<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1996
REGISTRATION NO. 333-10605
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
---------------------
<TABLE>
<S> <C> <C>
FLORIDA 7373 59-3389871
(State or other jurisdiction Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number Identification No.)
</TABLE>
101 SOUTHHALL LANE, SUITE 210
MAITLAND, FLORIDA 32751
(407) 875-9991
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MITCHEL J. LASKEY, PRESIDENT
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
101 SOUTHHALL LANE, SUITE 210
MAITLAND, FLORIDA 32751
(407) 875-9991
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD N. BERNSTEIN, ESQ. AND PAUL BERKOWITZ, ESQ. AND
KAREN Z. ROSEN, ESQ. JOSEPH A. MARINELLO, ESQ.
COHEN, BERKE, BERNSTEIN, GREENBERG, TRAURIG, HOFFMAN,
BRODIE & KONDELL, P.A. LIPOFF, ROSEN & QUENTEL, P.A.
2601 SOUTH BAYSHORE DRIVE, SUITE 1900 1221 BRICKELL AVENUE
MIAMI, FLORIDA 33133 MIAMI, FLORIDA 33131
TEL: (305) 854-5900 TEL: (305) 579-0500
FAX: (305) 857-9322 FAX: (305) 579-0717
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
---------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE
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<S> <C> <C>
Common Stock, $0.01 par value.................................. $30,187,500(1)(2) $10,409.00
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Representatives' Warrants...................................... $1,575,000 $544.00
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Common Stock, $0.01 par value(3)............................... -- (4)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933 on the basis of
the average high and low sales prices of the Company's Common Stock on
August 19, 1996, as reported by Nasdaq.
(2) Includes 750,000 shares of Common Stock which may be purchased by the
Underwriters pursuant to an over allotment option.
(3) Represents shares of Common Stock issuable upon exercise of the
Representatives' Warrants together with such indeterminate number of
securities as may be issuable by reason of the anti-dilution provisions
contained therein.
(4) Pursuant to Rule 457(i), no fee is being paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM LOCATION IN PROSPECTUS
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<C> <S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.............. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus.................................. Inside Front and Outside Back Cover Pages
of Prospectus; Available Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges................... Prospectus Summary; Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution...................................... Not Applicable
7. Selling Security Holders...................... Principal and Selling Shareholders
8. Plan of Distribution.......................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered.... Description of Capital Stock; Shares
Eligible for Future Sale; Dividend Policy
10. Interest of Named Experts and Counsel......... Legal Matters
11. Information with Respect to the Registrant
(a) Description of Business.................. Prospectus Summary; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Financial Statements
(including the Notes thereto)
(b) Description of Property.................. Business -- Facilities
(c) Legal Proceedings........................ Business -- Legal Proceedings
(d) Common Shares Price Range and Dividends.. Risk Factors; Underwriting; Dividend
Policy
(e) Financial Statements..................... Financial Statements (including the Notes
thereto)
(f) Selected Financial Data.................. Prospectus Summary -- Summary Consolidated
Financial Data; Selected Consolidated
Financial Data
(g) Supplemental Financial Information....... Prospectus Summary -- Summary Consolidated
Financial Data
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and disagreements with
accountants............................ Not Applicable
(j) Directors and Officers of Registrant..... Management
(k) Compensation of Directors and Officers... Management -- Executive Compensation
(l) Security Ownership of Certain Beneficial
Owners and Management.................. Principal and Selling Shareholders
(m) Interest of Management in Certain
Transactions........................... Management -- Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION DATED AUGUST 29, 1996
5,000,000 SHARES
DYNAMIC HEALTHCARE TECHNOLOGIES (LOGO)
COMMON STOCK
------------------------
Of the 5,000,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby, 4,000,000 shares are being issued and sold by
Dynamic Healthcare Technologies, Inc. (the "Company") and 1,000,000 shares are
being sold by certain shareholders of the Company (the "Selling Shareholders").
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
The Company has made an application to list the Common Stock on the Nasdaq
National Market under the trading symbol "DHTI." The Common Stock is currently
traded on the over-the-counter market and is quoted on the Nasdaq SmallCap
Market under the trading symbol "DHTI." On August 28, 1996 the last reported
sales price for the Common Stock was $6.00.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total(3)........................ $ $ $ $
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</TABLE>
(1) Does not include additional compensation to the Representatives of
Representatives' Warrants entitling the Representatives to purchase up to
250,000 shares of Common Stock. The Company and the Selling Shareholders
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $500,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 750,000 additional shares of Common Stock on
the same terms and conditions as the securities offered hereby, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholders will be $ , $ ,
$ , and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to certain other conditions including the right of the
Underwriters to withdraw, cancel, modify or reject any order in whole or in
part. It is expected that delivery of the shares will be made on or about
, 1996 at the offices of Raymond James & Associates, Inc., St.
Petersburg, Florida.
RAYMOND JAMES & ASSOCIATES, INC. VECTOR SECURITIES INTERNATIONAL, INC.
The date of this Prospectus is , 1996
<PAGE> 4
[Color Photographs]
[The color photograph is of three screens appearing on a computer monitor using
DynamicVision Clinical Workstation.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
This Prospectus may contain trademarks and servicemarks of other parties.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all financial
information and share data in this Prospectus (i) have been adjusted to reflect
the conversion of all outstanding shares of the Company's Series A Preferred
Stock into 968,750 shares of Common Stock and all outstanding shares of the
Company's Series B Preferred Stock into 3,750,000 shares of Common Stock
concurrently with the consummation of this Offering, and (ii) assume no exercise
of the Underwriters' over-allotment option. Investors should carefully consider
the information set forth under the heading "Risk Factors."
THE COMPANY
Dynamic Healthcare Technologies, Inc. ("Dynamic" or the "Company") is a
leading provider of enterprise-wide, patient-centered healthcare information
systems. These systems enable hospitals, physician practice groups and
integrated delivery networks to capture, store, archive and retrieve clinical,
financial and administrative patient information. The Company's products enhance
productivity, reduce costs and improve the quality of patient care by providing
on-line access to patient information previously maintained on a variety of
media, including paper, X-ray film, magnetic disk, and video and audio
recordings. The Company's current product lines include clinical information
systems for use in laboratory, radiology, anatomic pathology and anesthesiology
applications, and imaging and electronic health record solutions. The Company
provides support for all of its systems and provides systems integration and
other consulting services.
The Company currently serves over 250 customers in 44 states. Key customers
include the University of California at Los Angeles Medical Center, University
of Illinois at Chicago Medical Center, Methodist Hospital of Memphis, Memorial
Sloan-Kettering Cancer Center, Ohio State University Hospital, Columbia/HCA,
Greater Dayton Area Hospital Association, Advocate Health Care, Temple
University Hospital, UniHealth and Orlando Regional Health System.
Utilizing the Company's healthcare information experience, imaging
technologies and customer input, the Company is focusing on a new product
strategy for electronic health records. The Company's new electronic health
record product, DynamicVision, provides connectivity and enabling technologies
that integrate clinical and imaging information systems to create an open
architecture, multi-media clinical workstation. DynamicVision provides prompt
and simultaneous on-line access to information stored in various systems and
data repositories located at multiple sites. This information can include
documents, medical images such as X-rays, MRIs and CAT scans, and video and
audio recordings. DynamicVision is currently being beta-tested and is scheduled
for general availability by the end of 1996.
The healthcare information industry is undergoing rapid and significant
change. Cost containment pressures, industry consolidation, the movement toward
managed care and rising standards of healthcare quality represent fundamental
trends in today's healthcare operating environment. Increasingly, the key to
effective cost control and quality management lies in the collection,
availability and analysis of medical records in order to assess treatment
patterns, resource utilization and outcomes. As a result, the information
demands in the healthcare industry are rapidly increasing for caregivers,
managers and third party payors. Total healthcare information technology
spending in the United States was estimated to be $8.5 billion in 1994, and is
projected to reach $13.0 billion by 1997 and $20.0 billion by 2000.
The Company's new product development, including DynamicVision, employs
technical designs based on open architecture at all levels of data capture,
information management and workflow, application software and connectivity,
which permits platform independence and plug and play capability. Dynamic's
strategy to utilize open architecture leverages its own technology with
capabilities of leading technology companies, enabling the Company to focus its
research and development on healthcare software applications. The Company has
entered into strategic relationships with several leading technology developers,
including International Business Machines Corporation ("IBM"), Wang
Laboratories, Inc. ("Wang") and others, to gain access to certain technologies
that are integrated into the Company's systems. The Company's platform
3
<PAGE> 6
independent systems run on a variety of operating systems, including UNIX,
Windows 95/NT, IBM AS/400 and other proprietary platforms. Dynamic's systems are
developed using Internet/Intranet standards and protocols, are fully scaleable
and preserve the customers' investment in existing systems. The Company believes
its technical designs and strategic relationships enable it to respond more
rapidly to changes in core technologies at a lower cost than companies utilizing
proprietary information systems.
The Company's objective is to be the leading provider of enterprise-wide,
patient-centered healthcare information systems that enable the efficient
capture, storage, archival and retrieval of electronic health information and
the secure sharing of this information across the continuum of care throughout a
patient's lifetime. To achieve this objective, the Company intends to employ the
following strategies: (i) aggressively expand its position in the rapidly
growing electronic health record market through the commercial availability of
DynamicVision; (ii) focus on cross-selling additional applications and services
to existing and new customers; (iii) provide solutions utilizing open
architecture that offer cost-effective and flexible information solutions; (iv)
maintain its technological advantage by investing in proprietary research and
development for healthcare software applications while integrating
state-of-the-art technology through strategic relationships with industry
leading technology companies; and (v) acquire complementary businesses, products
and technologies.
The Company was originally incorporated in California in 1977,
reincorporated in Nebraska in 1982 and subsequently reincorporated in Florida in
1996. The Company's executive offices are located at 101 Southhall Lane, Suite
210, Maitland, Florida 32751, its telephone number is (407) 875-9991 and its
World Wide Web address is http://www.dht.com.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company..................... 4,000,000 shares
Common Stock Offered by the Selling Shareholders........ 1,000,000 shares
Common Stock to be Outstanding after the Offering....... 15,400,536 shares(1)
Use of Proceeds......................................... Repayment of indebtedness;
expansion of sales, marketing and
distribution; research and
development; general corporate
purposes, including working
capital; and potential
acquisitions. See "Use of
Proceeds."
Nasdaq Symbol........................................... DHTI
</TABLE>
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(1) Does not include 1,908,190 shares issuable upon the exercise of outstanding
options and warrants.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------------
1995 1995 1996
--------------------- ------ ------------------------
1993 1994(1) ACTUAL PRO FORMA(2) ACTUAL ACTUAL(3) PRO FORMA(2)
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total operating revenues... $9,688 $6,987 $8,886 $ 14,150 $4,502 $ 6,317 $7,323
Operating income (loss).... 253 (3,559) (162) (219) (503) (417) (1,537)
Net earnings (loss)........ 246 (4,307) (513) (646) (706) (522) (1,632)
Earnings (loss) per common
share.................... $0.05 $(0.78) $(0.08) $(0.10) $(0.11) $ (0.08) $(0.25)
Weighted average common
shares outstanding....... 5,363 5,536 6,443 6,443 6,295 6,619 6,619
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $771 $ 19,950
Working capital..................................................... 122 19,301
Total assets........................................................ 11,040 30,219
Long-term obligations, net of current maturities.................... 2,922 234
Series A preferred stock............................................ 10 --
Series B preferred stock............................................ 38 --
Total shareholders' equity.......................................... 3,597 25,537
</TABLE>
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(1) Includes the operating results and related financial information since the
acquisition of Dynamic Technical Resources, Inc. on August 23, 1994,
accounted for by the purchase method.
(2) Gives effect to the acquisition of Dimensional Medicine, Inc. ("DMI") as if
the acquisition occurred on January 1, 1995. See "Pro Forma Condensed
Consolidated Statements of Operations."
(3) Includes the operating results and related financial information since the
acquisition of DMI on May 1, 1996, accounted for by the purchase method.
(4) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock
offered by the Company at an assumed offering price of $6.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE> 8
RISK FACTORS
Prospective investors should carefully consider the specific factors set
forth below, as well as the other information contained in this Prospectus
before deciding to invest in the Common Stock offered hereby.
This Prospectus contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") which represent the Company's expectation or beliefs
including, but not limited to, statements regarding growth in sales of the
Company's products, profit margins and the sufficiency of the Company's cash
flow for its future liquidity and capital resource needs. For this purpose, any
statements contained in this Prospectus that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "estimate" or "continue" or the negative or other variations thereof
or comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors,
including those described below.
RECENT LOSSES; POTENTIAL NEED FOR ADDITIONAL FINANCING
The Company has in recent periods incurred operating losses. The Company
incurred a net loss of $513,000 for the year ended December 31, 1995 and a net
loss of $522,000 for the six months ended June 30, 1996. There can be no
assurance that the Company will be able to achieve or maintain profitability on
a quarterly or annual basis or that it will be able to sustain or increase
revenue growth. The Company believes that the net proceeds from this Offering,
together with funds from operations, will be sufficient to finance the Company's
foreseeable cash requirements for at least the next twelve months. If the
Company requires additional funds, there can be no assurance that additional
financing can be obtained on acceptable terms, if at all. The inability to
obtain such financing, if necessary, could have a material adverse effect on the
Company. If additional funds are raised by issuing equity securities, dilution
to existing shareholders may result. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
UNCERTAINTY OF MARKET DEVELOPMENT, DELIVERY AND ACCEPTANCE OF THE COMPANY'S
SYSTEMS
The market for electronic health record systems and clinical information
systems is relatively new and may not develop as the Company expects, which
could have a material adverse effect on the Company. The Company's success is
dependent upon market acceptance of its systems. The Company's future success
and financial performance will depend in large part on the Company's ability to
continue to meet the increasingly sophisticated needs of its customers through
the timely development and successful introduction of enhanced versions of its
existing systems, complementary systems and new systems. There can be no
assurance that the Company will successfully complete, develop, introduce and
market new systems or system enhancements, or that systems or system
enhancements currently in development or that may be developed by the Company in
the future will meet the requirements of healthcare providers and achieve market
acceptance. The Company has experienced delays from time to time in completing
the development of new or enhanced systems and may experience additional delays
in the future. The inability of the Company to develop and deliver new systems
on a timely basis could have a material adverse effect on the Company. Changing
prices of computer hardware could have a material effect on the cost of products
sold and the related selling price of software and hardware sales.
VARIABILITY OF QUARTERLY OPERATING RESULTS; EXTENDED SALES CYCLE
The Company's revenues and operating results may vary significantly from
quarter to quarter as a result of a number of factors, many of which are outside
the Company's control. These factors include, among others, the magnitude of
customer agreements; unpredictability in the number and timing of systems sales;
length of the sales cycle; possible delays in the installation process; and
changes in the customer's financial condition or budget. The Company's systems
may be implemented in several phases, in some cases over several years. The
decision by a healthcare provider to replace, substantially modify or upgrade
its information systems involves a large capital commitment and an extended
review and approval process. The sales cycle for
6
<PAGE> 9
the Company's systems is typically six to eighteen months from initial contact
with a customer to execution of a master sales agreement with the Company.
During this period, the Company may expend substantial time, effort and funds
preparing proposals and negotiating a master sales agreement with no certainty
of an agreement being reached.
The Company's revenue recognition policies vary depending upon the source
of revenue and recognition does not necessarily coincide with payment. As a
result of many factors, including the timing of system sales and installations,
there may be significant variations in operating results from quarter to
quarter. In the past, customers have delayed installations from the originally
scheduled installation date and have modified the original system configuration.
There can be no assurance that customers will not cancel all or portions of
master sales agreements in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE UPON THIRD PARTIES
The Company enters into strategic relationships for the non-exclusive use
of information management technologies of leading technology developers. Among
others, the Company has entered into agreements with IBM for its Medical
RecordsPlus imaging software and with Wang for its Physician Workstation and
OPEN/software products. There can be no assurance that these companies will
continue these strategic relationships with the Company or that the Company will
obtain rights to newly developed technologies of these companies or other
technology developers. The Company's products are based upon industry adherence
to open architecture systems. In the event that a non-open architecture standard
is developed and widely accepted, the Company may need to change its interfaces
or develop its own information management technology. There can be no assurance
that the Company's efforts to develop such technology would be successful or
that there would be adequate funds available for such effort. Furthermore, there
can be no assurance that the Company's relationship with IBM, Wang or others
will be successful or that any similar relationships will develop or be
successful. See "Business -- Strategic Relationships" and "Business --
Competition."
ABILITY TO MANAGE GROWTH
The Company is currently experiencing a period of rapid growth and
expansion which has placed, and could continue to place, a significant strain on
the Company's service and support operations, sales and administrative personnel
and other resources. In order to serve the needs of its existing and anticipated
customer base, the Company believes that it will have to increase its workforce
substantially, which will require the Company to attract, train, motivate,
manage and retain highly qualified employees. The Company's ability to manage
its planned growth also will require the Company to continue to expand its
operational, management and financial systems and controls, all of which may
significantly increase its operating expenses. If the Company fails to achieve
its growth as planned or is unsuccessful in managing growth that does occur,
there could be a material adverse effect on the Company. See "Use of Proceeds"
and "Business -- Strategy."
DEPENDENCE UPON KEY PERSONNEL
The Company's business is dependent upon the performance of its senior
executives. The loss of the services of one or more of those individuals or the
Company's inability to attract, motivate and retain highly qualified employees
in the future could have a material adverse effect on the Company. The Company
maintains key man life insurance policies in the amount of $2.0 million on the
lives of each of Mitchel J. Laskey and David M. Pomerance. See "Management."
7
<PAGE> 10
COMPETITION; RAPID CHANGES IN TECHNOLOGY
The market for information technology in the healthcare industry is
intensely competitive. Many of the Company's competitors have significantly
greater financial, research and development, technical and marketing resources
than the Company. Competitors vary in size and in the scope and breadth of the
products and services they offer. The Company's systems compete both with other
technologies and with similar systems developed by other companies. Other major
information management companies, including the companies with whom the Company
has strategic relationships, may enter the markets in which the Company
competes. Competitive pressures and other factors, such as new system
introductions by the Company's competitors, may result in significant pricing
pressures that could have a material adverse effect on the Company. In addition,
in the professional and technical consulting segment, the Company competes with
the consulting divisions of national accounting firms as well as national and
regional healthcare specialty consulting firms.
The computer and information systems industries are characterized by rapid
technological advances in both software and hardware, frequent new product
introductions and enhancements as well as changes in customer needs. New
developments of software or hardware could have a material adverse effect on the
Company's sales or render the Company's systems non-competitive or obsolete. To
respond to rapidly changing technology, the Company will be required to make
substantial continuing investments in research and development, and there can be
no assurance that its efforts will be successful or that there will be adequate
funds available for such efforts. During the period from January 1, 1994 through
June 30, 1996, the Company spent $5.0 million on software development. The
Company believes that to sustain its growth it must continue to devote
substantial resources to its product development efforts, including
DynamicVision, PACsPlus+ and Monitrax, and the maintenance and enhancement of
its existing products. See "Business -- Strategy" and "Business -- Competition."
RESTATED FINANCIAL REPORTS
In July 1994, David M. Pomerance, a non-employee director, was appointed
Chief Executive Officer and President of the Company, and James Terrano, the
former Chief Executive Officer and President of the Company, was appointed
Executive Vice President. In August 1994, the Company merged with Dynamic
Technical Resources, Inc. ("DTR"). Following the merger, Mitchel J. Laskey, the
former chief executive officer and principal shareholder of DTR, was appointed
the Company's President. In September 1994, the Company's Chief Financial
Officer was dismissed and replaced by Paul S. Glover. In October 1994, Messrs.
Laskey, Pomerance and Glover ("New Management") discovered possible
misapplication and errors in the application of generally accepted accounting
principles relating to the Company's method of income recognition in its
previously issued financial statements. In November 1994, the Company's Audit
Committee authorized an independent internal investigation which revealed that
the Company's financial statements during certain periods prior to September 30,
1994 had improperly recognized income and recommended that the Company restate
and amend its previously reported financial statements for the years ended
December 31, 1992 and 1993 and for the quarters ended March 31, June 30, and
September 30, 1994. Effective December 2, 1994, Mr. Terrano's employment was
terminated and his resignation as a director was accepted. The Company no longer
employs any of the 12 senior managers who held such positions in July 1994. Of
the 90 employees of the Company in July 1994, 84 are no longer associated with
the Company. In January 1995, restated financial statements were filed with the
Securities and Exchange Commission ("SEC") and Nasdaq. Shortly thereafter, the
Company's prior auditors were dismissed and its current auditors were retained.
In April 1995, the SEC commenced an investigation related to the Company's
previous revenue recognition practices. The Company has fully cooperated with
the SEC's investigation, has not received any substantive correspondence from
the SEC with respect to the investigation since December 1995 and does not
believe that it or New Management is the target of any SEC proceeding. There can
be no assurances, however, that an SEC proceeding will not be commenced against
the Company, New Management or prior management, or, if commenced, will not
result in substantial fines and penalties that could have a material adverse
effect on the Company. In addition, while the Company has received no
notification of any claims arising from the financial statements discussed
above, and while the Company believes that the statute of limitations has
expired with respect to any material potential claims, there can be no
assurances that actions will not be brought and that such actions, if determined
adversely to the Company, would not have a material adverse effect on the
Company.
