's Common
Stock on March 28, 1995, was 1,662. High and low bid quotations
for the Common Stock for the last eight quarters are presented
below:
<TABLE>
<S> <C> <C> <C> <C>
1994 1993
Quarter Ended High Low High Low
March 31 $2.750 $2.000 $2.125 $1.500
June 30 2.125 1.750 2.250 1.750
September 30 1.875 1.500 2.375 2.000
December 31 2.000 1.000 2.375 2.000
</TABLE>
The foregoing quotations reflect inter-dealer prices without
retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
ANNUAL REPORT ON FORM 10-K, WITHOUT EXHIBITS
Terrano Corporation's annual filing with the Securities and
Exchange Commission (Form 10-K) is available upon request without
charge to shareholders by writing to:
Gail E. Carter
Investor Services Department
Dynamic Healthcare Technologies, Inc.
101 Southhall Lane, Suite 210
Maitland, Florida 32751
(407) 875-9991
ANNUAL MEETING
The Annual Meeting of Shareholders of Dynamic Healthcare
Technologies, Inc. was held on June 13, 1995, in Maitland,
Florida.
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Dynamic Healthcare Technologies, Inc.:
We consent to incorporation by reference in the registration
statements (No. 33 -72684 and 33-72764) on Form S-8 of Dynamic
Healthcare Technologies, Inc. (formerly Terrano Corporation) of
our reports dated March 31, 1995, relating to the consolidated
balance sheet of Dynamic Healthcare Technologies, Inc. and
subsidiary as of December 31, 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows
for the year then ended, and related schedule, which reports
appear in the December 31, 1994 annual report on Form 10-KA No. 2
of Dynamic Healthcare Technologies, Inc.
/S/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Orlando, Florida
November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 10,173
<SECURITIES> 0
<RECEIVABLES> 2,416,813
<ALLOWANCES> 250,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,905,009
<PP&E> 3,152,947
<DEPRECIATION> 1,939,978
<TOTAL-ASSETS> 7,000,116
<CURRENT-LIABILITIES> 5,775,581
<BONDS> 722,569
<COMMON> 59,678
0
0
<OTHER-SE> 422,288
<TOTAL-LIABILITY-AND-EQUITY> 7,000,116
<SALES> 1,873,393
<TOTAL-REVENUES> 6,987,142
<CGS> 1,547,453
<TOTAL-COSTS> 10,546,482
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143,412
<INCOME-PRETAX> (3,697,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,697,500)
<DISCONTINUED> 0
<EXTRAORDINARY> (610,000)
<CHANGES> 0
<NET-INCOME> (4,307,500)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
