[CONFIRMING-COPY]
[FILER]
[FILE-NUMBER] 0-12516
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1995
Commission File Number 0-12516
Terrano Corporation
(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)
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 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 May 9, 1995, there were 6,582,815 shares outstanding, par value $.01
per share, of the issuer's only class of common stock.
This report consists of fourteen (14) pages.
The index to exhibits appears on page thirteen (13).
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
See attached statements following this item number.
TERRANO CORPORATION
Condensed Balance Sheets
<TABLE>
<CAPTION>
<C>
March 31,
1995
(Unaudited)
<C>
December 31,
1994
<S>
ASSETS
Current assets:
Cash and cash equivalents
$ 258,100
$ 10,173
Accounts receivable, net of allowance for doubtful accounts of $220,280 at
March 31, 1995, and $250,000 at December 31, 1994
1,915,734
2,166,813
Unbilled receivables
509,689
528,372
Other current assets
174,516
199,651
Total current assets
2,858,039
2,905,009
Property, equipment and leasehold improvements, net of accumulated
depreciation of $2,038,018 at March 31, 1995, and $1,939,978 at December 31,
1994
1,239,804
1,212,969
Capitalized software development costs, net of accumulated amortization of
$1,408,157 at March 31, 1995, and $1,273,095 at December 31,1994
1,915,859
1,821,917
Goodwill, net of accumulated amortization of $93,460 at March 31,1995, and
$54,787 at December 31, 1994
989,377
1,028,050
Other assets
12,892
32,171
$7,015,971
$7,000,116
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit
$3,188,401
$2,788,401
Accounts payable and accrued expenses
1,459,526
1,182,450
Deferred revenue
1,257,768
1,452,895
Advance billings
341,385
351,835
Total current liabilities
6,247,080
5,775,581
Long-term debt
94,962
112,569
Total liabilities
6,342,042
5,888,150
Common stock, $0.01 par value; authorized 20,000,000 shares, issued and
outstanding 6,582,815 shares at March 31, 1995, and 5,967,815 shares at
December 31, 1994
65,828
59,678
Additional paid-in capital
8,878,146
8,879,296
Deficit
(8,270,045)
(7,827,008)
Total shareholders' equity
673,929
1,111,966
$7,015,971
$7,000,116
</TABLE>
See notes to condensed financial statements.
TERRANO CORPORATION
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<C>
1995
<C>
1994
<S>
Operating revenues
Computer system equipment sales and support
$ 388,033
$ 915,050
Application software licenses
838,985
738,314
Software support and maintenance
1,007,172
600,806
Total operating revenues
2,234,190
2,254,170
Operating expenses:
Cost of equipment sold
365,808
712,700
Client services expense
724,189
462,303
Software development costs
477,391
416,052
Sales and marketing costs
577,173
426,312
Joint marketing costs
0
22,487
General and administrative expense
455,920
412,514
Total operating expenses
2,600,481
2,452,368
Operating income (loss)
(366,291)
(198,198)
Other income (expense):
Interest expense and financing costs
(78,775)
(5,560)
Miscellaneous
2,029
--
Total other income (expense)
(76,746)
(5,560)
Net earnings (loss) before income taxes
(443,037)
(203,758)
Income taxes - current
--
--
Net earnings (loss)
$ (443,037)
$ (203,758)
Net earnings (loss) per share
$ (0.07)
$ (0.04)
Weighted average number of common and common equivalent shares outstanding
6,003,871
5,291,938
</TABLE>
See notes to condensed financial statements.
TERRANO CORPORATION
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<C>
1995
<C>
1994
<S>
Cash flows from operating activities:
Net earnings (loss)
$ (443,037)
$ (203,758)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization
271,775
197,041
Changes in assets and liabilities:
Accounts receivable
251,079
(584,267)
Unbilled receivable
18,683
121,016
Other current assets
25,135
(29,404)
Accounts payable and accrued expenses
277,076
(31,113)
Deferred revenues
(195,127)
(283,234)
Advance billings
(10,450)
66,303
Other assets
19,279
--
Total adjustments
657,450
(481,438)
Net cash provided (used) by operating activities
214,413
(685,196)
Cash flows from investing activities:
Capitalized software development costs
(229,004)
(100,710)
Purchases of property and equipment
(124,875)
(52,627)
Net cash used in investing activities
(353,879)
(153,337)
Cash flows from financing activities:
Proceeds from line of credit
400,000
(39,000)
Repayment of long term debt
(17,607)
--
Proceeds from incentive stock option exercises
5,000
39,540
Net cash flows provided by financing activities
387,393
540
Net increase (decrease) in cash and cash equivalents
247,927
(837,993)
Cash and cash equivalents, beginning of period
10,173
1,100,142
Cash and cash equivalents, end of period
$ 258,100
$ 262,149
</TABLE>
See notes to condensed financial statements.