8
<PAGE> 11
POSSIBLE VOLATILITY OF STOCK PRICE
The Company's stock price has experienced significant volatility over the
past several years. Moreover, the stock market has from time to time experienced
extreme price and volume fluctuations, particularly in the high technology
sector, which may be unrelated to the operating performance of particular
companies. Market fluctuations and factors, such as announcements of
technological innovations or new products by the Company, its competitors or
third parties, as well as market conditions in the computer software or hardware
industries and healthcare reform measures, may have a significant effect on the
market price of the Company's Common Stock. Since the Company recognizes
revenues for certain products upon the completion of identified milestone
conditions, delays in meeting such conditions could result in the shift of
revenue recognition from one quarter to another. Any such shift could adversely
impact the results of operations for a particular quarter, which in turn could
cause fluctuations in the Company's stock price. See "Price Range of Common
Stock."
DEPENDENCE UPON PROPRIETARY SOFTWARE
The Company's healthcare information systems consist primarily of the
Company's software integrated with third party hardware and software. The
Company does not hold any patents nor has it filed copyrights with respect to
any of its software systems. To protect its proprietary rights, the Company
primarily relies upon trade secrets, copyright laws and confidentiality
agreements with employees and customers. These safeguards provide only limited
protection, and competitors may imitate the Company's systems and attempt to
integrate the same or similar third party systems into systems competitive with
those licensed by the Company. Furthermore, there can be no assurance that
others will not independently develop systems similar or superior to those of
the Company. There has been substantial litigation regarding intellectual
property rights in the computer industry. Although no such litigation is pending
or threatened against the Company, there can be no assurance that third parties
will not assert infringement claims against the Company in the future. Moreover,
the Company may need to initiate litigation from time to time to enforce or
protect the Company's intellectual property rights and to determine the validity
and scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company. See "Business -- Intellectual Property."
UNCERTAINTY RELATED TO ACQUISITIONS
The Company may pursue the acquisition of complementary businesses,
products or technologies. Acquisitions involve a number of risks that could
adversely affect the Company's operating results, including the diversion of
management's attention, the assimilation of the operations and personnel of the
acquired companies, the amortization of acquired intangible assets and the
potential loss of key employees of the acquired companies. There can be no
assurance that the Company will consummate future acquisitions on satisfactory
terms, if at all, that adequate financing will be available on terms acceptable
to the Company, if at all, or that any acquired operations will be successfully
integrated. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Business -- Strategy."
UNCERTAINTY IN HEALTHCARE INDUSTRY; GOVERNMENT REGULATION
The healthcare industry is undergoing significant and rapid changes,
including the consolidation of hospitals and other healthcare providers to form
integrated delivery networks as well as market-driven and government initiatives
to reform healthcare, which the Company anticipates will affect the operation
and procurement process of healthcare providers. The increased bargaining power
of such combined enterprises and their focus on cost containment could force the
Company to reduce prices for its systems, which could have a material adverse
effect on the Company. As the number of hospitals and other healthcare providers
decreases due to further industry consolidation, each potential sale of the
Company's systems becomes more significant and competition for each sale will be
greater. Such consolidation also creates the possibility that the Company's
customers could cancel their master sales agreements if the other healthcare
information providers involved in the consolidation have installed or selected a
competing or potentially incompatible information
9
<PAGE> 12
system. Further, healthcare providers may react to proposed federal and state
reform measures and cost containment pressures by curtailing or delaying
investments, including those for the Company's systems and related services.
Although the effects of federal and state initiatives for healthcare reform are
unknown, the Company believes that competitive factors in the healthcare
industry will continue to drive reform of healthcare delivery. The Company
cannot predict with any certainty what impact, if any, such market and
government initiatives might have on the Company.
The United States Food and Drug Administration ("FDA") has issued a draft
guidance document addressing the regulation of certain computer products as
devices under the Federal Food, Drug, and Cosmetic Act (the "FFDCA"). To the
extent that computer software is classified as a device under the applicable
regulations, the manufacturers of such products could be required, depending
upon the product, to: (i) register and list their products with the FDA; (ii)
notify the FDA and demonstrate substantial equivalence to other products on the
market before marketing such products; or (iii) obtain FDA clearance by filing a
pre-market application that establishes the safety and effectiveness of the
product. Compliance with these requirements can be burdensome, time consuming
and expensive and there can be no assurance that the Company will ultimately be
able to obtain the required FDA clearances to market its products. The Company
has two products considered devices under the FFDCA. Failure to obtain or
maintain compliance with FDA regulations could result in withdrawal of the
products from the market, which could have a material adverse effect on the
Company. See "Business -- Government Regulation."
POTENTIAL LIABILITY TO CUSTOMERS OR THIRD PARTIES
Certain of the Company's systems provide access to patient information used
by physicians and other medical personnel in providing medical care. The medical
care provided by physicians and other medical personnel is subject to numerous
medical malpractice risks and other claims. The Company may be subject to claims
by parties who may seek damages from any or all persons or entities connected to
the process of delivering patient care. Although the Company maintains liability
insurance to protect against certain claims associated with the use of its
systems, there can be no assurance that the Company will not be subject to
product liability or other claims and that its insurance coverage and the
contractual limitations on liability typically contained in master sales
agreements will provide adequate protection. A successful claim brought against
the Company, or unsuccessful claims causing a substantial expenditure of funds
and a diversion of management's time and resources, could have a material
adverse effect on the Company. While the Company has been able to obtain
liability insurance, there can be no assurance that the Company will be able to
maintain such insurance or that it will continue to be available on terms
acceptable to the Company or at all.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
after this Offering or the perception that such sales could occur may adversely
affect the market price of the Common Stock. Upon completion of this Offering,
the Company will have 15,400,536 shares of Common Stock outstanding. All
5,000,000 shares offered hereby will be freely tradeable. In a registration
statement which is intended to become effective concurrently with the
registration statement of which this Prospectus is a part, 6,278,746 shares of
Common Stock are being registered by certain shareholders of the Company, which
will result in all of the shares of Common Stock outstanding and underlying
options and warrants being registered. The holders of substantially all the
shares of Common Stock being offered in the concurrent offering have agreed with
the Underwriters not to sell or otherwise dispose of any of such shares for a
period of 180 days after the closing of the Offering. Of the shares of Common
Stock outstanding and underlying options and warrants, 4,979,596 shares are held
by persons deemed "affiliates" of the Company as such term is defined in Rule
144 and are subject to the "manner of sale" restrictions under Rule 144. See
"Principal and Selling Shareholders," "Description of Capital
Stock -- Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
10
<PAGE> 13
EFFECTS OF AUTHORIZED BUT UNISSUED STOCK AND CERTAIN ANTI-TAKEOVER
CONSIDERATIONS
The Company's Board of Directors has the authority to issue 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the Company's shareholders. There are 1,055,938 shares of Series A
Preferred Stock authorized, of which 968,750 shares are outstanding and
4,384,375 shares of Series B Preferred Stock authorized, of which 3,750,000
shares are outstanding. All outstanding shares of Series A Preferred Stock and
Series B Preferred Stock are being mandatorily converted to shares of Common
Stock on a one-to-one basis concurrently with the consummation of this Offering.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of additional preferred stock, as well as
certain provisions of the Company's Articles of Incorporation and By-laws and of
Florida law, could have the effect of delaying, deferring or preventing a change
in control of the Company or removal of management and may limit the price
certain investors may be willing to pay in the future for shares of Common
Stock. See "Description of Capital Stock."
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use the net proceeds of this Offering to finance the
expansion of the Company's sales and marketing force, for research and
development, to repay outstanding indebtedness and for other general corporate
purposes, including working capital. A portion of the net proceeds may also be
used for acquisitions of complementary businesses, products and technologies,
although the Company currently has no agreements or commitments with respect to
any such transactions. Accordingly, the Company will have broad discretion as to
the application of such proceeds. An investor will not have the opportunity to
evaluate the economic, financial and other relevant information which will be
utilized by the Company in determining the application of such proceeds. See
"Use of Proceeds."
NO DIVIDENDS
The Company intends to retain future earnings for use in its business and
does not anticipate paying any cash dividends on shares of its Common Stock in
the foreseeable future. See "Dividend Policy."
11
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and estimated offering expenses, assuming a public
offering price of $6.00 per share, are estimated to be $21.9 million
(approximately $25.3 million if the Underwriters' over-allotment option is
exercised in full). The Company intends to use the net proceeds to expand its
sales, marketing and distribution channels by hiring additional sales and
marketing personnel, to expand research and development, to repay outstanding
indebtedness and for general corporate purposes, including working capital. The
indebtedness intended to be repaid consists of the principal amount and accrued
interest outstanding under (i) a $2.8 million promissory note (the "Bank Note")
and (ii) unsecured promissory notes ("Unsecured Notes") in the aggregate amount
of $1.0 million payable to certain officers, directors and other parties
affiliated with the Company. The Bank Note bears interest at the lender's prime
rate plus two percent per annum and matures on March 31, 1998. As of July 31,
1996, the rate of interest on the Bank Note was 10 1/4% per annum. The Unsecured
Notes bear interest at a rate of 13% per annum and mature upon the earlier of
the completion of this Offering or November 14, 1996. See "Certain
Transactions." A portion of the net proceeds may also be used for acquisitions
of complementary businesses, products and technologies, although the Company
currently has no agreements or commitments with respect to such transactions.
Pending application of the net proceeds to the Company from this Offering,
the Company intends to invest in United States government securities, United
States government guaranteed obligations, short-term certificates of deposit or
other investment grade securities.
The expected use of the net proceeds from this Offering is subject to
change based upon factors such as competing technologies, market developments
and the cost of sales and marketing. The Company believes that the net proceeds
of this Offering, in addition to operating cash flow, will be sufficient to
finance the Company's planned growth and cash requirements for at least the next
twelve months. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
The Company will not receive any proceeds from the sale of the 1,000,000
shares of Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
12
<PAGE> 15
CAPITALIZATION
The following table sets forth as of June 30, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
which reflects the conversion of the Company's Series A Preferred Stock and
Series B Preferred Stock into Common Stock upon consummation of this Offering,
and (iii) the pro forma capitalization of the Company as adjusted to reflect the
sale of 4,000,000 shares of Common Stock by the Company (at an assumed offering
price of $6.00 per share) and the application of the net proceeds therefrom as
described under "Use of Proceeds." The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(2)
------- --------- --------------
<S> <C> <C> <C>
Long-term obligations........................................ $2,922 $2,922 $234
-------- ------ --------
Shareholders' equity:
Series A preferred stock, $0.01 par value (liquidating
preference of $792,438); 1,055,938 shares authorized;
968,750 shares outstanding actual; none outstanding, pro
forma and pro forma as adjusted......................... 10 -- --
Series B preferred stock, $0.01 par value (liquidating
preference of $3,067,500); 4,384,375 shares authorized;
3,750,000 shares outstanding actual; none outstanding,
pro forma and pro forma as adjusted..................... 37 -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized; 6,681,886 shares outstanding actual;
11,400,536 pro forma and 15,400,536 pro forma as
adjusted(1)............................................. 67 114 154
Additional paid-in capital................................. 12,955 12,955 34,855
Deficit.................................................... (9,472) (9,472) (9,472)
-------- ------ --------
Total shareholders' equity............................ 3,597 3,597 25,537
-------- ------ --------
Total capitalization............................. $6,519 $6,519 $25,771
======== ====== =======
</TABLE>
- ---------------
(1) Excludes approximately 1,908,190 shares issuable upon the exercise of stock
options to be outstanding upon consummation of this Offering.
(2) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock
offered by the Company at an assumed offering price of $6.00 per share and
the application of the net proceeds therefrom. See "Use of Proceeds."
13
<PAGE> 16
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq SmallCap Market under the trading
symbol "DHTI." The following table sets forth the range of quarterly high and
low bid quotations per share for the Common Stock for the periods indicated, as
reported by Nasdaq. The Company has made an application to list the Common Stock
on the Nasdaq National Market under the trading symbol "DHTI."
<TABLE>
<CAPTION>
COMMON STOCK
---------------
HIGH LOW
------ ------
<S> <C> <C>
1996:
Third Quarter (through August 28).......................................... $6.375 $3.750
Second Quarter............................................................. 7.375 2.250
First Quarter.............................................................. 2.375 1.625
1995:
Fourth Quarter............................................................. $2.313 $1.000
Third Quarter.............................................................. 1.125 0.625
Second Quarter............................................................. 1.000 0.875
First Quarter.............................................................. 1.375 0.875
1994:
Fourth Quarter............................................................. $2.000 $1.000
Third Quarter.............................................................. 1.875 1.500
Second Quarter............................................................. 2.125 1.750
First Quarter.............................................................. 2.750 2.000
</TABLE>
The latest reported sale price of the Common Stock as reported on the
Nasdaq SmallCap Market on August 28, 1996 was $6.00 per share. The number of
registered record holders of Common Stock at August 5, 1996 was 453. The Company
believes that there are in excess of 1,500 beneficial owners of the Common
Stock.
DIVIDEND POLICY
No cash dividends have been paid on Common Stock to date, and none are
anticipated in the foreseeable future. Any future determination concerning the
payment of cash dividends will depend upon the Company's results of operations,
financial condition, capital requirements and other factors deemed relevant by
the Company's Board of Directors. In addition, the loan agreement between the
Company and its primary lender prohibits the payment of dividends under certain
conditions.
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Except for the pro forma information, the following selected consolidated
financial data for the years ended December 31, 1991, 1992, 1993, 1994 and 1995
was derived from the financial statements of the Company which have been audited
by the Company's independent auditors. The following selected consolidated
financial data for the six months ended June 30, 1995 and 1996, have been
derived from the unaudited consolidated financial statements of the Company,
which in the Company's opinion include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. This data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------- ---------------------------------
1995 1995 1996
--------------------- ------ ------------------------
1991 1992 1993 1994(1) ACTUAL PRO FORMA(2) ACTUAL ACTUAL(3) PRO FORMA(2)
------ ------- ------ ------- ------ ------------ ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenues:
Computer system equipment
sales and support....... $4,472 $3,712 $3,961 $1,873 $1,101 $2,619 $742 $1,592 $2,037
Application software
licenses................ 2,828 3,066 3,578 1,849 2,429 4,477 1,547 1,306 1,339
Software support.......... 1,387 1,633 2,149 2,550 3,731 4,898 1,696 2,295 2,728
Services and other........ -- -- -- 715 1,625 2,156 516 1,124 1,217
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
revenues.......... 8,687 8,411 9,688 6,987 8,886 14,150 4,501 6,317 7,321
------ ------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of products sold..... 3,181 2,850 3,159 1,547 881 1,887 659 1,359 1,738
Client services
expenses................ 852 1,236 1,437 2,601 2,825 4,386 1,365 2,003 2,567
Software development
costs................... 1,043 1,388 1,425 1,775 1,643 3,024 915 827 1,242
Sales and marketing....... 1,450 1,655 2,032 1,718 1,931 2,689 1,118 1,536 1,744
General and
administrative.......... 1,084 1,358 1,382 2,219 1,768 2,383 948 1,009 1,568
Loss from discontinuance
of product line(4)...... -- 2,000 -- -- -- -- -- -- --
Restructuring costs(5).... -- -- -- 686 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total costs and
expenses.......... 7,610 10,487 9,435 10,546 9,048 14,369 5,005 6,734 8,859
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss)..... 1,077 (2,076) 253 (3,559 ) (162 ) (219) (504 ) (417) (1,538)
Other income (expense)...... (7) (42) (7) (748 ) (351 ) (427) (203 ) (105) (95)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net earnings (loss)......... $1,070 $(2,118) $246 $(4,307) $(513 ) $(646) $(707 ) $(522) $(1,633)
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) per common
share..................... $0.22 $(0.40) $0.05 $(0.78 ) $(0.08) $(0.10) $(0.11) $(0.08) $(0.25)
====== ====== ====== ====== ====== ====== ====== ====== ======
Weighted average common
shares outstanding........ 4,882 5,266 5,363 5,536 6,443 6,443 6,295 6,619 6,619
</TABLE>
- ---------------
(1) Includes the operating results and related financial information since the
acquisition of Dynamic Technical Resources, Inc. on August 23, 1994,
accounted for by the purchase method.
(2) Gives pro forma effect to acquisition of DMI assuming such transaction
occurred on January 1, 1995. See "Pro Forma Condensed Consolidated
Statement of Operations."
(3) Includes the operating results and related financial information since the
acquisition of DMI on May 1, 1996, accounted for by the purchase method.
(4) The Company recorded a one time charge of $2.0 million relating to the
estimated losses and write-downs associated with the discontinuance of a
product line operating on the Prime computer platform, which was no longer
commercially available.
(5) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note F of the December 31, 1995 financial statements
included herein.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT HISTORY
During the period from July 1994 through December 1994, the Company
underwent a significant management restructuring which included a change in all
senior management personnel. During this process, the Company retained a new
senior management team comprised of Messrs. David M. Pomerance, Mitchel J.
Laskey and Paul S. Glover ("New Management"). During the year ended December 31,
1995, the Company completed a restructuring plan (the "Restructuring Plan")
begun during 1994 and developed and executed a refinancing plan (the
"Refinancing Plan"). In addition, the Company changed its name to Dynamic
Healthcare Technologies, Inc. and re-engineered its product strategy to provide
the healthcare industry with a comprehensive electronic health record solution
which included the announcement of its new DynamicVision product.
The Restructuring Plan resulted in the closing of the Company's Lincoln,
Nebraska facility, the relocation of sales, marketing, accounting and
administrative personnel to Orlando, Florida and the organization of a national
support center based in Orlando, Florida. Throughout the restructuring process,
New Management maintained a commitment to preserving its customer base by
improving customer satisfaction. The Restructuring Plan included a
re-engineering of the Company's laboratory product line, enhancement of product
quality control processes and standards, the timely delivery of scheduled
installations and a commitment to meeting all outstanding customer contract
obligations. During the restructuring process, New Management determined that
additional financing was required. The Company was in default of certain
financial covenants contained in the loan agreement with its primary lender, and
was delisted from the Nasdaq stock market system for failing to meet the
continuing maintenance requirements of such listing.
In July 1995, the Company completed the private placement of Subordinated
Convertible Notes (the "Notes"), with detachable warrants, for an aggregate
consideration of $775,000. In November 1995, the Notes were converted into an
aggregate of 968,750 shares of the Company's newly designated Series A Preferred
Stock. In December 1995, the Company completed the private placement of
3,750,000 shares of Series B Preferred Stock for an aggregate consideration of
$3,025,000. The final phase of the Refinancing Plan included the restructuring
of the Company's $3,500,000 demand line of credit into a long-term $2,800,000
note, payable in monthly installments, based upon a 17 1/2 year amortization and
a balloon payment in March 1998. The Company subsequently regained listing on
the Nasdaq SmallCap Market in December 1995.
Following the completion of the Restructuring Plan and the Refinancing
Plan, the Company shifted its focus to new product development. Utilizing the
Company's healthcare information experience, document imaging technologies and
customer input, the Company focused on a new product strategy for electronic
health records. The Company's new electronic health record product,
DynamicVision, provides connectivity and enabling technologies that integrate
clinical and imaging information systems to create an open architecture,
multi-media clinical workstation. In February 1996, the Company demonstrated
DynamicVision at a major industry trade show. As a direct result of that
demonstration, the Company signed a beta-site agreement with an existing
customer. The beta-site installation commenced in July 1996.
In May 1996, the Company completed the acquisition of Dimensional Medicine,
Inc. ("DMI") in order to strategically expand its customer base as well as the
Company's clinical information systems product offerings. The DMI office in
Minnetonka, Minnesota was subsequently converted into the Company's radiology
technology center.
On June 10, 1996, the Company announced the appointment of Nikhil A. Bhatt
as Senior Vice President and Chief Technical Officer. In addition, David M.
Pomerance was named Chairman of the Board and Mitchel J. Laskey was named Chief
Executive Officer in addition to retaining his positions as President and
Treasurer.
16
<PAGE> 19
OVERVIEW
The Company's revenues are derived from (i) computer equipment sales and
support, (ii) application software licenses, (iii) software support and (iv)
services and other revenues. The Company generally recognizes revenues from
computer equipment sales at the time the products are shipped. Computer system
equipment sales and support revenues include hardware support contracts for a
specific period from which revenue is recognized ratably over the corresponding
contract period. Application software license revenues are recognized when
application software is delivered to the customer. Installation and training
service revenues, included with application software licenses, are recognized as
the services are performed. Software support revenues principally include
contracts for remote dial-up problem diagnosis, maintenance and corrective
support services, each of which covers a specified period for which revenue is
recognized ratably over the corresponding contract period. Services and other
revenues include project management, training, consulting, custom programming
services, post-contract support obligations and other services, which are
provided under separate contract and are recognized as services are performed.
Revenues from professional services and maintenance and support services
typically increase as the number of installed systems increases.
Cost of products sold includes the cost of hardware sold, costs of third
party software licenses and hardware support subcontracts. Client service
expense includes the direct and indirect costs associated with implementation
and support personnel. Software development costs include the direct and
indirect salaries and wages of software research and development personnel,
direct research and development expenses, and software amortization expense,
reduced by capitalized software development costs. Software development costs
are expensed until such time as technological feasibility is established and
then are capitalized in compliance with Statement of Financial Accounting
Standards No. 86 "Accounting for Costs of Computer Software to be Sold, Leased
or Otherwise Marketed." Sales and marketing costs include direct and indirect
salaries, commissions, joint marketing costs, advertising, trade show costs,
user group costs and travel and entertainment expenses related to the sale and
marketing of the Company's products and services. General and administrative
expenses include salaries and expenses for corporate administration, financial,
legal and human resources.