TERRANO CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
(A) Unaudited Financial Statements:
The accompanying unaudited Condensed Balance Sheet as of March 31, 1995,
Condensed Statements of Operations for the three month periods ended March
31, 1995 and 1994, and Condensed Statements of Cash Flows for the three
month periods ended March 31, 1995 and 1994, have been prepared by
management in conformity with generally accepted accounting principles for
interim financial statements and with instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all the disclosures
required by generally accepted accounting principles for complete financial
statements. All adjustments and accruals considered necessary for fair
presentation of financial information have been included in the opinion of
management. Operating results for the three month period ended March 31,
1995, are not necessarily indicative of the operating results which may be
expected for the year ending December 31, 1995.
(B) Reporting Entity:
On January 1, 1995 the Company's wholly owned subsidiary Dynamic Healthcare
Technologies, Inc. was merged with and into the Company.
(C) Reclassification:
Certain reclassifications have been made to the 1994 financial statements to
conform to classifications used in 1995.
(D) Financing:
Principally as a result of the restated financial statements for the years
ended December 31, 1992 and 1993, and the three quarters ended September 30,
1994, the Company was in technical default under the terms of the Revolving
Credit and Security Agreement with First Union National Bank (the "Line of
Credit"). The financial covenants under the Line of Credit required
tangible net worth of not less than $2,355,000 on December 31, 1994, and
require the ratio of total liabilities to tangible net worth, as of any
quarter end during the term of the loan, to be no more than two to one. 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.
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, of existing
financial covenants based upon Company-prepared projections of financial
condition deemed reasonable by the Bank and tested on a quarterly basis.
On April 13, 1995, the Company executed definitive agreements for a
$1,000,000 subordinated secured loan. The loan has not been funded as of
this date and there is uncertainty as to when or if this loan will close.
Additionally, the Company is working with various other third parties on
alternative debt and/or equity financing arrangements.
(E) Restatements:
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):
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)
Operating results as restated where applicable, are summarized as follows
(in thousands, except per share data):
<TABLE>
Three Months Ended
(Unaudited)
<S> <C> <C> <C> <C>
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) (2,066)
Net Earnings (Loss) Per Share ( .04) ( .13) ( .13) ( .37)
Shareholders' Equity 3,298 2,652 3,133
1,112
</TABLE>
Item 2. Management's discussion and analysis of financial condition and results
of operations.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company recorded significantly increased revenue during the first quarter
1995 as compared with the fourth quarter of 1994 and on par with the first
quarter of 1994. The increase is indicative of the Company's impetus on
revenues and marks the beginning of the turnaround in direction. More
notable was the mix of revenues. During the first quarter 1995, the Company
had increases in both its revenue from application software, and software
support and maintenance revenues while incurring a decrease in revenue from
computer system equipment sales. The Company expects gross margins to increase
as the expected margins from application software and services exceed that for
sales of computer equipment. Although the Company reported a loss for the
period, it was significantly reduced from the preceding quarter which is a
further indication that the restructure plan and management's proactive re-
engineering of the operations have been effective. Additionally, the Company
reported "cash provided from operations" of $214,000 for the quarter ended
March 31, 1995. This is the first quarter in over a year that the Company
reported positive "cash provided by operations", and represents a $900,000
increase over the results of the fourth quarter of 1994.
During the quarter ended March 31, 1994 the Company continued the
restructuring plan which commenced during the fourth quarter 1994. The
Company continued its investment in the laboratory product line and the
preservation of the customer base. The ongoing programs as part of this
planned restructuring include a reduction in staff, a revamped product
quality control process, product deliveries on a timely and scheduled basis,
the delivery of all outstanding customer contractual obligations, and the
attainment of enhanced customer satisfaction. The plan also included 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.
Significant Company resources have been and will continue to be 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.
During the execution of the restructure plan, the Company has continued to
develop new products. The major development activities in addition to the
completion of various laboratory product line commitments include, the
development of Monitrax, a new anesthesia information system which uses a
pen-based technology and document image solutions, an agreement with IBM
Corporation to provide support and enhancements for the IBM Medical
RecordsPlus/400 software product. Both Monitrax and document imaging
solutions are in their formative stages. They will need continued management
involvement and capital resources to reach marketability and market penetration.
During the first quarter, the Company determined that the plan of restructure,
ongoing normal operations, and continued software product development required
additional financing. Upon entering into a plan for an infusion of capital, the
Company advised its senior debt lender (First Union National Bank of Florida)
of the Company's financing plan, and sought an amendment to its current
Revolving Credit and Security Agreement. 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 executed definitive
agreements for a one million dollar loan on April 13, 1995. The loan has not
been funded as of this date and there is uncertainty as to when or if this
loan will close. The Company continues to actively and aggressively seek
financing from a number of capital markets, funds and private investors, but
there is no assurance that sufficient funds will be obtained.
Quarter Ended March 31, 1995
Total operating revenues were $ 2,234,000 during the quarter which was
comparable to the first quarter 1994. While revenues appear to be relatively
similar, there was substantial differences in the revenue mix between periods.
Computer system equipment sales and support declined by 58% to $388,033
during the quarter. This was as a result of fewer deliveries of new LabPro
2000 laboratory information systems (LIS) during the quarter as compared to
the same period in 1994. More new customers are operating the Company's
systems and software on an existing IBM AS/400 in a co-resident environment
with that of another vendor's software and are purchasing 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 increased by 13.6% to $839,000 as
compared to the first quarter 1994. This increase was primarily caused by
successful deliveries of and acceptance by customers of software products.
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, and other niche software and sub-
license revenues earned from joint marketing agreements.
Software support and maintenance revenues increased by 67.6% to $1,007,000 as
compared to the first quarter of 1994. 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 Dynamic Technical
Resources, Inc. (DTR) are included in the first quarter of 1995 and are
included in the first quarter of 1995 and are a 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 48.7% to $366,000 during the first
quarter of 1995 as compared to 1994, primarily as a direct result of a
reduction in computer system equipment sales. Hardware margins declined
from 22.1% during the first quarter 1995 to 5.7% during the same period in
1994. This reflects both the continued competitive marketplace for hardware
and the resulting lower margins available to remarketers.
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 56.6% to $724,000 in the first quarter 1995 as compared to 1994
in client services expense is primarily comprised of two factors. First, DTR
was acquired in August 1994, and the continuing client service costs have
been included. Second, more significantly, staffing levels and the resulting
costs and operational inefficiencies that existed in the Company's laboratory
product line also contributed to this increase. This product line is
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. As the restructuring and re-engineering is completed,
this cost will be reduced and the Company should benefit with increased
margins.
Software development costs increased 14.7% during the first quarter 1995 to
$477,000, or 21.4% of total revenues in 1995 compared to $416,000, or 18.5%
of total revenues in 1994. 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.
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 increased 35.4% during the first quarter 1995 to $577,000 as
compared to $426,000 in 1994. The increase is related 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 its image.
Interest expense and financing costs for the first quarter 1995 increased
to $78,775 from $5,560 for the first quarter 1994. Borrowings under Lines
of Credit increased by $2,488,000 from March 31, 1994 to March 31, 1995 and
the Company's borrowing rate of interest increased from 6.5% at December 31,
1994 to 9.5% at December 31, 1995.
Total operating expenses decreased by more than $1,000,000 over the previous
quarter. The restructuring plan begun during the fourth quarter of 1994
included aligning the Company's cost structure with its revenue base.
For the first time in over a year, the Company reported positive "cash flow
from operations". This represents an increase of approximately $900,000
over the "cash used by operations" reported during the same quarter a year
ago. The Company's Three Point Plan of (1) streamlining operations, (2)
increasing revenues, and (3) providing better customer service is beginning
to show results.
Liquidity and Capital Resources
As of March 31, 1995, the Company had cash of $258,000 and a working capital
deficiency of $3,389,000. This deficiency is mitigated to some extent by
the inclusion of deferred revenues of $1,258,000 and advance billings of
$341,000 in current liabilities as of March 31, 1995. These balances
represent cash received by the Company pursuant to contracts in advance of
revenue recognition upon contract performance, and typically do not require
an outlay of cash.
During the first quarter of 1995 the Company borrowed an additional $400,000
under the line of credit principally to fund $229,000 of software
development, and $125,000 of property and equipment additions. In
connection with the restructuring plan, the Company continues to re-engineer
its laboratory product line, and to develop Monitrax and document imaging.