The sales cycle for the Company's systems is typically six to eighteen
months from initial contact to contract signing. The product delivery cycle is
variable. Based on the customer's implementation plan, product delivery may take
two or more years, particularly with enterprise-wide electronic healthcare
record solutions involving significant and continuing customer service
requirements. Accordingly, the product delivery cycle depends upon the
combination of products purchased and the implementation plan defined by the
customer in the master sales agreement. Each customer contract is separately
negotiated. The installation schedule for a clinical information systems, or
departmental electronic healthcare record implementations, typically require six
to twelve months. Under its standard master sales agreement, the Company
generally receives a partial payment upon execution of the agreement, a hardware
installment payment upon delivery of hardware, installation progress payments
upon the completion of defined milestones and final payment, which may vary with
each contract.
17
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth, for each of the periods indicated, certain
selected statement of operations data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Operating revenues:
Computer system equipment sales and
support............................... 40.9% 26.8% 12.4% 16.5% 25.2%
Application software licenses............ 36.9 26.5 27.3 34.4 20.7
Software support......................... 22.2 36.5 42.0 37.7 36.3
Services and other....................... -- 10.2 18.3 11.4 17.8
----- ----- ----- ----- -----
Total operating revenues......... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of products sold.................... 32.6 22.1 9.9 14.7 21.5
Client services expenses................. 14.8 37.2 31.8 30.3 31.7
Software development costs............... 14.7 25.4 18.5 20.3 13.1
Sales and marketing...................... 21.0 24.6 21.7 24.8 24.3
General and administrative............... 14.3 31.8 19.9 21.1 16.0
Restructuring costs...................... -- 9.8 -- -- --
----- ----- ----- ----- -----
Total costs and expenses......... 97.4 150.9 101.8 111.2 106.6
----- ----- ----- ----- -----
Operating income (loss).................... 2.6 (50.9) (1.8) (11.2) (6.6)
Other income (expense)..................... (0.1) (10.7) (4.0) (4.5) (1.7)
----- ----- ----- ----- -----
Net earnings (loss)........................ 2.5% (61.6)% (5.8)% (15.7)% (8.3)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Operating Revenues. The Company's total consolidated operating revenues
were $6,317,000 for the first six months of 1996, as compared to $4,502,000 for
the corresponding period in 1995, representing an increase of $1,815,000 or
40.3%. This increase was primarily attributable to the inclusion of $1,380,000
in revenues for the two months ended June 30, 1996 resulting from the May 1996
acquisition of DMI. The balance of this increase was primarily attributable to
growth in laboratory system sales and upgrades, new imaging systems sales and
increased services and software support revenues.
Computer system equipment and sales support revenues were $1,592,000 for
the first six months of 1996, as compared to $742,000 for the corresponding
period in 1995, representing an increase of $850,000 or 114.6%. This increase
was primarily due to systems sales for laboratory migrations, imaging and
radiology.
Application software license revenues were $1,306,000 for the first six
months of 1996, as compared to $1,547,000 for the corresponding period in 1995,
representing a decrease of $241,000 or 15.6%. The Company had no new LabPro 2000
system sales during the first six months of 1996. LabPro 2000 installations
during the first six months of 1996 consisted solely of migrations converting
from the Prime computer platform to the IBM AS/400 platform, for which the
Company did not charge any application license fees. However, during the first
six months of 1996, $527,000 of radiology system application license revenues
were recognized and $343,000 of imaging software revenues were recognized, with
no such corresponding revenues recognized for the corresponding period in 1995.
Software support revenues were $2,295,000 for the first six months of 1996,
as compared to $1,696,000 for the corresponding period in 1995, representing an
increase of $599,000 or 35.3%. This increase was primarily due to radiology
systems support revenues attributable to DMI, LabPro 2000 support revenues from
the completion of system deliveries and revenues from the software support of
imaging and health information systems.
18
<PAGE> 21
Services and other revenues for the first six months of 1996 were
$1,124,000, as compared to $516,000 for the corresponding period in 1995,
representing an increase of $608,000 or 117.8%. This increase was primarily
attributable to a shift of resources to billable professional services from
non-billable customer support stabilization undertaken as part of the
Restructuring Plan, as well as additional revenues from professional services
efforts related to complex systems integrations and implementations.
Cost of Products Sold. The cost of products sold was $1,359,000 for the
first six months of 1996, as compared to $659,000 for the corresponding period
in 1995, representing an increase of $700,000 or 106.2%. This increase was
primarily attributable to a higher percentage of revenues associated with
hardware sales and the payment of licensing fees to IBM with respect to the
imaging software licenses.
Client Services Expenses. Client services expenses were $2,003,000 for the
first six months of 1996, as compared to $1,365,000 for the corresponding period
in 1995, representing an increase of $638,000 or 46.7%. This increase was
largely attributable to DMI and its client services expenses for the two months
ended June 30, 1996, as well as increased professional staffing in anticipation
of professional services requirements associated with the DMI consolidation and
the general availability of DynamicVision and PACsPlus+.
Software Development Costs. Software development costs were $827,000 for
the first six months of 1996, as compared to $915,000 for the corresponding
period in 1995, representing a decrease of $88,000 or 9.6%. This decrease was
primarily attributable to an increase in capitalized software development costs
during 1996. During the first six months of 1996, $604,000 of software
development costs were capitalized, as compared to $447,000 of software
development costs capitalized during the first six months of 1995.
Sales and Marketing Expenses. The Company's sales and marketing expenses
were $1,536,000 for the first six months of 1996, as compared to $1,118,000 for
the corresponding period in 1995, representing an increase of $418,000 or 37.4%.
This increase was primarily attributable to additional sales and marketing
personnel hired or employed in anticipation of the general availability of
DynamicVision, PACsPlus+ and imaging products. This increase was also
attributable to sales and marketing expenses related to DMI.
General and Administrative Expenses. General and administrative expenses
were $1,009,000 for the first six months of 1996, as compared to $948,000 for
the corresponding period in 1995, representing an increase of $61,000 or 6.4%.
As a percentage of total revenues, general and administrative expenses were
16.0% for the six months ended June 30, 1996, as compared to 21.1% for the six
months ended June 30, 1995.
Other Income (Expense). The Company's total other expense for the first
six months of 1996 was $105,000, as compared to $203,000 for the corresponding
period in 1995, representing a decrease of $98,000 or 48.3%. This decrease was
primarily attributable to a decrease in interest expense and financing charges
resulting from the restructuring of the Company's demand line of credit into a
long-term note.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Operating Revenues. The Company's total operating revenues for 1995 were
$8,886,000, as compared to $6,987,000 for 1994, representing an increase of
$1,899,000 or 27.2%. Computer system equipment sales and support revenues for
1995 were $1,101,000, as compared to $1,873,000 for 1994, representing a
decrease of $772,000 or 41.2%. Application software license revenues for 1995
were $2,429,000, as compared to $1,849,000 for 1994, representing an increase of
$580,000 or 31.4%. Although the Company had fewer system placements of its
laboratory product line during 1995, these variances were primarily the result
of an increased focus on installing software sales contracted for in 1994 which
were completed during 1995. Software support revenues for 1995 were $3,731,000,
as compared to $2,550,000 for 1994, representing an increase of $1,181,000 or
46.3%. The increase was principally attributed to increased laboratory system
installations, the acquisition in August 1994 of Dynamic Technical Resources,
Inc. ("DTR") and revenues associated with a contract with IBM for support of
Medical RecordsPlus software installations. Services and other revenues for 1995
were $1,625,000, as compared to $715,000 for 1994, representing an increase of
$910,000 or 127.3%. This increase was primarily attributable to the acquisition
of DTR, which expanded the Company's custom programming, technical consulting
and other professional services revenues.
19
<PAGE> 22
Cost of Products Sold. The cost of products sold during 1995 was $881,000,
as compared to $1,547,000 during 1994, representing a decrease of $666,000 or
43.1%. This decrease was primarily attributable to a decrease in hardware sales.
Client Services Expenses. Client services expenses for 1995 were
$2,825,000, as compared to $2,601,000 for 1994, representing an increase of
$224,000 or 8.6%. This increase was primarily attributable to the inclusion of a
full year of related client services expenses for 1995 following the acquisition
of DTR in August 1994.
Software Development Costs. Software development costs for 1995 were
$1,643,000, as compared to $1,775,000 for 1994, representing a decrease of
$132,000 or 7.4%. This decrease was principally attributable the effects of
restructuring and the reassignment of the Company's technical personnel to
product delivery and support installation activities. Capitalized software
development activities initially slowed during the restructuring process in
early 1995, but increased at the end of 1995 as a result of development work on
LabPro 2000, Monitrax and DynamicVision. Capitalized software expenses were
$796,000 for 1995, as compared to $854,000 for 1994. Software amortization
expenses were $563,000 for 1995, as compared to $506,000 for 1994, reflecting
the inclusion of DTR for the full year.
Sales and Marketing Expenses. Sales and marketing expenses were $1,931,000
for 1995, as compared to $1,717,000 for 1994, representing an increase of
$214,000 or 12.5%. This increase was principally attributable to an increase in
sales and marketing personnel and associated costs. This increase began in the
fourth quarter of 1995 as a result of the Company's new product introductions.
In addition, during 1995, the Company changed its corporate name and incurred
expenses in developing sales and marketing materials involving its new corporate
image.
General and Administrative Expenses. General and administrative expenses
for 1995 were $1,768,000, as compared to $2,219,000 for 1994, representing a
decrease of $451,000 or 20.3%. This decrease resulted from the centralization of
administrative functions after the DTR merger and a reduction in executive and
administrative salaries and personnel expenses. Amortization of goodwill
increased from $55,000 in 1994 to $155,000 in 1995 in direct proportion to the
periods of amortization occurring each year. As a percentage of total revenues,
general and administrative expenses were 19.9% for 1995, as compared to 31.7%
for 1994.
Restructuring Costs. During 1994, $686,000 of restructuring costs were
incurred, as compared to no restructuring costs in 1995. These expenses resulted
from consolidation of sales, marketing, accounting, administration and national
support functions to Orlando, Florida, from Lincoln, Nebraska, as well as the
re-engineering of the laboratory product line. These expenses were recognized in
order to write down assets to net realizable value and to record costs
associated with the Company's Restructuring Plan.
Other Income (Expense). The Company's total other expense for 1995 was
$351,000, as compared to $748,000 for 1994, representing a decrease of $397,000
or 53.1%. The decrease was attributable to a $610,000 charge to operations in
1994 as a result of the issuance of an additional 610,000 shares of Common
Stock, with a market value of $1.00 per share, as an adjustment to the
consideration paid to former DTR shareholders pursuant to the DTR merger which
the Company's Board of Directors determined was required due to breaches by the
Company of representations and warranties (the "Acquisition Contingency").
Notwithstanding this decrease, interest expense and financing charges for 1995
were $378,000, as compared to $143,000 for 1994, representing an increase of
$235,000 or 164.3%. This increase was primarily attributable to debt financing
required to fund the Restructuring Plan and pay interest on the Notes.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Operating Revenues. The Company's total operating revenues for 1994 were
$6,987,000, as compared to $9,688,000 for 1993, representing a decrease of
$2,701,000 or 27.9%. This reduction was primarily attributable to significantly
lower revenues from the sale of computer systems equipment and support as well
as the reduction in application software licenses. During 1994, the Company sold
significantly fewer laboratory information systems, as compared to 1993, and a
significant percentage of customers purchased hardware from sources other than
the Company. Computer system equipment sales and support revenues for 1994 were
20
<PAGE> 23
$1,873,000, as compared to $3,961,000 for 1993, representing a decrease of
$2,088,000 or 52.7%. This was the result of fewer customer sales of new systems
and an increase in customers who purchased computer systems directly from IBM or
an IBM authorized dealer. Application software license revenues for 1994 were
$1,849,000, as compared to $3,578,000 for 1993, representing a decrease of
$1,729,000 or 48.3%. This decrease was primarily attributable to fewer new
customer sales and increased customer discounts. Software support revenues for
1994 were $2,550,000, as compared to $2,149,000 for 1993, representing an
increase of $401,000 or 18.7%. This increase was primarily attributable to
customers having completed the installation process and thereupon commencing
support and maintenance services. Services and other revenues for 1994 were
$715,000, as compared to no corresponding revenues for 1993. The services
revenues increase was related solely to the acquisition of DTR in August 1994.
Cost of Products Sold. The cost of products sold during 1994 was
$1,547,000, as compared to $3,159,000 during 1993, representing a decrease of
$1,612,000 or 51.0%. This decrease was attributable to a decrease in computer
system equipment sales. This, in part, reflected the competitive marketplace for
hardware systems, as well as competitive pricing as a result of re-marketer
sales.
Client Services Expenses. Client services expenses for 1994 were
$2,601,000, as compared to $1,437,000 for 1993, representing an increase of
$1,164,000 or 81.0%. This increase was primarily attributable to two factors.
First, the inclusion of client services expenses attributable to DTR reflected
$415,000 for the four months during 1994 following the Company's merger with
DTR. Second, and more significantly, personnel costs and operational
inefficiencies that existed in the Company's laboratory product line required
extensive resources during the latter part of 1994 to effect product
re-engineering and restructuring.
Software Development Costs. Software development costs for 1994 were
$1,775,000, as compared to $1,425,000 for 1993, representing an increase of
$350,000 or 24.6%. The cost of producing software product masters subsequent to
establishing technological feasibility was capitalized whereas all other
development and research costs were expensed. Capitalized software development
costs were amortized primarily over a five-year estimated economic life, and
$854,000 was capitalized in 1994, as compared to $887,000 capitalized in 1993.
In addition, during 1994, and as part of the Restructuring Plan, New Management
took a charge to operations of approximately $122,000 for the carrying value of
certain software products after a determination of net realizable value.
Sales and Marketing Expenses. Sales and marketing expenses for 1994 were
$1,717,000, as compared to $2,032,000 for 1993, representing a decrease of
$315,000 or 15.5%. This decrease was primarily the result of reduced joint
marketing costs due to the Company directly marketing to its customers and not
relying upon former business partners to market its systems. These actions were
caused primarily as a result of two of the Company's largest business partners
being merged into other companies and the joint marketing agreements with the
Company being terminated.
General and Administrative Expenses. General and administrative expenses
for 1994 were $2,219,000, as compared to $1,382,000 for 1993, representing an
increase of $837,000 or 60.6%. This increase was primarily attributable to the
replacement of the entire management and the retention of New Management during
the third and fourth quarters of 1994, the merger of DTR and the inclusion of
related consolidated costs, including amortization of goodwill, and increased
legal and accounting costs, as well as expenses attributable to the restatement
of prior period financial statements. As a percentage of total revenues, general
and administrative expenses were 31.7% for 1994, as compared to 14.3% for 1993.
Other Income (Expense). The Company's total other expense for 1994 was
$748,000, as compared to $7,000 for 1993, representing an increase of $741,000.
This increase was attributable to a $610,000 charge to operations resulting from
the Acquisition Contingency. This increase was also attributable to increased
interest expense and financing charges resulting from increases in the Company's
line of credit to effect borrowings necessary to implement the Restructuring
Plan and to continue operations.
21
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the
four quarters during the fiscal year ended December 31, 1995, and the two
quarters ended March 31, 1996 and June 30, 1996. This quarterly information is
unaudited, has been prepared on the same basis as the annual financial
statements and, in the opinion of the Company's management, reflects all
normally recurring adjustments necessary for fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results of any future period. See "Risk
Factors -- Variability of Quarterly Operating Results; Extended Sales Cycle."
<TABLE>
<CAPTION>
1995 1996
------------------------------------------------- -----------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues............ $2,234,190 $2,267,300 $2,213,396 $2,171,450 $2,309,838 $4,007,551
Operating income (loss)............. (366,291) (136,478) 251,646 89,825 (323,458) (93,066)
Net earnings (loss)................. (443,037) (262,402) 148,313 44,502 (366,911) (155,208)
Earnings (loss) per common share.... $(0.07) $(0.04) $0.02 $0.01 $(0.06) $(0.02)
Weighted average common shares
outstanding....................... 6,003,871 6,582,883 6,589,071 6,589,316 6,611,646 6,626,733
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $772,000 for the six months
ended June 30, 1996. Net cash used in investment activities was $2,234,000 for
the six months ended June 30, 1996, principally as a result of the DMI
acquisition. Net cash used in financing activities for the six months ended June
30, 1996 was $57,000, reduced principally as a result of $110,000 paid as
dividends on preferred stock, repayments under bank indebtedness and lease
obligations, offset by proceeds of stock sales and the exercise of stock options
in the amount of $165,000.
Net cash used in operating activities for the twelve months ended December
31, 1995 was $25,000, principally attributable to increases in accounts
receivable, and offset by decreases in unbilled receivables and decreases in
accounts payables. Net cash used in investing activities was $1,102,000 for the
twelve months ended December 31, 1995, principally as a result of capitalization
of software development costs, purchases of property and equipment, and a
restricted cash deposit associated with the DMI acquisition. Net cash received
from financing activities for the twelve months ended December 31, 1995 was
$3,407,000, principally the result of the proceeds from the sale of Series B
Preferred Stock, warrants and the conversion of convertible notes into Series A
Preferred Stock.
The Company currently has a long-term promissory note payable to a bank in
the original principal amount of $2.8 million, with interest at the lender's
prime rate plus 2% per annum. As of July 31, 1996, the rate of interest on this
note was 10.25% per annum. This note is payable on a 17.5 year amortization
schedule, matures on March 31, 1998 and is secured by substantially all of the
assets of the Company. The Company does not currently have an available working
capital line of credit facility. On August 16, 1996, the Company executed
unsecured notes in an aggregate amount of $1.0 million payable to certain
officers, directors and other parties affiliated with the Company. These notes
provide for payment, in full, at the earlier of the completion of this Offering
or November 14, 1996, together with interest at a rate of 13% per annum. See
"Certain Transactions."
As of December 31, 1995 the Company had net operating loss carryforwards
for federal income tax purposes of approximately $9.8 million, which can be used
to offset taxable income in future years. Future equity offerings combined with
sales of the Company's equity during the preceding years may cause changes in
ownership under Section 382 of the Internal Revenue Code of 1986, as amended,
which will limit the use of the Company's net operating loss carryforward
existing as of the date of the ownership change. In the event the Company has
taxable income in the future, a change of ownership under Section 382 may result
in the application of such limitations and could have a material adverse effect
on the Company.
22
<PAGE> 25
Due primarily to the DMI acquisition in May 1996, the Company has recently
experienced a depletion in its working capital. The Company's future capital
needs will include requirements for office facilities and office equipment as
personnel increases for sales, marketing and research and development.
Short-term borrowings, a restructured credit facility or modification of the
terms of the Unsecured Notes will be required to meet necessary liquidity needs
in the event that this Offering is not completed.
The Company believes that the net proceeds of the Offering, in addition to
operating cash flow, will be sufficient to finance the Company's planned growth
and cash requirements for at least the next twelve months. The Company's ability
to meet its cash obligations on a long-term basis will depend upon, among other
factors, achieving profitable operations and the consistent and timely
collection of accounts receivable.
INFLATION
The Company believes that the general state of the economy and inflationary
trends have only a limited effect on its business. Historically, inflation has
not had a material effect on the Company. Changing prices of computer hardware
could have a material effect on the cost of materials sold and the related
selling price of software and hardware sales.
23
<PAGE> 26
BUSINESS
GENERAL
The Company is a leading provider of enterprise-wide, patient-centered
healthcare information systems. These systems enable hospitals, physician
practice groups and integrated delivery networks to capture, store, archive and
retrieve clinical, financial and administrative patient information. The
Company's products enhance productivity, reduce costs and improve the quality of
patient care by providing on-line access to patient information previously
maintained on a variety of media, including paper, X-ray film, magnetic disk and
video and audio recordings. The Company's current product lines include clinical
information systems for use in laboratory, radiology, anatomic pathology and
anesthesiology applications, and imaging and electronic health record solutions.
The Company provides support for all of its systems and provides systems
integration and other consulting services.
The Company currently serves over 250 customers in 44 states. Key customers
include the University of California at Los Angeles Medical Center, University
of Illinois at Chicago Medical Center, Methodist Hospital of Memphis, Memorial
Sloan-Kettering Cancer Center, Ohio State University Hospital, Columbia/HCA,
Greater Dayton Area Hospital Association, Advocate Health Care, Temple
University Hospital, UniHealth and Orlando Regional Health System.
Utilizing the Company's healthcare information experience, imaging
technologies and customer input, the Company is focusing on a new product
strategy for electronic health records. The Company's new electronic health
record product, DynamicVision, provides connectivity and enabling technologies
that integrate clinical and imaging information systems to create an open
architecture, multi-media clinical workstation. DynamicVision provides prompt
and simultaneous on-line access to information stored in various systems and
data repositories located at multiple sites. This information can include
documents, medical images such as X-rays, MRIs and CAT scans, and video and
audio recordings. DynamicVision is currently being beta-tested and is scheduled
for general availability by the end of 1996.