Deferred revenues as of March 31, 1995 decreased by $195,000 from the
December 31, 1994 level and accounts receivable decreased by $251,000 over
the same period. Customers under annual support agreements requested more
frequent interim billing as opposed to annual billing, and management
responded by implementing a policy recognizing a billable premium to
accomodate these requests.
Accounts payable and accrued expenses as of March 31, 1995 increased by
$277,000 over the balance on December 31, 1994 and cash increased by $248,000
over the same period. These changes result principally from a timing shift
in the disbursements cycle. The Company had been paying outstanding
operating expenses immediately prior to month end. Typical month end
disbursements occured after March 31, 1995.
During the first quarter of 1995 the Company again obtained accomodation from
its senior debt lender (the "Bank"). A waiver of default to the specific
conditions existing on December 31, 1994 was received from the Bank on
January 10, 1995. A letter agreement from the Bank was received on March
20, 1995 which subject to the Company obtaining qualifying equity or debt
funding of $1,000,000 and meeting certain other conditions, the demand line
of credit would be modified to reflect an April 30, 1996 maturity date. The
Bank also provided an additional $400,000 of funding.
The Company continues to actively and aggressively seak qualifying financing,
but there is no assurance that sufficient funds will be obtained. The
Company believes that this infusion is necessary during the second quarter
of 1995 to ensure 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 qualifying financing.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in existing or pending legal
proceedings involving the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
The information required by this item is incorporated by reference to
Footnote D of the financial statements
included in Part I herein.
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11: Statement Regarding Computation of Per Share Earnings.
(b) Reports on Form 8-K:
Item Reported Date of Report
Engagement of Special Legal Counsel 02/10/95
Dismissal of Deloitte & Touche LLP 02/14/95
Engagement of KPMG Peat Marwick LLP and the
Resignation of Gary Kohler (03/02/95) From the
Company's Board of Directors. 03/01/95
Revised Merger Consideration 03/05/95
Charles H. Altshuler, M.D. Resignation From the
Company's Board of Directors. 04/06/95
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TERRANO CORPORATION (Registrant)
Date /S/MITCHEL J. LASKEY
Mitchel J. Laskey
President, Chief Operating Officer and Treasurer
Date /S/PAUL S. GLOVER
Paul S. Glover
Vice President of Finance, CFO
FORM 10-Q
TERRANO CORPORATION
Index to Exhibits
Description of Exhibit Page number
Exhibit 11: Statement regarding computation of per share earnings
14
FORM 10-Q
TERRANO CORPORATION
Exhibit 11
Computation of Weighted Average Number of Shares Outstanding and
Per Share Earnings
Three Months Ended
March 31, (Unaudited)
1995 1994
Earnings (loss) available for common shareholders:
Net earnings (loss) $ (443,037) $(203,758)
Weighted average number of common shares outstanding
and earnings per share:
Primary:
Weighted average number of common shares out-
standing 6,003,871 5,291,938
Dilutive effect of options and warrants using
treasury stock method ------ ------
Weighted average number of common and common
equivalent shares outstanding 6,003,871 5,291,938
Earnings (loss) per share - primary $ (0.07) $ (0.04)
Fully diluted:
Weighted average number of common shares
outstanding 6,003,871 5,291,938
Dilutive effect of options and warrants using
treasury stock method ------ ------
Weighted average number of common and common
equivalent shares outstanding assuming full
dilution 6,003,871 5,291,938
Earnings (loss) per share - fully diluted $ (0.07) $ (0.04)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 258,100
<SECURITIES> 0
<RECEIVABLES> 1,915,734
<ALLOWANCES> 220,280
<INVENTORY> 0
<CURRENT-ASSETS> 2,858,039
<PP&E> 1,239,804
<DEPRECIATION> 2,038,018
<TOTAL-ASSETS> 7,015,971
<CURRENT-LIABILITIES> 6,247,080
<BONDS> 0
<COMMON> 65,828
0
0
<OTHER-SE> 608,101
<TOTAL-LIABILITY-AND-EQUITY> 7,015,971
<SALES> 388,033
<TOTAL-REVENUES> 2,234,190
<CGS> 35,808
<TOTAL-COSTS> 2,600,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,775
<INCOME-PRETAX> (443,037)
<INCOME-TAX> 0
<INCOME-CONTINUING> (366,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (443,037)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