INDUSTRY
The healthcare information industry is undergoing rapid and significant
change. Cost containment pressures, industry consolidation, the movement toward
managed care and rising standards of healthcare quality represent fundamental
trends in today's healthcare operating environment. Increasingly, the key to
effective cost control and quality management lies in the collection,
availability and analysis of medical records in order to assess treatment
patterns, resource utilization and outcomes. As a result, the information
demands in the healthcare industry are rapidly increasing for caregivers,
managers and third party payors. Total healthcare information technology
spending in the United States was estimated to be $8.5 billion in 1994, and is
projected to reach $13.0 billion by 1997 and $20.0 billion by 2000.
Cost containment and quality management efforts in the healthcare industry
have historically been hampered by a lack of integrated clinical and financial
information and the fact that a large amount of healthcare information exists on
paper and is not accessible by computer. The paper based storage of patient
information creates costly information management problems including: (i) delays
in accessing information; (ii) space and personnel costs to store paper-based
records; (iii) lost and misfiled documents; (iv) single user access to relevant
data; and (v) errors in entering and reading information. As reimbursement is
shifting more toward risk sharing and capitation, providers and payors need to
better manage risk by controlling costs, demonstrating quality, measuring
outcomes and influencing utilization.
Healthcare providers have recently begun to view information systems
technology as a viable alternative for increasing productivity and efficiency,
measuring and managing costs, and improving the quality of services delivered.
The 1996 Annual Healthcare Information Management and Systems Society ("HIMSS")/
Hewlett Packard Leadership Survey showed that 63% of its respondents indicated
that their healthcare information systems budgets will increase by 20% or more
over the next two years. In addition, 45% of respondents indicated that the most
important advantage of computer technology for healthcare providers is the
ability to access current patient information across the enterprise.
24
<PAGE> 27
As the need for readily accessible information throughout the healthcare
enterprise continues to grow, hospitals, providers and payors of all sizes are
faced with the challenge of implementing healthcare information management
systems that are scaleable, capable of working with existing multiple legacy
information systems and flexible to adapt to changes in the healthcare
marketplace. Also, such systems must be patient-centered, integrating all
aspects of managing the healthcare process, such as clinical care, financial
management and administrative decision support.
Industry changes are resulting in fewer but larger healthcare entities and
the emerging organizational model is the integrated delivery network ("IDN"). An
IDN is a network of healthcare organizations that assumes and manages healthcare
risk, provides coordinated care and is held financially and clinically
accountable for the health of the population it serves. The 1996 HIMSS/Hewlett
Packard Leadership Survey indicated that 83% of the respondents are now or will
soon be part of an IDN.
IDNs require innovative information systems infrastructure to support their
multi-entity, multi-site environments. Their information systems must contribute
to making the delivery of healthcare services more efficient and effective
across the continuum of care. They must deliver tangible cost reductions and
measurable productivity and quality improvements, making the availability of
complete, timely and cost-effective patient-centered information essential.
The Company believes that one of the most significant changes in healthcare
information needs will be the development and implementation of the electronic
health record. Electronically capturing, storing, indexing, archiving and
disseminating information enables physicians, health information managers,
clinicians, claims processors and others across an entire healthcare enterprise
to share centralized comprehensive patient information. The Company believes
that the electronic health record will be an essential part of information
systems that support IDNs.
25
<PAGE> 28
STRATEGY
The Company's objective is to be the leading provider of enterprise-wide,
patient-centered healthcare information systems that enable the efficient
capture, storage, archival and retrieval of electronic patient health
information and the secure sharing of this information across the continuum of
care throughout a patient's lifetime. To achieve this objective, the Company
intends to employ the following strategies:
AGGRESSIVELY EXPAND ITS POSITION IN THE ELECTRONIC HEALTH RECORD
MARKET. The Company believes the rapidly growing electronic health record
market represents a significant growth opportunity. The Company believes
DynamicVision, its new electronic health record product, provides an
opportunity to capture a significant share of this emerging and potentially
large market. As such, the Company plans to aggressively market
DynamicVision to existing and new customers through a combination of direct
sales, strategic relationships, trade shows and other forums.
FOCUS ON CROSS-SELLING TO EXISTING AND NEW CUSTOMERS. The Company
believes its customer relationships with key decision makers, many of whom
may have only purchased systems for one department, provide it with a
significant opportunity to sell additional systems and services.
Furthermore, the addition of new products, such as DynamicVision, better
leverages the Company's sales and marketing expenditures. Accordingly, the
Company intends to focus its sales and marketing efforts on increased
penetration of existing customers and broad penetration of new accounts.
PROVIDE SOLUTIONS UTILIZING OPEN ARCHITECTURE. The Company's
technical strategy is to continue to develop systems utilizing open,
client/server architecture. The Company believes that this strategy
provides distinct advantages over competitive product offerings in the
marketplace. The Company's new product development, including
DynamicVision, employs technical designs based on open architecture at all
levels of data capture, information management and workflow, application
software and connectivity, which permits platform independence and plug and
play capability. This capability is critical to customers because it
protects their investment in existing information systems. In addition, the
Company's use of open architecture provides its customers with the
flexibility to acquire incrementally, or upgrade to, new state-of-the-art
information solutions as they become available without incurring the
substantial expenses that may be required with closed or "proprietary"
systems.
MAINTAIN TECHNOLOGICAL ADVANTAGE BY LEVERAGING TECHNOLOGY OF INDUSTRY
LEADERS. The Company's commitment to open architecture leverages its own
technology with capabilities of leading technology companies, enabling the
Company to invest in research and development for its healthcare software
applications. The Company has entered into strategic relationships with
industry leaders, including IBM, Wang and others. The Company believes its
technical designs and strategic relationships enable it to respond more
rapidly to changes in core technologies at a lower cost than companies
utilizing proprietary information systems.
ACQUIRE COMPLEMENTARY BUSINESSES, PRODUCTS AND TECHNOLOGIES. The
Company believes it is well positioned to capitalize on the significant
consolidation opportunities that exist in the healthcare information
systems industry. For example, the Company recently completed its
acquisition of DMI, a radiological information and imaging software company
that is now a wholly-owned subsidiary of the Company. The Company will
continue to evaluate potential acquisitions and strategic relationships
which are consistent with its business strategy, complementary to its
product line or that incorporate new technologies.
26
<PAGE> 29
PRODUCTS AND SERVICES
The Company has a broad offering of products and services that are based
upon a strategic mix of applications and technologies that support the
restructuring of healthcare delivery information systems backed by
implementation and support services. The Company's products are organized into
two areas: electronic health record and imaging solutions, and clinical
information systems.
<TABLE>
<CAPTION>
SITES/
PRODUCT TYPE OF SOLUTION STATUS(1) DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ELECTRONIC HEALTH RECORD AND IMAGING SOLUTIONS
DynamicVision.................. Electronic Health Record Beta Site An enterprise-wide multi-media electronic
System health records clinical workstation and system
Medical RecordsPlus............ Enterprise-wide Document 45 Based on IBM's ImagePlus/400 image processing
Imaging System system, enables authorized caregivers to access
centralized repositories of document images
Professional Access
Facility(2).................... OS/2 based Workstation 22 Enables authorized caregivers to review and
complete charts
Open Image Server.............. Enterprise-wide Document Available Based on Wang's OPEN/software, enables
Imaging System First Half authorized caregivers to access centralized
1997 repositories of document images
Maxiview....................... Diagnostic Image Graphics 20 An advanced imaging and graphic workstation
Workstation that enables two- and three-dimensional image
processing
PACsPlus+...................... Diagnostic Image Management Beta Site Enables physicians and caregivers to access and
and Distribution System review images from local and remote locations
- -----------------------------------------------------------------------------------------------------------------------
CLINICAL INFORMATION SYSTEMS
LabPro 2000.................... Laboratory Information 92 Manages clerical and administrative functions
System in the laboratory including monitoring and
controlling specimens, ordering, tracking, and
results reporting
Transfusion Service
Manager(3)..................... Blood Bank System 33 Manages specialized result entry, blood
storage, patient history storage, and product
inventory
Maxifile....................... Radiology Information System 63 Manages clerical and administrative functions
of radiology department including patient
scheduling and film tracking
OPTIMA(4)...................... Radiology Mammography 21 Manages clerical and administrative functions
Manager for mammography services
ANSIRS......................... Anatomic Pathology System 27 Manages clerical and administrative functions
of cytology/pathology department
Monitrax....................... Perioperative Information Available Facilitates the collection and presentation of
System Second Half vital patient, surgical and anesthesia data
1997 through the perioperative process
Physician's Workstation........ Point-of-Care Patient Available A Wang product that facilitates real time data
Record System First Half capture of patient information which the
1997 Company intends to incorporate into its systems
solutions
---------------
(1) As of June 30, 1996.
(2) Professional Access Facility is an add-on component which may be used only in conjunction with Medical RecordsPlus.
(3) Transfusion Service Manager is an add-on component which may be used only in conjunction with LabPro 2000.
(4) OPTIMA is an add-on component which may be used only in conjunction with Maxifile.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
ELECTRONIC HEALTH RECORD AND IMAGING SOLUTIONS
DynamicVision, the Company's electronic health record, is a universal,
clinical workstation which provides enterprise-wide connectivity through a
master patient index to systems and data repositories existing in the healthcare
environment, giving physicians, caregivers and other authorized individuals
prompt and simultaneous access to both current and historical health
information. DynamicVision enables physicians, clinicians and other technical
professionals to: (i) view records, report results and worklist assignments;
(ii) display and manipulate document and diagnostic images; (iii) handle the
analysis and assignment of chart deficiencies and electronically sign records;
(iv) play video and audio recordings; and (v) participate in video
consultations. DynamicVision provides business process and workflow automation
that streamlines the flow of tasks and information throughout an enterprise. In
addition, system administration capabilities include security profiling and
specific permissions for the enterprise. DynamicVision provides the connectivity
and enabling technologies that integrate Dynamic's imaging and clinical
information systems, as well as those from other companies, into a virtual
healthcare information systems environment. DynamicVision is currently being
beta-tested and is scheduled for general availability by the end of 1996.
Medical RecordsPlus is an industry leading, enterprise-wide document
imaging solution based on IBM's ImagePlus/400 image processing system. Medical
RecordsPlus gathers information from scanned or faxed paper documents or
directly from existing provider systems which enables physicians, medical
records personnel and other authorized individuals to access centralized
electronic health record information operating on IBM AS/400.
Professional Access Facility is an OS/2 based clinical workstation which is
used with Medical RecordsPlus to enable physicians, clinicians and other
technical professionals to view records and worklist assignments, display and
manipulate document images, handle the analysis and assignment of record
deficiencies and electronically sign records.
Open Image Server is an open architecture, platform independent,
enterprise-wide document imaging solution based on Wang's Enterprise Work
Management software (OPEN/workflow, OPEN/image and OPEN/COLD) and is available
for both UNIX and Windows NT environments. Open Image Server enables physicians,
medical records personnel and other authorized individuals to access centralized
electronic health records information. Open Image Server gathers information
from scanned or faxed paper documents or directly from existing provider
systems.
Maxiview is an advanced imaging and graphics workstation which accommodates
two- and three-dimensional image processing and is compatible with imaging
equipment from all major manufacturers. It enables a physician to observe
interrelationships of soft tissue and bone, precisely locate lesions and tumors
and perform a variety of measurements. See " -- Government Regulation."
PACsPlus+ is an enterprise-wide, diagnostic image management and
distribution system. It provides physicians and caregivers local and remote
access to review quality or diagnostic quality images from cost effective,
standard workstations. PACsPlus+ provides remote access to diagnostic images
across a network already functioning at the customer's location.
CLINICAL INFORMATION SYSTEMS
LabPro 2000 is a clerical and administrative laboratory information system
that allows the laboratory to monitor and control the flow of specimens through
the department. It computerizes the process of ordering, tracking and reporting
results of procedures performed by the clinical laboratory. Patient and
management reporting capabilities provide support for diagnostic and therapeutic
decision making. Multiple LabPro 2000 laboratory systems may be linked,
providing economies of scale through specialized testing stations.
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<PAGE> 31
Transfusion Service Manager is a blood bank system which manages
specialized blood test result entries, blood product inventory, blood storage
and patient transfusion histories. Transfusion Service Manager may be used only
in conjunction with LabPro 2000. In addition, management reports enable the
department to evaluate the effectiveness of transfusion services provided.
Transfusion Service Manager is an FDA regulated product for which approval is
pending. See "-- Government Regulation."
Maxifile is a radiology information system that computerizes the clerical
and administrative functions of the radiology department. Modular in design,
Maxifile applications include patient scheduling and tracking, film management,
statistical reporting, quality control and patient billing. Maxifile schedules
patient appointments and automatically generates documents which are available
when the patient arrives. The system monitors the patient throughout the
radiology process and offers time and status reports. Film management tracks
film movement among departments, film libraries, clinics and off-site locations.
Diagnostic reports can be approved electronically and then printed, communicated
via a network or automatically faxed through Maxifile's AutoFAX capability.
Primary markets include hospitals, clinics and independent diagnostic imaging
centers.
OPTIMA is a radiology mammography manager which performs clerical and
administrative functions for mammography services, including American College of
Radiology compliance. OPTIMA may be used only in conjunction with Maxifile.
OPTIMA displays an on-line patient history, including breast diagrams.
ANSIRS is an anatomic pathology system that functions independently, or
with LabPro 2000, to manage clerical and administrative functions within
cytology/pathology departments. ANSIRS provides on-line workstation access for
cytologists/histologists, medical secretaries and pathologists. Major functional
areas include report transcription and word processing, quality assurance,
regulatory requirements and on-line access to patient history.
Monitrax is designed to be a point-of-care clinical information system that
will allow the collection and presentation of vital patient, surgical and
anesthesia data through each phase of the perioperative process. The portable
hardware platform will allow for entry of vital signs, drugs, fluids and notes
from any location. Monitrax will capture the data collected during the
perioperative process, organize it, and display it in real-time to facilitate
both clinical and management decision making. The anesthesia record will be
available to become a part of the patient electronic health record. The data
elements are designed to be stored in a repository of clinical information
available for query and outcome reporting.
Physician's Workstation, a Wang product, is a scaleable, point-of-care
patient record application designed by physicians and intended to be
incorporated into the Company's systems solutions. Physician's Workstation
communicates with existing information systems to provide for the real-time
capture of clinical and administrative information and build a comprehensive
electronic health record. Information can be scanned, received by fax or updated
by the physician during the delivery of care.
CONSULTING, SYSTEMS INTEGRATION AND OTHER SERVICES
The Company provides a full range of professional consulting services
including project management, implementation planning, training and education.
The Company's technical services include network design, implementation and
support, custom software development, interfaces and modifications and systems
integration. The Company also provides support services including 24 hour
telephone support, and software maintenance and enhancements.
RESEARCH AND DEVELOPMENT
The Company's research and development program is designed to extend the
capabilities of existing products and develop new healthcare software
applications. The Company believes that a substantial and sustained commitment
to product development is important to the long term success of its business. As
of July 31, 1996, 23 professional employees were engaged in research and
development activities. During the years ended December 31, 1993, 1994 and 1995,
the Company spent $1,984,000, $2,068,000 and $1,862,000, respectively, on
research and development. The Company's research and development is influenced
by
29
<PAGE> 32
customer input and user group forums. Currently, the Company's research and
development efforts are primarily focused on the DynamicVision, PACsPlus+ and
Monitrax product lines.
SALES AND MARKETING
As of July 31, 1996, the Company had five sales representatives focusing on
new business development reporting to the Vice President -- New Business Sales
and four account executives focusing on existing customers reporting to the Vice
President -- Customer Sales. New business sales and existing customer sales are
supported by six product specialists who cover the entire United States. The
compensation of the Company's sales employees is substantially dependent on the
achievement of individual sales targets. In addition, a ten person sales support
group provides telemarketing, proposal development, demonstration coordination
and administrative support. The Company's marketing department consists of four
individuals who develop product competitive analyses, sales collateral, audio
and video products and coordinate trade shows, advertising and public relations
activities.
The Company's sales cycle is typically six to eighteen months and includes
several steps: (i) initial contact and qualification; (ii) development of
proposal in response to request for a proposal or direct sales lead; (iii)
business problem requirements definition; (iv) product demonstrations; (v) site
visits; and (vi) contract preparation and negotiations. Members of the Company's
professional services, product management and sales support departments, and
members of executive management assist the sales force in completing the
proposal, conducting demonstrations and analyzing the requirements. In support
of the sales efforts, the Company advertises in trade journals, participates in
trade shows, publishes articles and provides speakers for industry shows and
conferences. In addition, the Company receives qualified leads as well as
support in proposal development, demonstrations and site visits from its
strategic business partners, which include IBM, Wang and others.
STRATEGIC RELATIONSHIPS
The Company has entered into strategic relationships with several leading
technology developers, including IBM, Wang and others, to gain access to certain
technologies that are integrated into the Company's systems. In addition,
through these strategic relationships the Company is able to cross-market its
internally developed or acquired technologies to customers of its business
partners.
In November 1994, the Company signed a non-exclusive agreement with IBM to
market, support and enhance Medical RecordsPlus. The Company is responsible for
providing maintenance, support, product shipment 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. A fee based on IBM's then current list price, less certain
allowances, is paid to IBM by the Company for licenses sold by the Company. IBM
has retained the right to market the product and, pursuant to the terms of the
Agreement, pays a license fee to the Company for sales of the product by IBM.
In March 1996, the Company signed non-exclusive agreements with Wang. This
relationship provides open systems, core imaging technology and business process
automation capabilities to the Company through Wang's suite of OPEN/software
products which includes OPEN/image, OPEN/workflow, and OPEN/ COLDplus. In
addition, Physician's Workstation provides the Company with a scaleable,
point-of-care patient record application which facilitates the real-time capture
of clinical and administrative information and the construction of a
comprehensive patient health record. The agreements also provide for the mutual
sharing of technology and permits the Company to market these products, for
which the Company pays a fee to Wang.
CUSTOMERS
The Company currently supports over 250 customers in 44 states. The Company
generates revenues almost exclusively through sales to the healthcare industry
located in the United States. Due to this concentration, substantially all
receivables of the Company are from healthcare institutions which may be
similarly affected by changes in economic, regulatory or other industry related
conditions. Key customers
30
<PAGE> 33
include the University of California at Los Angeles Medical Center, University
of Illinois at Chicago Medical Center, Methodist Hospital of Memphis, Memorial
Sloan-Kettering Cancer Center, Ohio State University Hospital, Columbia/HCA,
Greater Dayton Area Hospital Association, Advocate Health Care, Temple
University Hospital, UniHealth Hospital and Orlando Regional Health System.
COMPETITION
The market for information technology in the healthcare industry is
intensely competitive. Many of the Company's competitors have significantly
greater financial, research and development, technical and marketing resources
than the Company. Competitors vary in size and in the scope and breadth of the
products and services they offer. The Company's systems compete both with other
technologies and with similar systems developed by other companies. Other major
information management companies, including the companies with whom the Company
has strategic relationships, may enter the markets in which the Company
competes. Competitive pressures and other factors, such as new system
introductions by the Company's competitors, may result in significant pricing
pressures that could have a material adverse effect on the Company. In addition,
in the professional and technical consulting segment, the Company competes with
the consulting divisions of national accounting firms as well as national and
regional healthcare specialty consulting firms.
GOVERNMENT REGULATION
The FDA has issued a draft guidance document addressing the regulation of
certain computer products as devices under the FFDCA. To the extent that
computer software is classified as a device under applicable regulations, the
manufacturers of such products could be required, depending upon the product,
to: (i) register and list their products with the FDA, (ii) notify the FDA and
demonstrate substantial equivalence to other products on the market before
marketing such products or (iii) obtain FDA clearance by filing a pre-market
application that establishes the safety and effectiveness of the product. The
Company has two products considered devices under the FFDCA: Maxiview and
Transfusion Service Manager. As a result of the characterization of certain of
the Company's products as devices, the Company's manufacturing facilities are
registered with the FDA and its manufacturing operations regarding devices are
required to be in compliance with the FDA's rules and regulations. The FDA
conducted on-site inspections at the Maitland facility in May 1996 and at the
Minnetonka facility in June 1996. Both inspections were concluded without
incident. There can be no assurance that the Company will ultimately be able to
obtain or maintain required FDA approvals to market its products. Of the
Company's two regulated products, Maxiview cleared as substantially equivalent
to a predicate device by the FDA in December 1995 and the 510(k) submission to
demonstrate substantial equivalence for the Transfusion Service Manager was
submitted to the FDA in March 1996 and is pending.
INTELLECTUAL PROPERTY
The Company primarily relies upon trade secrets, copyright laws and
confidentiality agreements with employees and customers to protect its rights in
its software technology. The Company does not hold any patents nor has it filed
copyrights with respect to any of its software technology. Due to the rapid pace
of innovation within the software industry, the Company believes that patent,
trade secret and copyright protection are less significant than the Company's
ability to further develop, enhance and modify its current products and other
clinical information systems through the technological and creative skills of
its personnel. To minimize the possibility of third parties imitating the
Company's systems, the Company only licenses object code and does not license or
otherwise distribute source code.
The Company's employees are required to enter into confidentiality
agreements which prohibit the disclosure of confidential information and require
employees to report and assign to the Company all concepts, developments,
discoveries and inventions conceived during their employment.
The Company has federal trademark registration for Maxifile(R) and has
applied for federal trademark registration for DynamicVision, Monitrax,
PACSPlus+, ASAP, OPTIMA and Maxiview.
There can be no assurance that the legal protections and precautions taken
by the Company will be adequate to prevent misappropriation of the Company's
technology. In addition, these protections do not
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<PAGE> 34
prevent independent third-party development of functionally equivalent or
superior technologies or services. The Company does not believe that its
operations or products infringe on the intellectual property rights of others.
There can be no assurance that others will not assert infringement or trade
secret claims against the Company with respect to its current or future products
or that the Company will be successful in defending any such claim.
EMPLOYEES
As of July 31, 1996, the Company had 135 full time employees, of which 23
were employed in research and development, 72 in client services, 18 in general
and administrative and 22 in sales and marketing. None of the Company's
employees is represented by a labor union or subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are good.
LEGAL PROCEEDINGS
In February 1996, the Company 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 (i) 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, (ii) breached his fiduciary duty to the Company
and (iii) breached his obligations under his employment agreement with the
Company. The Company is seeking to recover damages in the amount of at least
$50,000 in addition to the 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. Mr. Terrano has
counter-claimed that he has been defamed by the Company. The Company is a
defendant in an action in which Mr. Terrano has a demand for $280,000 in
severance pay together with two years worth of benefits unquantified to include
the use of an automobile, club dues and insurance policies. The Company is
vigorously contesting this case.
The Company is a defendant in an action filed by a former Vice-President in
March, 1995 in the District Court of Lancaster County, Nebraska, alleging that
the Company did not lawfully terminate her for cause, and, therefore, breached
her employment agreement. The former employee is seeking severance payment. The
Company is vigorously contesting this case.
The Company is a defendant in a claim by a customer for $250,000 for
compensatory damages and unspecified punitive damages alleging that the Company
breached express and implied warranties and committed fraud in connection with
the sale of a laboratory information system. The Company intends to vigorously
contest the allegations. The Company continues to provide software support
services on an ongoing basis to this customer.
The above cases are in the early stages of discovery and the Company
believes that it is not possible to evaluate the likelihood of a favorable or
unfavorable outcome of either case at this time. As of the date hereof, there
are no other material legal proceedings pending against the Company.
FACILITIES
The Company's corporate headquarters are located at 101 Southhall Lane,
Suite 210, in Maitland, Florida 32751. The Maitland location consists of
approximately 20,000 square feet of office space under a lease which expires
March 31, 1999. The Company also maintains an office at 10901 Bren Road East,
Minnetonka, Minnesota 55343 (the former DMI facility) as the Company's radiology
technology center. The Minnetonka location consists of approximately 13,000
square feet under lease which expires on July 31, 1999. The Company considers
its existing facilities to be adequate for its foreseeable needs.
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<PAGE> 35
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Certain information is set forth below concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------- --- -----------------------------------------------------------
<S> <C> <C>
David M. Pomerance.......... 51 Chairman of the Board and Secretary
Mitchel J. Laskey........... 46 President, Chief Executive Officer, Treasurer and Director
Nikhil A. Bhatt............. 43 Senior Vice President and Chief Technical Officer
Paul S. Glover.............. 37 Vice President -- Finance and Chief Financial Officer
Jerry L. Carson............. 55 Director
Thomas J. Martinson......... 46 Director
Bret R. Maxwell............. 37 Director
Daniel Raynor............... 36 Director
Richard W. Truelick......... 55 Director
</TABLE>
Certain information is set forth below concerning additional key employees
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Steven J. Akerson........... 46 Vice President -- Clinical Products
Philip R. Kneeland.......... 39 Vice President -- Technical Operations
Mary Lu Lander.............. 55 Vice President -- Marketing
Matthew P. Lawton........... 52 Vice President -- Customer Sales
Linda A. Moline............. 40 Vice President -- Professional Services
Bruce B. Sherr.............. 57 Vice President -- Sales
</TABLE>
DAVID M. POMERANCE has been Chairman of the Board of Directors since May
1996, Secretary of the Company since August 1994 and a director since 1991. Mr.
Pomerance served as Chief Executive Officer of the Company from July 1994 to May
1996 and was President from July 1994 through August 1994. He is the managing
general partner of Martin Magnetic Imaging, Ltd., a magnetic resonance imaging
(MRI) facility in Stuart, Florida. From 1990 through 1994, and from 1985 through
1989, Mr. Pomerance was a principal in various private businesses. During 1989
and 1990, Mr. Pomerance was the president of the Healthcare Systems Division of
UNISYS Corporation. From 1983 through 1985, Mr. Pomerance was the president of
the Dynamic Control Division of Baxter International. From 1974 until its sale
to Baxter International in 1983, he was the president and controlling
shareholder of Dynamic Control Corporation, a healthcare information systems
company which he founded.
MITCHEL J. LASKEY has been Chief Executive Officer since May 1996,
President, Chief Operating Officer and Treasurer since August 1994 and a
director since December 1994. From 1992 to 1994, Mr. Laskey was chairman and
chief executive officer of DTR, which was acquired by the Company in August
1994. From 1985 through 1991, Mr. Laskey was a principal or managing partner in
various entrepreneurial investments and also acted as a volunteer officer for a
not-for-profit social agency. From 1983 through 1985, Mr. Laskey was executive
vice president of the Dynamic Control Division of Baxter International and, from
1980 until its sale to Baxter International in 1983, was the executive vice
president of Dynamic Control Corporation, a healthcare information systems
company. Mr. Laskey has been a licensed certified public accountant since 1974
and is a member of the American and Florida Institutes of Certified Public
Accountants.
NIKHIL A. BHATT has been Senior Vice President and Chief Technical Officer
of the Company since June 1996. From January 1989 to May 1996, Mr. Bhatt was
senior vice president and chief technical officer of IMNET Systems, Inc. Mr.
Bhatt has more than 20 years experience in the image processing industry,
specializing in software development, engineering and research and development.
Mr. Bhatt was directly responsible for the design and development of the IMNET
MegaSAR(R) Microfilm Jukebox and personally holds numerous patents, including 15
in image processing and seven in biomedical engineering.
33
<PAGE> 36
PAUL S. GLOVER has been Vice President -- Finance and Chief Financial
Officer of the Company since December 1994 and was Director of Financial
Operations from August 1994 through December 1994. Mr. Glover was the executive
vice president of Uniprompt Microsystems, Inc. and president of its wholly owned
subsidiary, Unisoft, Inc., from August 1990 through July 1994. Mr. Glover served
as a certified public accountant with the national accounting firms of Main
Hurdman and Company (now part of KPMG Peat Marwick LLP) and Deloitte, Haskins
and Sells (now part of Deloitte & Touche LLP).
JERRY L. CARSON has been a director of the Company since January 1993. Mr.
Carson has been executive vice president and chief financial officer of Evans
Enterprises, a property management and real estate development firm in Bedford,
New Hampshire, since 1990. Mr. Carson was executive vice president and chief
financial officer of Playboy Enterprises, Inc. from 1988 to 1990 and held the
positions of vice president of corporate development and treasurer of Baxter
International from 1980 to 1986.
THOMAS J. MARTINSON has been a director of the Company since 1986. He also
was the Company's Chairman of the Board from 1986 until 1996 and Secretary from
1986 until 1994. Mr. Martinson has been president of Martinson & Company, Ltd.
of Wayzata, Minnesota, an investment banking firm, since 1985. In March 1996,
Mr. Martinson became the chairman of the board of directors of Interventional
Innovations Corporation of St. Paul, Minnesota.
BRET R. MAXWELL has been a director of the Company since May 1996. Mr.
Maxwell is a managing director of First Analysis Corporation, a securities
investment firm which he joined in 1982. Mr. Maxwell is also a director of
Continental Waste Industries, Inc. and numerous privately held companies.
DANIEL RAYNOR has been a director of the Company since May 1996. Mr. Raynor
has been the president of a general partner of The Argentum Group, a private
investment firm, since November, 1987, and chairman of the general partner of
Argentum Capital Partners, L.P., a small business investment company, since its
organization in February 1990.
RICHARD W. TRUELICK has been a director of the Company since May 1996. Mr.
Truelick is the sole owner of Truelick Associates, a merger consulting and
investment firm, where he has been employed since 1988. From 1979 through 1988,
Mr. Truelick was a partner in Adler-Truelick Associates, also a merger
consulting and investment firm. Mr. Truelick was vice president corporate
development for Beatrice Foods Company from 1968 through 1979.
STEVEN J. AKERSON has been Vice President -- Clinical Products of the
Company since March 1996. Mr. Akerson was the Company's Director of Product
Development from 1994 until March 1996. From 1983 to 1994, Mr. Akerson was
employed by IBAX Healthcare Systems in various management and director level
positions in the product development area.
PHILIP R. KNEELAND has been Vice President -- Technical Operations of the
Company since August 1994. From 1992 to 1994 Mr. Kneeland was vice president of
development of DTR. From 1983 to 1992, Mr. Kneeland was employed by IBAX
Healthcare Systems in capacities related to healthcare data processing
consulting and facilities management with emphasis in developing and
implementing new service products. Mr. Kneeland is married to Ms. Moline.
MARY LU LANDER has been Vice President -- Marketing of the Company since
September 1994. From 1991 to 1994 Ms. Lander was president of Health Practice
Services, a re-marketer of physician practice management systems. Prior to 1991,
Ms. Lander was director of marketing services for Unisys Corporation, Healthcare
Systems Division.
MATTHEW P. LAWTON has been Vice President -- Customer Sales of the Company
since August 1994. Mr. Lawton was Director of Sales and Marketing for DTR from
1992 to 1994. He has significant healthcare systems experience with multiple
healthcare information system vendors, including IBAX Healthcare Systems, where
he held the position of vice president of product development.
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<PAGE> 37
LINDA A. MOLINE has been Vice President -- Professional Services of the
Company since August 1994. From 1992 to 1994 Ms. Moline held the position of
director of customer services for DTR. Ms. Moline, who is a registered records
administrator, was development manager of application design for IBAX Healthcare
Systems, where she was employed from 1985 to 1992. Ms. Moline is married to Mr.
Kneeland.
BRUCE B. SHERR has been Vice President -- Sales of the Company since
October 1995. Prior to joining the Company in 1995 and during 1994, Mr. Sherr
was vice president of sales and marketing for Biovation, a laboratory
information systems company. During 1993 and 1994, Mr. Sherr was vice president
of sales for the Western Division of First Data Corporation, Health System
Group. Mr. Sherr was vice president of sales for Micro Health Systems during
1992 and 1993, and was director of sales for Critikon, a division of Johnson &
Johnson, from 1990 to 1992.
Officers of the Company serve at the pleasure of the Board of Directors,
subject to the terms of any employment agreements with the Company. The term of
office of each director of the Company ends at the next annual meeting of the
Company's shareholders or when their successor is duly elected and qualified.
Other than Mr. Kneeland and Ms. Moline, there are no family relationships among
any of the Company's officers and directors. See "Management -- Employment
Agreements."
COMPENSATION OF DIRECTORS
Non-employee directors are compensated at the rate of $500 plus expenses
for each Board meeting attended in person and receive a five-year warrant for
25,500 shares of Common Stock upon their election to the Board of Directors. The
exercise price of the warrant is equal to the average of the closing bid and ask
prices of Common Stock on the date of issuance. Prior to June 14, 1995, these
warrants vested one-third upon issuance and one-third upon each of the first and
second anniversaries of issuance. After June 13, 1995, these warrants were
issued to vest 40% upon issuance and 20% on each of the next three
anniversaries. In addition, warrants to purchase 5,000 shares of Common Stock
are issued annually to non-employee directors starting at the beginning of that
director's third consecutive term in office. Each warrant has a five year term
and an exercise price equal to the average of the closing bid and ask prices of
Common Stock on the date of issuance. Prior to June 14, 1995, these warrants
vested fully upon issuance. After June 13, 1995 these warrants were issued to
vest 40% upon issuance and 20% on each of the next three anniversaries. With
certain exceptions, all outside director warrants expire upon the termination of
that director's service to the Company as a director. See "-- Director and
Management Stock Warrant and Option Plan."
No director receives any additional compensation for services as a member
of any committee of the Board of Directors.
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<PAGE> 38
EXECUTIVE COMPENSATION
The following table is a summary of the annual, long-term and other
compensation of the Company's Chief Executive Officer and each other corporate
officer whose total salary and bonus during the fiscal year ended December 31,
1995 exceeded $100,000 (collectively, the "Named Officers.")
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION
------------------------ AWARDS PAYOUTS
OTHER ANNUAL -------- ------- ALL OTHER
NAME AND COMPENSATION OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY (1) SARS PAYOUTS (2)
------------------ ---- -------- ------------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
David M. Pomerance............... 1995 $151,750 $ 7,800 -- -- $2,772
Chairman of the Board 1994 73,365 2,600 250,000(3) -- 804
and Secretary
Mitchel J. Laskey................ 1995 151,750 7,800 -- $50,000 2,772
President, Chief Executive 1994 50,000 2,600 250,000(3) 20,833(4) 924
Officer and Treasurer
Philip R. Kneeland............... 1995 100,000 7,800 25,000(5) -- 2,772
Vice President -- Technical 1994 33,333 2,600 -- -- 920
Operations
Matthew P. Lawton................ 1995 100,000 -- 10,000(5) -- --
Vice President -- Customer 1994 31,667 -- -- -- --
Sales
</TABLE>
- ---------------
(1) Includes amounts paid as car allowances.
(2) Includes Company contributions to the individual employee's 401(k)
Retirement Plan.
(3) Options awarded during 1994 to Messrs. Pomerance and Laskey were in addition
to compensation paid under their respective employment agreements.
(4) Represents amounts paid under a deferred compensation agreement with Mitchel
J. Laskey assumed in connection with the acquisition of DTR which is
payable in monthly installments of $4,167. As of July 31, 1996, $50,004 was
owed to Mr. Laskey under this agreement.
(5) Options awarded under the 1993 Incentive Stock Option Plan.
STOCK OPTION INFORMATION
The following table sets forth information relative to stock options
granted to the Named Officers. The Company has not granted any stock
appreciation rights.
OPTION GRANTS DURING 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE
----------------------------------------------- AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
NUMBER OF TOTAL PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERMS
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------
NAME GRANTED IN 1995 PER SHARE DATE 5% 10%
- -------------------------------------- --------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Mitchel J. Laskey..................... 250,000(1) 38.00% $1.00 8/23/99 $15,131 $68,524
David M. Pomerance.................... 250,000(2) 38.00 1.00 7/06/99 13,484 64,737
Philip R. Kneeland.................... 25,000(2) 3.80 1.00 6/13/05 13,177 35,791
Matthew P. Lawton..................... 10,000(3) 1.52 1.00 6/13/05 5,271 14,316
</TABLE>
- ---------------
(1) Represents previously granted employment contract options covering 250,000
shares as to which the option price was reduced to $1.00 from $1.6875 per
share of Common Stock on September 13, 1995.
(2) Represents previously granted employment contract options covering 250,000
shares as to which the option price was reduced to $1.00 from $1.875 per
share of Common Stock on September 13, 1995.
(3) Options awarded under the 1993 Incentive Stock Option Plan.
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<PAGE> 39
The following table sets forth information relative to stock options
exercised by the Named Officers and values of stock options held by those
officers that were outstanding at year end. No options were exercised by any
executive officer of the Company during 1995.
AGGREGATED OPTION EXERCISES AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT YEAR END OPTIONS AT YEAR END
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David M. Pomerance..................... 180,500 100,000 $ 213,282 $ 140,625
Mitchel J. Laskey...................... 180,500 100,000 210,938 140,625
Philip R. Kneeland..................... -- 25,000 -- 35,156
Matthew P. Lawton...................... -- 10,000 -- 14,063
</TABLE>
EMPLOYMENT AGREEMENTS
In August 1994, the Company entered into an employment agreement with
Mitchel J. Laskey to serve as the Company's President and Chief Operating
Officer. The agreement is for a term of three years, which automatically renews
for two successive one-year periods, unless terminated by either party not less
than 60 days prior to end of the initial, or renewal term, as the case may be.
The agreement provides for an annual base salary of $150,000, which is to be
reviewed annually by the Board of Directors. In March 1996, the Board of
Directors approved an increase in the base salary of Mr. Laskey to $187,500,
effective March 1, 1996. If the employment agreement is terminated without
cause, one year of Mr. Laskey's annual base salary as of the date of
termination, in addition to all other benefits and other compensation, if any,
shall accrue and be paid. The agreement contains a covenant not to compete for
two years after termination.
In June 1996, the Company entered into an employment agreement with Nikhil
A. Bhatt to serve as the Company's Senior Vice President and Chief Technical
Officer. The agreement is for a term of three years, which automatically renews
for three successive one-year periods, unless terminated by the Company not less
than 60 days prior to the commencement of any renewal period. The agreement
provides for an annual base salary of $155,000, which is to be reviewed annually
by the Board of Directors and is subject to increases based on the Consumer
Price Index. If the employment agreement is terminated without cause, the
Company fails to renew the contract or Mr. Bhatt elects to terminate for "good
reason," Mr. Bhatt is to receive on the termination date a lump sum cash payment
equal to one year of Mr. Bhatt's annual base salary, in addition to all other
benefits and other compensation to which he would be entitled if he were an
employee during the one-year period. The agreement contains a covenant not to
compete for a period of 18 months after termination.
In August 1994, the Company entered into an employment agreement with David
M. Pomerance, which was amended effective August 1, 1996. Pursuant to the
amended agreement, Mr. Pomerance serves as Chairman of the Board and a part-time
consultant to the Company. The agreement, as amended, is for a term of one year
commencing August 1, 1996 and automatically renews for successive one-year
periods unless terminated by written notice from either party within 60 days
prior to the commencement of any renewal term. The agreement provides for a
one-time payment of approximately $10,000 on August 1, 1996, monthly payments of
$1,500 for his services as Chairman of the Board and per diem payments of
$2,500, with a non-cumulative minimum of five days per month, for his part-time
services as a consultant. The agreement, as amended, also provides that Mr.
Pomerance shall be reimbursed for all reasonable expenses incurred by him in the
performance of his duties. Mr. Pomerance has waived participation in the MIC
Plan and in all vacation and sick day benefit programs. In consideration for Mr.
Pomerance entering into the amendment, the Company agreed (i) to pay Mr.
Pomerance a bonus of $12,500 per quarter for four calendar quarters commencing
August 1, 1996, and (ii) that certain unvested options held by Mr. Pomerance to
purchase an aggregate of 50,000 shares of Common Stock be deemed vested as of
August 1, 1996.
37
<PAGE> 40
MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company has a Management Incentive Compensation ("MIC") Plan pursuant
to which cash distributions may be made annually based on the Company's earnings
growth and on each participating officer's contributions to the Company's
profits and other corporate goals. Distributions are made from a pool, the
amount of which is established by the Company's Board of Directors, annually as
a percentage of targeted increases in net earnings. Individual distributions
from the pool are determined by the Compensation Committee based on
recommendations from the Company's President and Chief Executive Officer. With
respect to 1996, the Board of Directors has established $1,000,000 as the target
of pre-tax net income before any amount is paid pursuant to the MIC Plan.
Maximum bonuses to be paid for 1996 will not be greater than 20% of pre-tax net
income. No amounts were accrued or paid under the MIC Plan based on the
Company's operating results in 1995.
1983 INCENTIVE STOCK OPTION PLAN
The Company had an incentive stock option plan which expired March 1993
("1983 Plan"). Under the 1983 Plan as of July 31, 1996, there are 9,000 shares
of Common Stock underlying unexpired outstanding incentive options. Options may
be exercised for periods up to ten years from date of grant or, in the case of
holders of ten percent or more of the Company's Common Stock five years from
date of grant. The expiration of the 1983 Plan does not effect the right of the
holders to exercise unexpired options under such plan.
1993 INCENTIVE STOCK OPTION PLAN
The Company adopted an incentive stock option plan in 1993 ("1993 Plan").
As of July 31, 1996, there were 392,190 shares of Common Stock underlying
unexpired outstanding options granted under the 1993 Plan. The exercise price of
the options granted under the Plan may not be less than 100% of the fair market
value of the Company's Common Stock on the grant date or, in the case of holders
of ten percent or more of the Company's Common Stock, 110% of the fair market
value of the Company's Common Stock at grant date. Options may be exercised to
acquire 40% of the shares underlying the option after one year, 30% after two
years and 30% after three years. The terms and vesting schedule of options
granted under both the 1983 Plan and 1993 Plan are the same. All full-time
permanent Company employees have been eligible to participate under both plans.
Options may be exercised either by payment of cash or, at the discretion of the
Compensation Committee, delivery of shares of Common Stock.
DIRECTOR AND MANAGEMENT STOCK WARRANT AND OPTION PLAN
The Company adopted the director and management stock warrant and option
plan in 1993 ("D&M Plan") for the issuance of stock purchase warrants and stock
options to directors, officers and key management employees of the Company.
Grants under this plan are made under the direction of the Company's
Compensation Committee. The purpose of the plan is to attract and retain
talented directors, officers and key management employees of the Company.
The Company has reserved 250,000 shares of its Common Stock for issuance
upon the exercise of warrants and options granted under the D&M Plan. As of July
31, 1996, there were 157,000 shares of Common Stock underlying unexpired
outstanding warrants granted under the D&M Plan. Under the D&M Plan, warrants to
directors are to be issued with an exercise price equal to the average of the
closing bid and ask prices of the Company's Common Stock on the date of
issuance. Options to employees and officers are to be issued with an exercise
price of no less than 85% of the fair market value of the Company's Common Stock
on the date of issuance.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted the Employee Stock Purchase Plan in 1993 for the
purpose of encouraging full-time employees to become shareholders in the
Company. The Company has reserved 200,000 shares of its Common Stock for
issuance pursuant to purchases under this plan. As of July 31, 1996, 50,666
shares have been issued under the Employee Stock Purchase Plan.
38
<PAGE> 41
The price for stock purchased under the Employee Stock Purchase Plan is the
lesser of 85% of the average bid and ask prices of the Company's Common Stock at
the beginning of and at the end of each six month purchase period. Employees pay
for the shares through payroll deductions. This Plan qualifies for favorable tax
treatment to employees under Sections 421 and 423 of the Internal Revenue Code.
CERTAIN TRANSACTIONS
During 1993, 1994 and 1995, the Company incurred $0, $55,000 and $65,000,
respectively, of airline transportation charges from DDK Enterprises LLC ("DDK")
on terms which management believes approximate fair market value. DDK is
majority owned by Mr. Pomerance. Effective August 1, 1996 the Company will no
longer incur such expenses.
In each of 1993, 1994 and 1995, Mr. Martinson received $12,000 plus
reimbursement of expenses for his services as the Company's Chairman of the
Board. In addition, Martinson & Company, Ltd., which is wholly-owned by Mr.
Martinson, provides financial, consulting and advisory services to the Company.
The Company incurred $18,500 plus expenses to Martinson & Company, Ltd. for
these services in 1995. The Company has not paid Martinson & Company, Ltd. for
financial consulting and advisory services in 1996 and does not anticipate
incurring fees for such services in the future.
In connection with the private placement offering of subordinated
convertible notes in June 1995, Messrs. Pomerance, Laskey and Martinson
purchased notes in the principal amount of $100,000, $100,000 and $50,000,
respectively, and received warrants to purchase 20,000, 20,000 and 10,000 shares
of Common Stock, respectively. See "Description of Securities -- Warrants."
These notes were converted into Series A Preferred Stock on November 28, 1995 at
$0.80 per share.
In December 1995, in connection with the private placement of Series B
Preferred Stock, The Argentum Group was paid a financial consulting fee of
$175,000 and purchased warrants to purchase 210,000 shares of Common Stock for
$25,000. Mr. Raynor is the president of a general partner of The Argentum Group.
On August 16, 1996, Messrs. Pomerance, Laskey, Maxwell and certain other
shareholders of the Company made unsecured loans to the Company in an aggregate
amount of $1,000,000, pursuant to which the Company executed the Unsecured
Notes. The Unsecured Notes provide for payment, in full, at the earlier of the
completion of this Offering or November 14, 1996, together with interest at a
rate of 13% per annum.
39
<PAGE> 42
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of Common Stock as of July 31, 1996 by (i) each person (or group of
affiliated persons) known by the Company to be the beneficial owner of five
percent or more of the outstanding Common Stock, (ii) each director and current
executive officer, (iii) the Selling Shareholders, and (iv) all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING(2) OWNED AFTER OFFERING(3)
----------------------- NUMBER OF SHARES -----------------------
NAME(1) NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ----------------------------------- --------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
Mitchel J. Laskey(4)............... 938,255 8.1% -- 938,255 6.0%
David M. Pomerance(5).............. 437,900 3.8 -- 437,900 2.8
Nikhil A. Bhatt(6)................. 60,000 * -- 60,000 *
Paul S. Glover(7).................. 10,000 * -- 10,000 *
Daniel Raynor(8)................... 2,186,450 18.9 5,000 1,866,450 12.0
Bret R. Maxwell(9)................. 2,103,950 18.4 5,000 1,768,950 11.5
Thomas J. Martinson(10)............ 177,500 1.6 15,000 162,500 1.1
Richard W. Truelick(11)............ 102,700 * 10,000 92,700 *
Jerry L. Carson(12)................ 40,500 * -- 40,500 *
Philip R. Kneeland(13)............. 349,401 3.1 25,000 321,901 2.1
Linda Ann Moline(14)............... 349,401 3.1 2,500 321,901 2.1
Matthew P. Lawton(15).............. 67,690 * 5,000 62,690 *
Walter Barandiaran(16)............. 2,245,000 19.7 16,000 1,914,000 12.4
First Analysis Corporation(17)..... 2,062,500 18.1 -- 1,732,500 11.2
Oliver Nicklin(18)................. 2,062,500 18.1 -- 1,732,500 11.2
Environmental Private Equity Fund
II, L.P.(19)..................... 1,031,250 9.0 165,000 866,250 5.6
The Productivity Fund, III,
L.P.(20)......................... 1,031,250 9.0 165,000 866,250 5.6
Argentum Capital Partners,
L.P.(21)......................... 938,750 8.2 150,000 788,750 5.1
Okabena Partnership, K(22)......... 500,000 4.4 43,950 456,050 3.0
First Bank System, Inc. ........... 499,600 4.4 -- 499,600 3.2
Charles Richard Johnson(23)........ 255,120 2.2 75,000 180,120 1.2
Advisors Trust(24)................. 93,750 * 15,000 78,750 *
Robert Goldstein(25)............... 93,750 * 15,000 78,750 *
Joseph Cooper(26).................. 82,500 * 10,000 72,500 *
Ronald J. Adams(27)................ 72,500 * 62,500 10,000 *
Charles Farrow(28)................. 72,500 * 62,500 10,000 *
David Moore(29).................... 72,500 * 62,500 10,000 *
Don Aron(30)....................... 62,500 * 10,000 52,500 *
Mathers Associates, L.P.(31)....... 62,500 * 10,000 52,500 *
Edward M. Sellian(32).............. 62,500 * 10,000 52,500 *
Robert L. Frome(33)................ 43,750 * 7,000 36,750 *
Sherman Family Trust(34)........... 36,250 * 36,250 -- *
Arnold and Sandra Raynor(35)....... 31,250 * 5,000 26,250 *
Richard Fields(36)................. 30,000 * 4,800 25,200 *
Benjamin M. Fishman(37)............ 27,500 * 2,000 25,200 *
Steven Wolosky(38)................. 18,750 * 3,000 15,750 *
Robert Grossman(39)................ 12,500 * 2,000 10,500 *
All executive officers and
directors as a group (nine
persons)......................... 5,026,005 41.2 515,000 4,511,005 27.9
</TABLE>
- ---------------
* Less than 1.0%
40
<PAGE> 43
(1) The address for each of the officers and directors is 101 Southhall Lane,
Suite 210, Maitland, Florida 32751. The other addresses are as follows: Mr.
Raynor, c/o The Argentum Group, 405 Lexington Avenue, 54th Floor, New York,
NY 10174; Mr. Maxwell, c/o First Analysis Corporation, The Sears Tower,
Suite 9500, 233 South Wacker Drive, Chicago, IL 60606; Mr. Carson, Venetian
Tower Place, PH 302, 2971 Gulf Shore Boulevard N., Naples, FL 33940, Mr.
Martinson, c/o Martinson & Company, 140 Barry Avenue North, Wayzata, MN
55391; Mr. Truelick, c/o Truelick Associates, 167 Regatta Drive, Jupiter,
FL 33477; The Productivity Fund, III, L.P., 233 South Wacker Drive, Suite
9500, Chicago, IL 60606; Environmental Private Equity Fund II, L.P., 233
South Wacker Drive, Suite 9500, Chicago, IL 60606; Argentum Capital
Partners, L.P., 405 Lexington Avenue, 54th Floor, New York, NY 10174; First
Analysis Corporation, 233 South Wacker Drive, Suite 9500, Chicago, IL
60606; Mr. Barandiaran, 245 East 93rd Street, Apt. 26D, New York, NY 10128;
Mr. Nicklin, 233 South Wacker Drive, Suite 9500, Chicago, IL 60606; Okabena
Partnership, K, 5140 Norwest Center, Minneapolis, MN 55402; First Bank
System, Inc., 601 Second Avenue South, Minneapolis, MN 55402; Mr. Moore,
2814 S.E. Dune Drive, #2211, Stuart, FL 34996; Mr. Farrow, 47 North River
Road, Stuart, FL 34996; Mr. Adams, 395 Golf Brook Circle, #111, Longwood,
FL 32779; Sherwin Family Trust, 17166 Pocato Way, San Diego, CA 92128; Mr.
Fishman, c/o The Argentum Group, 405 Lexington Avenue, 54th Floor, New
York, NY 10174; Mr. Grossman, 420 East 70th Street, Apt. 8Q, New York, NY
10021; Advisors Trust, c/o Mr. Tessler, c/o Fusion Systems Corp., 7600
Standish Place, Rockville, MD 20855; Mr. Goldstein, c/o Equity Group Profit
Sharing Plan & Trust, 919 Third Avenue, 18th Floor, New York, NY 10022;
Mathers Associates, L.P., 160 East 65th Street, Apt. 23F, New York, NY
10021; Mr. Cooper, 415 Northern Boulevard, Great Neck, NY 10021; Mr.
Sellian, 6794 S.E. Isle Way, Stuart, FL 34996; Mr. Fields, c/o Allen &
Company, 711 Fifth Avenue, 9th Floor, New York, NY 10022; Mr. Frome, c/o
Olshan, Grundman, Frome & Rosenweig, 505 Park Avenue, 16th Floor, New York,
NY 10022-1170; Mr. Wolosky, c/o Olshan, Grundman, Frome & Rosenweig, 505
Park Avenue, 16th Floor, New York, New York 10022-1170; Mr. and Mrs.
Raynor, c/o Shapiro & Lobel, 111 West 40th Street, New York, NY 10018; Mr.
Aron, c/o The Aron Companies, 1400 Post Oak Blvd., Suite 500, Houston, TX
77056 and Mr. Johnson, 124 Meadow Boulevard, Sanford, FL 32771.
(2) Shares not actually outstanding are deemed to be beneficially owned by an
individual and outstanding if such individual has the right to acquire the
shares within 60 days.
(3) Excludes an aggregate of 150,000 shares of Common Stock subject to the
Underwriters' over-allotment option.
(4) Includes 125,000 shares of Series A Preferred Stock and 220,000 shares of
Common Stock that Mr. Laskey may acquire within 60 days upon the exercise
of stock purchase warrants. Does not reflect the occurrence of the
following events that took place after July 31, 1996: (i) on August 15,
1996, Mr. Laskey transferred 125,000 shares of Series A Preferred Stock to
the Laskey Family Irrevocable Trust, with respect to which he exercises no
control and disclaims any beneficial ownership interest; and (ii) on August
15, 1996, the Board of Directors granted Mr. Laskey options to purchase
50,000 shares of Common Stock at an exercise price equal to the offering
price set forth on the cover of this Prospectus, 40% of which vested on the
date of the grant, and 20% of which will vest on each of three successive
anniversaries thereafter.
(5) Includes 125,000 shares of Series A Preferred Stock and 225,000 shares of
Common Stock that Mr. Pomerance may acquire within 60 days upon the
exercise of stock purchase warrants.
(6) Includes 60,000 shares of Common Stock that Mr. Bhatt may acquire within 60
days upon the exercise of stock options.
(7) Includes 10,000 shares of Common Stock that Mr. Glover may acquire within
60 days upon the exercise of stock purchase warrants.
(8) Includes 31,250 shares of Series B Preferred Stock owned by Mr. Raynor. In
addition, by reason of Mr. Raynor's status as controlling person of
Argentum Capital Partners, L.P. ("ACP"), The Argentum Group ("TAG") and the
general partner of Environmental Private Equity Fund II, L.P. ("EPEF"), Mr.
Raynor may be deemed to be the indirect beneficial owner of 1,970,000
shares of Series B Preferred Stock owned by ACP and EPEF, and 175,000
additional shares of Common Stock which may be acquired by TAG within 60
days upon the exercise of stock purchase warrants.
(9) Includes 2,062,500 shares of Series B Preferred Stock owned by The
Productivity Fund III, L.P. ("PFIII") and EPEF. By reason of his status as
the ultimate general partner, Mr. Maxwell may be deemed to be the indirect
beneficial owner of PFIII and EPEF.
(10) Includes 10,000 shares attributed to him through ownership by Joan
Martinson, his spouse. Also includes 62,500 shares of Series A Preferred
Stock and 30,000 shares of Common Stock that Mr. Martinson may acquire
within 60 days upon exercise of stock purchase warrants.
(11) Includes 62,500 shares of Series A Preferred Stock and 20,200 shares of
Common Stock that Mr. Truelick may acquire within 60 days upon the exercise
of stock purchase warrants.
(12) Includes 35,500 shares of Common Stock that Mr. Carson may acquire within
60 days upon the exercise stock purchase warrants.
(13) Includes 33,590 shares of Common Stock attributed to him through ownership
by Ms. Moline, his spouse. Also, includes 10,000 shares of Common Stock
that Ms. Moline may acquire, and 10,000 shares that Mr. Kneeland may
acquire, within 60 days upon the exercise of stock purchase warrants.
(14) Includes 295,811 shares of Common Stock attributed to her through ownership
by Mr. Kneeland, her spouse. Additionally, includes 10,000 shares of Common
Stock that Mr. Kneeland may acquire, and 10,000 shares of Common Stock that
Ms. Moline may acquire, within 60 days upon the exercise of stock purchase
warrants.
(15) Includes 4,000 shares of Common Stock that Mr. Lawton may acquire within 60
days upon the exercise of stock purchase warrants.
(16) Includes 50,000 shares of Series B Preferred Stock owned by Mr. Barandiaran
through his individual retirement account and 50,000 shares of Series B
Preferred Stock held by an individual retirement account for the benefit of
his spouse and controlled by Mr. Barandiaran pursuant to a power of
attorney. In addition, by reason of Mr. Barandiaran's status as a
controlling person of ACP, TAG and a general partner of EPEF, includes
1,031,250 shares of Series B Preferred Stock owned by EPEF, 938,570 shares
of Series B Preferred Stock owned by ACP and 175,000 shares of Common Stock
which may be acquired by TAG within 60 days upon the exercise of stock
purchase warrants.
(17) Includes 1,031,250 shares of Series B Preferred Stock owned by EPEF and
1,031,250 shares of Series B Preferred Stock owned by PFIII. By reason of
First Analysis Corporation's ("FAC") status as a general partner of PFIII
and EPEF, FAC may be deemed to be the indirect beneficial owner of PFIII
and EPEF.
41
<PAGE> 44
(18) Includes 1,031,250 shares of Series B Preferred Stock owned by EPEF and
1,031,250 shares of Series B Preferred Stock owned by PFIII. By reason of
Mr. Nicklin's status as the majority shareholder of FAC, the ultimate
general partner of PFIII and EPEF, Mr. Nicklin may be deemed to be the
indirect beneficial owner of PFIII and EPEF.
(19) Includes 1,031,250 shares of Series B Preferred Stock.
(20) Includes 1,031,250 shares of Series B Preferred Stock.
(21) Includes 938,750 shares of Series B Preferred Stock.
(22) Includes 125,000 shares of Series A Preferred Stock and 20,000 shares of
Common Stock that Okabena Partnership, K may acquire within 60 days upon
the exercise of stock purchase warrants.
(23) Includes 400 shares of Common Stock that Mr. Johnson may acquire within 60
days upon the exercise of stock purchase warrants.
(24) Includes 93,750 shares of Series B Preferred Stock.
(25) Includes 93,750 shares of Series B Preferred Stock.
(26) Includes 62,500 shares of Series B Preferred Stock and 20,000 shares of
Common Stock that Mr. Cooper may acquire within 60 days upon the exercise
of stock purchase warrants.
(27) Includes 62,500 shares of Series A Preferred Stock and 10,000 shares of
Common Stock that Mr. Adams may acquire within 60 days upon exercise of
stock purchase warrants.
(28) Includes 62,500 shares of Series A Preferred Stock and 10,000 shares of
Common Stock that Mr. Farrow may acquire within 60 days upon exercise of
stock purchase warrants.
(29) Includes 62,500 shares of Series A Preferred Stock and 10,000 shares of
Common Stock that Mr. Moore may acquire within 60 days upon exercise of
stock purchase warrants.
(30) Includes 62,500 shares of Series B Preferred Stock.
(31) Includes 62,500 shares of Series B Preferred Stock.
(32) Includes 62,500 shares of Series B Preferred Stock.
(33) Includes 43,750 shares of Series B Preferred Stock.
(34) Includes 31,250 shares of Series A Preferred Stock and 5,000 shares of
Common Stock that the Sherwin Family Trust may acquire within 60 days upon
exercise of stock purchase warrants.
(35) Includes 31,250 shares of Series B Preferred Stock.
(36) Includes 30,000 shares of Series B Preferred Stock.
(37) Includes 5,625 shares of Series B Preferred Stock owned by Mr. Fishman
through his individual retirement account and 6,875 shares of Series B
Preferred Stock owned by Mr. Fishman. Also includes 15,000 shares of Common
Stock that Mr. Fishman may acquire within 60 days upon exercise of stock
purchase warrants.
(38) Includes 18,750 shares of Series B Preferred Stock.
(39) Includes 5,625 shares of Series B Preferred Stock owned by Mr. Grossman
through his individual retirement account and 6,875 shares of Series B
Preferred Stock owned by Mr. Grossman.
42
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
par value $0.01 per share. The holders of Common Stock have the following
rights: (i) to share ratably in the distribution of dividends as and when
declared by the Board of Directors out of funds legally available therefor; (ii)
to cast one vote per share on all matters voted on by shareholders, generally;
and (iii) in the event of liquidation, dissolution or winding up of the Company,
to share ratably in all assets remaining after payment of liabilities, subject
to the prior distribution rights of preferred stock, if any, then outstanding.
The shares of Common Stock are not redeemable and do not carry any preemptive
rights to subscribe for or purchase any additional shares of any class of stock.
PREFERRED STOCK
Under the Company's Articles of Incorporation, the Board of Directors of
the Company has the authority to divide the 10,000,000 authorized shares of
preferred stock, $0.01 par value, into series and to fix the rights and
preferences of any series so established. Variations between different series
may be created by the Board of Directors with respect to such matters as voting
rights, if any, the rate of dividend, the priority of payment thereof, and the
right to cumulation thereof, if any, redemption terms and conditions, and the
right of conversion, if any. The holders of preferred stock have no preemptive
right to subscribe to any additional securities which may be issued by the
Company, except as provided below.
The Board of Directors has adopted a Certificate of Designation of the 9%
Cumulative Convertible Preferred Stock, Series A (the "Series A Preferred
Stock") and the 9% Cumulative Convertible Preferred Stock, Series B (the "Series
B Preferred Stock"). The 968,750 outstanding shares of Series A Preferred Stock
and 3,750,000 outstanding shares of Series B Preferred Stock will be
automatically converted into shares of Common Stock on a one-to-one basis on the
effectiveness of the Registration Statement of which this Prospectus is a part.
Series A Preferred Stock and Series B Preferred Stock have certain dividend,
liquidation, redemption, voting, conversion and pre-emptive rights. See Note E
to the December 31, 1995 financial statements included herein.
The following summary of the terms and provisions of the Series A Preferred
Stock and Series B Preferred Stock does not purport to be complete and is
qualified in its entirety by reference to the pertinent sections of the
Certificate of Designation, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
WARRANTS
The Company has outstanding the following warrants as of June 30, 1996: (i)
warrants to purchase up to 155,000 shares of Common Stock exercisable at a price
of $1.00 per share at any time prior to July 31, 2000; (ii) warrants to purchase
up to 210,000 shares of Common Stock exercisable at a price of $1.00 per share
at any time prior to December 4, 2002; (iii) warrants to purchase up to 35,000
shares of Common Stock exercisable at a price of $4.32 per share at any time
prior to December 12, 1996; and (iv) warrants to purchase 157,000 shares of
Common Stock at exercise prices ranging from $1.00 to $6.025 issued pursuant to
the D&M Plan. See "Management."
REGISTRATION RIGHTS
An aggregate of 7,059,246 shares of the Common Stock outstanding or
issuable upon exercise of certain warrants and options or upon conversion of the
Series A Preferred Stock and Series B Preferred Stock have certain registration
rights. All of such shares of Common Stock are either being offered hereby or
registered in a registration statement being filed concurrently with the
registration statement of which this Prospectus is a part.
43
<PAGE> 46
CERTAIN FLORIDA LEGISLATION
The State of Florida has enacted legislation that may deter or frustrate
takeovers of Florida corporations. The Florida Control Share Act generally
provides that shares acquired in excess of certain specified thresholds will not
possess any voting rights unless such voting rights are approved by a majority
of a corporation's disinterested shareholders. The Florida Affiliated
Transactions Act generally requires super-majority approval by disinterested
shareholders of certain specified transactions between a public corporation and
holders of more than ten percent of the outstanding voting shares of the
corporation (or their affiliates).
Florida law and the Company's Articles of Incorporation also authorize the
Company to indemnify the Company's directors, officers, employees and agents. In
addition, Florida law and the Company's Articles of Incorporation presently
limit the personal liability of corporate directors for monetary damages, except
where the directors (i) breach their fiduciary duties, and (ii) such breach
constitutes or includes certain violations of criminal law, a transaction from
which the directors derived an improper personal benefit, certain unlawful
distributions or certain other reckless, wanton or willful acts or misconduct.
The Company may also indemnify any person who was or is a party to any
proceeding by reason of the fact that he is or was a director, officer, employee
or agent of such corporation (or is or was serving at the request of such
corporation in such a position for another entity) against liability if he acted
in good faith and in a manner he reasonably believed to be in the best interests
of such corporation and, with respect to criminal proceedings, had no reasonable
cause to believe his conduct was unlawful.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved shares of Common
Stock and Preferred Stock may enable the Board of Directors to issue shares to
persons friendly to current management which would render more difficult or
discourage an attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger or otherwise, and may thereby protect the
continuity of the Company's management.
TRANSFER AGENT
The Company's transfer agent is Norwest Bank Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 15,400,536 shares
of Common Stock outstanding. All 5,000,000 shares offered hereby will be freely
tradeable. In a registration statement which is intended to become effective
concurrently with the registration statement of which this Prospectus is a part,
6,278,746 shares of Common Stock are being registered by certain shareholders of
the Company, which will result in all of the shares of Common Stock outstanding
and underlying options and warrants being registered. The holders of
substantially all the shares of Common Stock being offered in the concurrent
offering have agreed with the Underwriters not to sell or otherwise dispose of
any of such shares for a period of 180 days after the closing of the Offering.
Of the shares of Common Stock outstanding and underlying options and warrants
4,979,596 shares are held by persons deemed "affiliates" of the Company as such
term is defined in Rule 144 and are subject to the "manner of sale" restrictions
under Rule 144.
44
<PAGE> 47
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives,
Raymond James & Associates, Inc. and Vector Securities International, Inc. (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Shareholders the following respective numbers of shares of Common Stock
at the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Raymond James & Associates, Inc. .........................................
Vector Securities International, Inc. ....................................
-------
TOTAL...........................................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are purchased.
The Underwriters through the Representatives, propose to offer part of the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page of this Prospectus and part of the shares to certain
dealers at a price which represents a concession not in excess of $ per
share under the public offering price. The Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per share to certain
other dealers. The Representatives of the Underwriters have advised the Company
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Certain of the Underwriters and the selling group members that currently
act as market makers for the Common Stock of the Company may engage in "passive
market making" in the Common Stock on the Nasdaq National Market in accordance
with the Rule 10b-6A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Rule 10b-6A permits, upon satisfaction of certain conditions,
underwriters and selling group members participating in a distribution that are
also Nasdaq market makers in the security being distributed to engage in limited
market making activity when Rule 10b-6A would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in passive
market
45
<PAGE> 48
making generally from entering a bid or affecting a purchase at a price that
exceeds the highest bid for those securities displayed on Nasdaq by a market
maker that is not participating in the distribution of the Common Stock. Each
underwriter or selling group member engaged in passive market making is subject
to a daily net purchase limitation equal to 30% of such entity's average daily
trading volume during the two full consecutive calendar months immediately
preceding the date of the filing of the Registration Statement of which this
Prospectus forms a part.
The Company and the Selling Shareholders have granted the Underwriters
options exercisable not later than 30 days after the date of this Prospectus, to
purchase up to an aggregate of 750,000 additional shares of Common Stock, at the
public offering price, less the underwriting discounts and commissions set forth
on the cover page of this Prospectus. Of the shares subject to this option,
600,000 shares will be sold by the Company and 150,000 shares will be sold by
the Selling Shareholders. To the extent that the Underwriters exercise such
options, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total shown,
and the Company and the Selling Shareholders will be obligated, pursuant to the
options, to sell such shares to the Underwriters. The Underwriters may exercise
their options only to cover over-allotments made in connection with the sale of
the shares of Common Stock offered hereby. If purchased, the Underwriters will
sell such additional shares on the same terms as those on which the shares are
being offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain civil
liabilities, including liabilities under the Securities Act.
The Company, each of its officers and directors and certain shareholders
have agreed not to sell without the consent of the Representatives any shares of
Common Stock to the public, other than shares offered hereby, for a period 180
days following the closing of this Offering. This restriction does not apply to
certain issuances of Common Stock by the Company pursuant to its stock option
plans. See "Shares Eligible for Future Sale."
The Company has agreed to sell to the Representatives or their designees,
for an aggregate of $100, warrants (the "Representatives' Warrants") to purchase
up to 250,000 shares of Common Stock for a period of three years commencing one
year from the date of this Prospectus (the "Warrant Exercise Term") at 120% of
the public offering price. The Representatives' Warrants may not be transferred
for one year from the date of the Prospectus, except to the officers, employees
and shareholders of the Representatives. During the Warrant Exercise Term, the
holders of the Representatives' Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Common Stock. Any
profit realized by the Representatives on the sale of the Representatives'
Warrants or the underlying shares of Common Stock may be deemed additional
underwriting compensation.
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement which is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Company has applied for the Common Stock to be listed on the Nasdaq
National Market under the symbol DHTI.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cohen, Berke, Bernstein, Brodie & Kondell, P.A., Miami,
Florida. Certain legal matters in connection with the underwriting will be
passed upon by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A.,
Miami, Florida, counsel for the Underwriters. Mr. Richard N. Bernstein, a
principal in the law firm of Cohen, Berke, Bernstein, Brodie & Kondell, P.A. is
the trustee of the Laskey Family Irrevocable Trust, which is the owner of
125,000 shares of Series A Preferred Stock.
46
<PAGE> 49
EXPERTS
The financial statements and schedule of Dynamic Healthcare Technologies,
Inc. as of December 31, 1994 and 1995, and for each of the years then ended,
have been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for the periods
ended June 30, 1995 and 1996, included herein, the independent certified public
accountants have reported that they applied limited procedures in accordance
with professional standards for a review of such information. However, the
separate report included herein for the six months ended June 30, 1995 and 1996,
states that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the Registration Statement prepared or certified by the accountants
within the meaning of Sections 7 and 11 of the Securities Act.
The financial statements of Terrano Corporation, the previous corporate
name of the Company, for the year ended December 31, 1993 included in this
Prospectus and the related financial statement schedule for the year ended
December 31, 1993 included elsewhere in the Registration Statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of DMI as of March 31, 1995 and 1996 and for each
of the years then ended included in this Prospectus and the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files, reports, proxy statements and other
information with the SEC. These materials can be inspected and copied at the
public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549, and at the following Regional Offices
of the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661. Copies of these materials may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
25049 at prescribed rates. The Company's Common Stock is quoted on Nasdaq.
Reports, proxy statements and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, DC 20006.
A Registration Statement on Form S-1 relating to the Common Stock offered
hereby has been filed by the Company with the SEC in Washington, DC. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to the Registration Statement and
the exhibits and schedules thereto. A copy of the Registration Statement may be
inspected by anyone without charge and may be obtained at prescribed rates from
the SEC at the Public Reference Section of the SEC maintained at its principal
office located at 450 Fifth Street, N.W., Washington, DC 25049, the New York
Regional Office located at 75 Park Place, Room 1228, New York, New York 10007,
or the Chicago Regional Office located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 or Internet Address:
http://www.sec.gov.
47
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Independent Auditors' Report -- KPMG Peat Marwick LLP............................... F-2
Independent Auditors' Report -- Deloitte & Touche LLP............................... F-3
Balance Sheets as of December 31, 1994 and 1995..................................... F-4
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995....... F-5
Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1994 and
1995............................................................................. F-6
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995....... F-7
Notes to Financial Statements....................................................... F-8
Independent Auditors' Review Report -- KPMG Peat Marwick LLP........................ F-19
Condensed Consolidated Balance Sheet as of June 30, 1996 (Unaudited)................ F-20
Condensed Consolidated Statement of Operations for the Six Months Ended
June 30, 1995 and 1996 (Unaudited)............................................... F-21
Condensed Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1995 and 1996 (Unaudited)............................................... F-22
Notes to Condensed Consolidated Financial Statements (Unaudited).................... F-23
DIMENSIONAL MEDICINE, INC.
Independent Auditors' Report -- Ernst & Young LLP................................... F-27
Balance Sheets as of March 31, 1995 and 1996........................................ F-28
Statements of Operations for the Years Ended March 31, 1995 and 1996................ F-29
Statements of Shareholders' Equity for the Years Ended March 31, 1995 and 1996...... F-30
Statements of Cash Flows for the Years Ended March 31, 1995 and 1996................ F-31
Notes to Financial Statements....................................................... F-32
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Basis of Presentation............................................................... F-38
Pro Forma Condensed Consolidated Statements of Operations........................... F-38
Notes to Pro Forma Condensed Consolidated Statements of Operations.................. F-39
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dynamic Healthcare Technologies, Inc.:
We have audited the accompanying balance sheets of Dynamic Healthcare
Technologies, Inc. as of December 31, 1994 and 1995, and the related statements
of operations, shareholders' equity, and cash flows for the years then ended.
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, the 1994 and 1995 financial statements referred to above
present fairly, in all material respects, the financial position of Dynamic
Healthcare Technologies, Inc. as of December 31, 1994 and 1995, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG PEAT MARWICK LLP
Orlando, Florida
March 6, 1996
F-2
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Terrano Corporation:
We have audited the statements of operations, shareholders' equity, and
cash flows of Terrano Corporation for the year ended December 31, 1993. 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 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. Our 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 1993 financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Terrano Corporation for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
The accompanying financial statements for the year ended December 31, 1993
have been restated.
/s/ DELOITTE & TOUCHE LLP
--------------------------------------
DELOITTE & TOUCHE LLP
Orlando, Florida
March 16, 1994
(January 11, 1995 as to the 1993 restated financial statements)
F-3
<PAGE> 53
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 10,173 $ 2,290,366
Restricted cash (Note K).................................................... -- 50,000
Accounts receivable, net of allowance for doubtful accounts of $250,000 and
$140,837 in 1994 and 1995, respectively................................... 2,166,813 2,811,711
Unbilled receivables........................................................ 528,372 307,693
Other current assets........................................................ 199,651 141,569
----------- -----------
Total current assets................................................. 2,905,009 5,601,339
Property and equipment, net (Notes B and C)................................... 1,212,969 1,119,278
Capitalized software development costs, net of accumulated amortization of
$1,273,095 and $1,835,701 in 1994 and 1995, respectively (Note A)........... 1,821,917 2,040,727
Goodwill, net of accumulated amortization of $54,787 and $209,479 at December
31, 1994 and 1995, respectively (Note A).................................... 1,028,050 873,358
Other assets.................................................................. 32,171 24,408
----------- -----------
$ 7,000,116 $ 9,659,110
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit (Note C).................................... $ 2,788,401 $ --
Accounts payable and accrued expenses (Note F).............................. 1,182,450 852,515
Deferred revenue............................................................ 1,452,895 1,818,871
Advance billings............................................................ 351,835 80,260
Bank note payable -- current maturities..................................... -- 73,285
----------- -----------
Total current liabilities............................................ 5,775,581 2,824,931
Bank note payable (Note C).................................................... -- 2,726,715
Accrued liability -- Acquisition contingency (Note G)......................... 610,000 --
Other (Note J)................................................................ 112,569 43,053
----------- -----------
Total liabilities......................................................... 6,498,150 5,594,699
----------- -----------
Shareholders' equity (Note E):
Series A preferred stock, $0.01 par value (liquidation preference of
$782,992); authorized 1,055,938 shares; issued and outstanding 968,750
shares as of December 31, 1995............................................ -- 9,688
Series B preferred stock, $0.01 par value (liquidation preference of
$3,023,062); authorized 4,384,375 shares; issued and outstanding 3,750,000
shares as of December 31, 1995............................................ -- 37,500
Common stock, $0.01 par value, authorized 20,000,000 shares; issued and
outstanding 5,967,819 and 6,611,646 shares in 1994 and 1995,
respectively.............................................................. 59,678 66,116
Additional paid-in capital.................................................. 8,879,296 12,900,738
Deficit..................................................................... (8,437,008) (8,949,631)
----------- -----------
Total shareholders' equity........................................... 501,966 4,064,411
----------- -----------
$ 7,000,116 $ 9,659,110
============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 54
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- ----------
<S> <C> <C> <C>
Operating revenues (Note A):
Computer system equipment sales
and support........................................ $3,961,164 $ 1,873,393 $1,101,017
Application software licenses......................... 3,577,868 1,848,522 2,428,928
Software support...................................... 2,148,675 2,549,761 3,731,149
Services and other.................................... -- 715,466 1,625,242
---------- ----------- ----------
Total operating revenues...................... 9,687,707 6,987,142 8,886,336
Costs and expenses:
Cost of products sold................................. 3,158,671 1,547,453 880,639
Client services expense............................... 1,437,204 2,600,913 2,824,987
Software development costs............................ 1,425,083 1,774,897 1,642,825
Sales and marketing................................... 2,031,869 1,717,973 1,931,178
General and administrative............................ 1,381,973 2,218,807 1,768,005
Restructuring costs (Note F).......................... -- 686,439 --
---------- ----------- ----------
Total costs and expenses...................... 9,434,800 10,546,482 9,047,634
---------- ----------- ----------
Operating income (loss)....................... 252,907 (3,559,340) (161,298)
---------- ----------- ----------
Other income (expense):
Acquisition contingency (Note G)...................... -- (610,000) --
Interest expense and financing costs.................. (18,615) (143,412) (378,043)
Miscellaneous......................................... 11,392 5,252 26,718
---------- ----------- ----------
Total other expense........................... (7,223) (748,160) (351,325)
---------- ----------- ----------
Earnings (loss) before income taxes..................... 245,684 (4,307,500) (512,623)
Income taxes (Note H)................................... -- -- --
---------- ----------- ----------
Net earnings (loss)..................................... $ 245,684 $(4,307,500) $ (512,623)
========== =========== ==========
Earnings (loss) per common share........................ $ (0.05) $ (0.78) $ (0.08)
========== =========== ==========
Weighted average common shares outstanding.............. 5,362,625 5,536,202 6,443,294
</TABLE>
See notes to financial statements.
F-5
<PAGE> 55
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
SERIES A SERIES B COMMON PAID-IN
PREFERRED PREFERRED STOCK CAPITAL DEFICIT
--------- --------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992................ $ -- $ -- $52,713 $ 7,532,617 $(4,375,192)
Exercise of stock options............... -- -- 65 6,435 --
Net earnings............................ -- -- -- -- 245,684
------ ------- ------- ----------- -----------
Balance, December 31, 1993................ -- -- 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)
Common stock issued to resolve
acquisition contingency.............. -- -- 6,100 603,900 --
Conversion of subordinated convertible
notes................................ 9,688 -- -- 760,062 --
Issuance of Series B preferred stock.... -- 37,500 -- 2,601,005 --
Issuance of warrants.................... -- -- -- 25,000 --
Exercise of stock options............... -- -- 50 4,950 --
Employee stock purchase plan............ -- -- 288 26,525 --
Net loss................................ -- -- -- -- (512,623)
------ ------- ------- ----------- -----------
Balance, December 31, 1995................ $ 9,688 $ 37,500 $66,116 $12,900,738 $(8,949,631)
====== ======= ======= =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 56
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)..................................... $ 245,684 $(4,307,500) $ (512,623)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 677,441 1,036,740 1,081,694
Acquisition contingency............................ -- 610,000 --
Changes in assets and liabilities:
Accounts receivable.............................. (634,020) (1,096,151) (644,898)
Unbilled receivables............................. -- 1,949,552 220,679
Other............................................ 19,891 (17,844) 65,845
Accounts payable and accrued expenses............ 80,360 (95,206) (329,935)
Deferred revenue................................. 291,140 99,940 365,976
Advance billings................................. -- (45,236) (271,575)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 680,496 (1,865,705) (24,837)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Dynamic Technical Resources, Inc....... -- 286,586 --
Capitalized software development costs................ (943,595) (796,024) (781,416)
Purchases of property and equipment................... (237,238) (445,065) (270,705)
Restricted cash deposit............................... -- -- (50,000)
----------- ----------- -----------
Net cash used in investing activities......... (1,180,833) (954,503) (1,102,121)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit, net..... 239,000 1,874,401 (2,788,401)
Borrowings under bank note payable.................... -- -- 2,800,000
Proceeds from issuance of common stock................ 6,500 147,144 31,813
Other................................................. (46,392) 20,084 (5,250)
Proceeds from issuance of subordinated convertible
notes.............................................. -- -- 775,000
Proceeds from issuance of Series B preferred stock.... -- -- 2,638,505
Proceeds from issuance of warrants.................... -- -- 25,000
Principal payments on long-term debt and capital lease
obligations........................................ -- (311,390) (69,516)
----------- ----------- -----------
Net cash provided by financing activities..... 199,108 1,730,239 3,407,151
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... (301,229) (1,089,969) 2,280,193
Cash and cash equivalents, beginning of year............ 1,401,371 1,100,142 10,173
----------- ----------- -----------
Cash and cash equivalents, end of year.................. $ 1,100,142 $ 10,173 $ 2,290,366
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Interest paid......................................... $ 16,284 $ 102,354 $ 375,434
========== ========== ==========
Income taxes paid (received).......................... $ (3,823) $ 0 $ 0
========== ========== ==========
</TABLE>
See notes to financial statements.
F-7
<PAGE> 57
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- Dynamic Healthcare Technologies, Inc. (formerly Terrano
Corporation) develops, markets and supports clinical information systems and
electronic health record solutions in the healthcare industry. The specific
market segments in which the Company participates include Clinical Workstations,
Document Imaging, Diagnostic Imaging, Laboratory Information Systems, Radiology
Information Systems, and Perioperative (Anesthesiology) Information Systems. All
of the Company's products are complementary to and contribute to the creation
and maintenance of the electronic health record.
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 ceases when
the product is available for general release to customers. Amortization of
capitalized Software Development Costs for the years ended December 31, 1993,
1994 and 1995 were $384,569, $505,613 and $562,606, respectively, and write
downs to net realizable value of $0, $121,535 and $0, respectively. 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 its 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 statements of operations are
recognized as the services are performed. Software support revenues principally
include contracts for continuing support services which cover a specific period,
and from which revenue is recognized ratably over the period of the contract.
Also included in software support revenue are revenues from other significant
continuing obligations and post contract support obligations, which are
typically under separate contract and are recognized as the services are
performed. Services revenues are recognized as the services are performed.
Employee Benefit Plan -- The Company has a 401(k) savings plan covering all
full-time employees. 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 $52,576, $75,545 and $63,390 in 1993, 1994 and 1995, respectively.
Stock-Based Employee Compensation Plans -- The Company's employee stock
option plans are accounted for under APB Opinion 25, Accounting for Stock Issued
to Employees, and related interpretations.
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.
F-8
<PAGE> 58
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 dilutive.
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.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk -- The Company generates revenue primarily
through sales to the healthcare industry located throughout the United States.
Due to this concentration, substantially all receivables at December 31, 1994
and 1995, are from healthcare institutions which may be similarly affected by
changes in economic, regulatory or other conditions. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and such
losses have been within management's expectations.
The Company invests its excess cash in deposits with major financial
institutions, in U.S. government agency securities and in commercial paper of
companies with strong credit ratings. Generally, the investments mature within
90 days and, therefore, are subject to little risk. The Company has not
experienced losses related to these investments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of the Company's financial instruments. The fair value of cash and cash and
equivalents approximates its carrying amounts because of the short maturity of
those instruments. The fair value of bank note payable is estimated based on the
current rates available to the Company for debt of the same remaining maturities
and approximates its carrying amount.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement,
which is effective for fiscal years beginning after December 15, 1995, provides
that an entity review long-lived assets and certain identifiable intangibles, to
be held and used, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. The
Company will adopt this standard in 1996 and does not expect compliance with
such standard to have a material effect, if any, on the Company's financial
position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. The Statement, which is effective for fiscal years beginning after
December 15, 1995, provides that companies must either charge the value of stock
options granted to their income statement or provide pro forma equivalent
information in a footnote disclosure. The Company will adopt this standard in
1996 by providing pro forma equivalent information in a footnote disclosure.
Reclassifications -- Certain prior year balances have been reclassified to
conform to the 1995 presentation.
F-9
<PAGE> 59
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 264,424 $ 208,434
Equipment................................................... 2,778,373 2,696,946
Leasehold improvements...................................... 110,150 48,559
---------- ----------
3,152,947 2,953,939
Less accumulated depreciation and amortization.............. 1,939,978 1,834,661
---------- ----------
$1,212,969 $1,119,278
========== ==========
</TABLE>
C. BANK NOTE PAYABLE
On December 8, 1995 the Company entered into a $2,800,000 promissory note
payable to a bank (the "Note"), and discharged its line of credit. The line of
credit was due on demand with accrued interest payable monthly at the bank's
prime plus one percent per annum. The terms of the Note require fixed monthly
payments of principal and interest of $29,911 beginning January 1, 1996, and a
balloon payment equal to the remaining unpaid principal balance and accrued
interest on March 31, 1998. Principal payments are anticipated to approximate
$73,000, $76,000, and $2,651,000 during the years ending December 31, 1996, 1997
and 1998, respectively. Interest on the outstanding principal balance accrues at
the bank's prime rate plus two percent per annum (10.5% as of December 31,
1995). Under the applicable credit agreement, the bank has a security interest
in all of the assets of the Company.
D. LEASES
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. Total rent expense
on all operating leases was $204,000, $208,000 and $161,835 for the years ended
December 31, 1993, 1994 and 1995, respectively.
The future minimum rental payments under operating leases as of December
31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------------
<S> <C>
1996............................................................... $257,026
1997............................................................... 240,718
1998............................................................... 249,390
1999............................................................... 62,890
--------
Total.............................................................. $810,024
========
</TABLE>
E. CAPITAL STOCK, WARRANTS AND OPTIONS
During 1993, the Company's Board of Directors adopted and the shareholders
approved a stock warrant and option plan for directors and management employees
(the "D&M Plan"), whereby 250,000 shares of Common Stock are reserved for
issuance. Under the D&M Plan 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. Management employee
options expire ten years after the first anniversary of the date of issuance and
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. During 1995, the shareholders
approved an amendment to
F-10
<PAGE> 60
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the D&M Plan to conform the terms of vesting to 40% upon grant plus 20% per year
for each of three years thereafter, and to provide for early vesting upon death
or employment termination without cause for all future options granted under the
D&M Plan. Additionally, annual warrants are issued to non-employee directors at
the beginning of that director's third consecutive term in office. Each annual
warrant is for 5,000 shares of the Company's Common Stock, has a five year term,
has an exercise price equal to the average of the closing bid and ask prices of
the Company's Common Stock on the date of issuance and is fully vested upon
issuance. At December 31, 1995, the Company had stock warrants and options
outstanding to purchase shares of its Common Stock under the D&M Plan as
follows:
<TABLE>
<CAPTION>
NUMBER PRESENTLY PRICE YEAR EXPIRATION
OF SHARES EXERCISABLE PER SHARE GRANTED DATE
--------- ----------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
Directors'
Warrants: 25,500 25,500 $3.06 1991 May 1996
5,000 5,000 2.25 1993 June 1998
25,500 25,500 2.06 1993 January 1998
15,000 15,000 1.93 1994 June 1999
5,000 5,000 2.25 1994 June 1999
15,000 15,000 1.00 1995 June 2000
Management
Employees'
Options: -- --
------ ------
91,000 91,000
====== ======
</TABLE>
As part of a public offering of Common Stock in December 1991, the Company
granted warrants to an underwriter of its offering for 35,000 shares of Common
Stock. As of December 31, 1995, these underwriter warrants are exercisable at
$4.32 per share and will expire, if unexercised, in December 1996.
The Company's Board of Directors adopted and the shareholders approved an
incentive stock option plan in 1983 (the "1983 Plan") for key employees whereby
400,000 shares of common stock were reserved for issuance. 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, 1995,
the Company had granted options of 355,040 shares, of which options for 104,240
shares had been exercised and options for 19,000 shares were exercisable at
between $1.00 and $1.9375 a share. No new options will be granted under the
terms of the 1983 Plan.
During 1993, the Company's Board of Directors adopted and the shareholders
approved an incentive stock option plan (the "1993 Plan") for employees whereby
100,000 shares of Common Stock were reserved for issuance. The terms of the 1993
Plan are similar to the 1983 Plan. During 1995, the Company's Board of Directors
adopted and the shareholders approved increasing shares issuable pursuant to the
1993 Plan to 600,000. At December 31, 1995, the Company had granted options of
177,750 shares, no options had been exercised, 13,700 options were terminated
and options for 14,670 shares were exercisable between $1.93 and $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.
F-11
<PAGE> 61
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Incentive stock option activity under the 1983 and 1993 Plans and price
information follows:
<TABLE>
<CAPTION>
STOCK OPTION
SHARES PRICE RANGE
-------- -------------
<S> <C> <C>
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 1.94
Canceled................................................. (246,125) 1.00 - 3.06
--------
Balance at December 31, 1994............................... 102,750 1.00 - 2.25
Exercised................................................ (5,000) 1.00
Granted.................................................. 143,000 1.00 - 1.13
Canceled................................................. (57,700) 1.00 - 2.25
--------
Balance at December 31, 1995............................... 183,050 1.00 - 2.25
========
</TABLE>
During 1993, the Company's Board of Directors and the shareholders approved
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 this plan. This 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. A summary of plan
activity is as follows:
<TABLE>
<CAPTION>
PHASE PHASE ENDING DATE SHARES ISSUED PRICE
-------- ----------------- ------------- -----
<S> <C> <C> <C>
1.............................................. June 30, 1994 5,274 $1.65
2.............................................. December 31, 1994 2,535 0.98
3.............................................. June 30, 1995 6,256 0.93
4.............................................. December 31, 1995 22,575 0.93
------
36,640
======
</TABLE>
On July 6, 1994, the Company's Board of Directors, in connection with an
employment agreement, granted options to David M. Pomerance, 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 of $1.875 per share, the fair
market value on the date of the grant. On August 23, 1994, the Company's Board
of Directors, in connection with an employment agreement, granted options to
Mitchel J. Laskey, covering 250,000 shares of Common Stock under similar terms
at an exercise price of $1.6875 per share, the fair market value on the date of
the grant. Both option agreements provide for early vesting upon death or
employment termination without cause. On September 13, 1995, the Company's Board
of Directors reduced the exercise price on these employment options to $1.00 per
share.
The Articles of Incorporation authorize 10,000,000 shares of $0.01 par
value preferred stock, in such series and variations in the relative rights and
preferences, including voting rights, if any, among series as the Board of
Directors shall determine.
On November 15, 1995 the Company was authorized by the Board of Directors
to reserve for issuance 1,055,938 Shares of 9% Series A Cumulative Convertible
Preferred Stock $0.01 par value ("Series A
F-12
<PAGE> 62
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock"), and 4,384,375 shares of 9% Series B Cumulative Convertible
Preferred Stock $0.01 par value ("Series B Preferred Stock"), (collectively,
"Preferred Stock"), with the following attributes:
(1) Rank. The Preferred Stock, 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
Preferred Stock are entitled to cumulative dividends on a pari passu basis
at the rate per share of nine (9%) percent per annum payable quarterly in
arrears, 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 Company, whether voluntary or involuntary, the holders of the
Preferred Stock are entitled to receive and to be paid out of the assets of
the Company available for distribution a liquidation distribution in cash
in an amount equal to $0.80 per share plus accrued and unpaid dividends
thereon to the date of such distribution.
(4) Conversion Rights. The holders of shares of Preferred Stock have
the rights, at their option, to receive on a share for share basis, Common
Stock of the Company plus any dividends accrued and unpaid on any shares of
Preferred Stock surrendered for conversion.
(5) Mandatory Conversion. Each share of Series A Preferred Stock will
automatically be converted into one share of Common Stock if (i) the
Company's Common Stock shall have traded above $1.20 for 20 consecutive
trading days on any nationally recognized stock exchange or Nasdaq and (ii)
the underlying common shares have been registered under the Securities Act
of 1933, as amended (the "Securities Act").
Each share of Series B Preferred Stock shall automatically be
converted into one share of Common Stock if (i) the Company's Common Stock
shall have traded above $2.80 for 20 consecutive trading days on any
nationally recognized stock exchange or Nasdaq and (ii) the average weekly
trading volume during such 20 consecutive trading days is equal to or
greater than 150,000 shares of Common Stock and (iii) either the underlying
Common Stock have been registered under the Securities Act or eligible to
be sold by the Series B Preferred Stock holders pursuant to Rule 144
promulgated under the Securities Act.
(6) 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
Company, at the following redemption prices: (i) $0.90 per share, if
redeemed on or before June 30, 1999, and (ii) $0.80 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 Company will redeem
such shares on a pro rata basis. Redemption of Series B Preferred Stock is
at the option of the holder(s) upon the occurrence of a liquidating
consolidation or merger, or a sale of substantially all of the Company's
assets. There is no mandatory redemption or sinking fund obligation with
respect to the Preferred Stock.
(7) 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.
The holders of shares of Series B Preferred Stock are entitled to vote on
all matters, in the same manner and with the same effect as holders of Common
Stock as one class. Additionally, the Company requires approval of two-thirds of
the Series B Preferred Stock holders voting as a separate class with respect to
certain matters, including (i) to authorize, alter, create or issue any class or
series of capital stock; (ii) merge or consolidate with and or into any other
entity; or (iii) permit the occurrence of a change in control as defined.
F-13
<PAGE> 63
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On July 31, 1995 the Company completed a private placement offering of
$775,000 of subordinated convertible notes, bearing simple interest at 9% per
annum, together with detachable warrants to purchase 155,000 shares of the
Company's Common Stock ("Debt Warrants") (see also Note I). The Debt Warrants
are exercisable at $1.00 per common share, and are exercisable for five years
from the date of issuance (70,000 in June 1995 and 85,000 in July 1995). On
November 28,1995 all of the subordinated convertible notes were converted into
968,750 shares of Series A Preferred Stock.
On December 5, 1995 the Company issued 3,375,000 shares of Series B
Preferred Stock for $2.7 million, and on December 29, 1995 issued 375,000 shares
of Series B Preferred Stock for an additional $300,000 in a Private Placement
transaction.
In connection with the private placement of the shares of Series B
Preferred Stock, the Board of Directors of the Company authorized the issuance
on December 8, 1995 of warrants to purchase 210,000 shares of the Company's
common stock for $1.00 per share to a financial consultant ("Series B Warrants")
for $25,000. The Series B Warrants are exercisable for seven years from the date
of issuance.
As of December 31, 1995 no dividends had been declared, and arrearages on
Series A and Series B Preferred Stock were $6,394 and $18,450, respectively.
Additionally, as of December 31, 1995 none of the Debt Warrants or the Series B
Warrants had been exercised.
F. 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
included reduction in the workforce, restructuring of the sales compensation
program, relocation of the corporate office and the closing of the Lincoln,
Nebraska operation. Accordingly, the Company provided or incurred $686,439
during the year ended December 31, 1994 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 Statement of Operations for the year ended December 31, 1994, and are
summarized as follows:
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
NOVEMBER 15, PAID OR ACCRUAL DECEMBER 31,
1994 INCURRED ADJUSTMENTS 1994
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Excess costs attributable to exit
activities............................ $254,430 $(213,930) $ -- $ 40,500
Noncancelable lease termination costs... 206,357 (28,738) -- 177,619
Involuntary employee termination
benefits.............................. 95,060 (68,215) -- 26,845
Employee costs after operations cease... 130,592 (54,592) -- 76,000
-------- --------- -------- --------
$686,439 $(365,475) $ -- $320,964
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
DECEMBER 31, PAID OR ACCRUAL DECEMBER 31,
1994 INCURRED ADJUSTMENTS 1995
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Excess costs attributable to exit
activities............................ $ 40,500 $ -- $ (40,500) $ --
Noncancelable lease termination costs... 177,619 (187,375) 9,756 --
Involuntary employee termination
benefits.............................. 26,845 (23,235) (3,610) --
Employee costs after operations cease... 76,000 (110,354) 34,354 --
-------- --------- -------- --------
$320,964 $(320,964) $ -- $ --
======== ========= ======== ========
</TABLE>
The Company completed the plan of restructure during the second quarter of
1995, and all employee groups were restructured. As of December 31, 1995 actual
involuntary termination benefits of $91,450 were paid to 31 terminated
employees.
F-14
<PAGE> 64
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
G. ACQUISITION CONTINGENCY/RESTATEMENT
In connection with the acquisition of Dynamic Technical Resources, Inc.
("DTR") in August 1994, 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 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.
H. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- ----------- ---------
<S> <C> <C> <C>
Current income tax expense (benefit) before
operating
loss carry forward................................ $ 3,000 $(1,523,000) $(281,000)
Tax effects of temporary differences................ 96,000 44,000 76,000
Non-recognition of benefits of operating loss
carry forward..................................... -- 1,479,000 205,000
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
F-15
<PAGE> 65
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 and
1995, are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax asset:
Operating loss carryforwards............................ $ 3,365,000 $ 3,920,000
Tax credit carryforwards................................ 701,000 717,000
Other................................................... 85,000 57,000
----------- -----------
4,151,000 4,694,000
Deferred tax liabilities:
Capitalized software development costs.................. (729,000) (816,000)
Other................................................... (46,000) --
----------- -----------
Net deferred tax asset.................................... 3,376,000 3,878,000
Valuation allowance....................................... (3,376,000) (3,878,000)
----------- -----------
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 $502,000 from the allowance of $3,376,000 at
January 1, 1995.
The provisions 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, 1995, as follows:
<TABLE>
<CAPTION>
AMOUNT OF TAX
----------------------------------
1993 1994 1995
-------- ----------- ---------
<S> <C> <C> <C>
Computed expected tax expense (benefit)............. $ 84,000 $(1,465,000) $(174,000)
State taxes, net of federal benefit................. 15,000 (222,000) (31,000)
Acquisition consideration not deductible for tax.... -- 208,000 --
Non-recognition of benefits of operating loss
carryforward...................................... -- 1,479,000 205,000
Benefits of operating loss carryforward............. (99,000) -- --
--------- ----------- --------
$ -- $ -- $ --
========= =========== ========
</TABLE>
At December 31, 1995 the Company had unused operating loss carryforwards
for tax and alternative minimum tax purposes of approximately $9,801,000 and
$9,423,000, respectively, and unused tax credits of approximately $717,000.
These operating loss carryforwards and tax credits expire in varying amounts
during 1996 through 2009.
F-16
<PAGE> 66
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
I. UNAUDITED QUARTERLY INFORMATION
Quarterly information is summarized as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31*
-------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
1994
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..................... (0.04) (0.13) (0.13) (0.48)
Shareholders' equity.............................. 3,298 2,652 3,133 502
1995
Total operating revenues.......................... $2,234 $ 2,267 $2,213 $ 2,172
Operating income (loss)........................... (366) (136) 252 89
Net earnings (loss)............................... (443) (262) 148 44
Net earnings (loss) per share..................... (0.07) (0.04) 0.02 0.01
Shareholders' equity.............................. 674 417 566 4,064
</TABLE>
- ---------------
* Results reported for the fourth quarter of 1994 include the fluctuations
resulting from the accrual of restructuring costs and the acquisition
contingency. See also Notes F and G.
J. RELATED PARTY TRANSACTIONS
In connection with the private placement offering of subordinated
convertible notes David M. Pomerance (CEO and Director), Mitchel J. Laskey
(President, COO and Director) and Thomas J. Martinson (Chairman) purchased
$100,000, $100,000 and $50,000, respectively and received 20,000, 20,000 and
10,000 Debt Warrants, respectively. These notes were converted into Series A
Preferred Stock on November 28, 1995 at $0.80 per share.
Included in other non-current liabilities is an installment obligation
payable in connection with a deferred compensation agreement with the Company's
current President assumed in connection with the acquisition of DTR, which is
payable in 19 remaining monthly installments of $4,167 at an imputed interest
rate of 8.25%.
The Company expensed airline transportation charges from DDK Enterprises
LLC ("DDK") on terms which approximate fair market value of $65,000 during the
year ended December 31, 1995. DDK is majority owned by Mr. Pomerance.
K. SUBSEQUENT EVENT/RESTRICTED CASH
On December 8, 1995 the Company signed a letter of intent agreeing in
principle to acquire all of the outstanding common shares of Dimensional
Medicine, Inc. ("DMI") located in Minnetonka, Minnesota. As of December 31, 1995
restricted cash of $50,000 represents an escrow deposit on the transaction
pursuant to this letter of intent.
On February 6, 1996 the Company signed a definitive merger agreement (the
"Agreement") with DMI. Under the terms of the Agreement, the Company will
acquire through a wholly owned newly created subsidiary DMI Acquisition
Corporation, on or before May 17, 1996, all of the outstanding common shares of
DMI and retire $600,000 of DMI's senior debt. The transaction is subject to
approval of the shareholders of
F-17
<PAGE> 67
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DMI scheduled for April 29, 1996. The Company and DMI are coordinating joint
management of DMI operations through the anticipated closing. DMI develops and
markets radiology information management solutions for hospitals, clinics, and
independent diagnostic imaging centers. DMI's two major products are
Maxifile(R), which computerizes the clerical and administrative functions in the
radiology department, and Maxiview(TM), an advanced imaging and graphics
workstation.
DMI also sells an image review workstation, Maxiview Powerstation (MVP),
which allows a physician to access and review images from a remote location.
Remote access to the images may be obtained either through the use of a modem or
through a network that may already be functioning at the installation's site.
DMI is publicly traded on the over-the-counter market under the symbol
DIMM. As reported in DMI's unaudited Form 10-Q for the nine months ended
December 31, 1995, DMI reported a $64,000 net loss on revenues of $3,700,000.
F-18
<PAGE> 68
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Dynamic Healthcare Technologies, Inc.
We have reviewed the condensed consolidated balance sheet of Dynamic
Healthcare Technologies, Inc. and subsidiary as of June 30, 1996, and the
related condensed consolidated statements of operations and cash flows for the
six month periods ended June 30, 1995 and 1996. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG Peat Marwick LLP
Orlando, Florida
July 30, 1996
F-19
<PAGE> 69
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 771,186
Accounts receivable, net of allowance for doubtful accounts of $283,739....... 2,914,653
Unbilled receivables.......................................................... 322,860
Lease receivables............................................................. 197,873
Other current assets.......................................................... 437,284
-------------
Total current assets.................................................. 4,643,856
Property, equipment and leasehold improvements, net of accumulated depreciation
of $2,045,490................................................................. 1,412,438
Capitalized software development costs, net of accumulated amortization of
$2,202,179.................................................................... 3,907,092
Goodwill, net of accumulated amortization of $286,825........................... 796,012
Lease receivables............................................................... 256,489
Other assets.................................................................... 24,609
-------------
$ 11,040,496
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................................... $ 2,444,019
Deferred revenue.............................................................. 1,546,026
Advance billings.............................................................. 257,436
Notes payable -- current maturities........................................... 273,958
-------------
Total current liabilities............................................. 4,521,439
Notes payable................................................................. 2,914,939
Other......................................................................... 6,855
-------------
Total liabilities..................................................... 7,443,233
-------------
Shareholders' equity:
Series A preferred stock, $0.01 par value (liquidation preference of
$792,438); authorized 1,055,938 shares; issued and outstanding 968,750
shares..................................................................... 9,688
Series B preferred stock, $0.01 par value (liquidation preference of
$3,067,500); authorized 4,384,375 shares; issued and outstanding 3,750,000
shares..................................................................... 37,500
Common stock, $0.01 par value; authorized 20,000,000 shares; issued and
outstanding 6,681,586 shares............................................... 66,816
Additional paid-in capital.................................................... 12,955,009
Deficit....................................................................... (9,471,750)
-------------
Total shareholders' equity............................................ 3,597,263
-------------
$ 11,040,496
==========
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE> 70
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1995 1996
---------- ----------
<S> <C> <C>
Operating revenues:
Computer system equipment sales and support..................... $ 742,442 $1,592,474
Application software licenses................................... 1,546,902 1,305,582
Software support................................................ 1,696,422 2,295,014
Services and other.............................................. 515,724 1,124,319
---------- ----------
Total operating revenues................................ 4,501,490 6,317,389
---------- ----------
Costs and expenses:
Cost of products sold........................................... 658,939 1,359,361
Client services expense......................................... 1,364,883 2,002,877
Software development costs...................................... 915,123 826,879
Sales and marketing costs....................................... 1,117,632 1,536,152
General and administrative expense.............................. 947,682 1,008,644
---------- ----------
Total costs and expenses................................ 5,004,259 6,733,913
---------- ----------
Operating income (loss)........................................... (502,769) (416,524)
---------- ----------
Other income (expense):
Interest expense and financing costs............................ (167,623) (179,657)
Loss on sale of fixed assets.................................... (62,283) --
Miscellaneous................................................... 27,236 74,062
---------- ----------
Total other income (expense)............................ (202,670) (105,595)
---------- ----------
Net earnings (loss) before income taxes........................... (705,439) (522,119)
Income taxes...................................................... -- --
---------- ----------
Net earnings (loss)............................................... $ (705,439) $ (522,119)
========== ==========
Net earnings (loss) per share..................................... $ (0.11) $ (0.08)
========== ==========
Weighted average number of common and common equivalent shares
outstanding..................................................... 6,294,977 6,619,190
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE> 71
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1995 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................................ $(705,439) $ (522,119)
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................. 536,805 654,653
Loss on sale of fixed assets.................................. 62,283 --
Changes in assets and liabilities:
Accounts receivable......................................... 508,932 467,894
Unbilled receivables........................................ (70,640) 183,498
Lease receivables........................................... -- 36,737
Other current assets........................................ 74,790 207,196
Accounts payable and accrued expenses....................... 55,440 451,509
Other current liabilities................................... -- (250,000)
Deferred revenues........................................... (417,785) (362,004)
Advance billings............................................ (105,482) (98,702)
Other assets................................................ 3,113 3,559
----------- ----------
Net cash provided by (used in) operating activities...... (57,983) 772,221
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs............................. (447,121) (604,321)
Purchases of property and equipment................................ (232,693) (280,260)
Proceeds from sale of fixed assets................................. 26,646 --
Restricted cash released from escrow............................... -- 50,000
Purchase of net assets of Dimensional Medicine, Inc................ -- (1,399,389)
----------- ----------
Net cash used in investing activities.................... (653,168) (2,233,970)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit....................................... 611,599 --
Repayments of bank note payable.................................... -- (38,669)
Proceeds from subordinated convertible notes payable............... 350,000 --
Repayments of lease obligations.................................... -- (37,535)
Repayment of other long term debt.................................. (35,559) (36,198)
Proceeds from issuance of common stock............................. -- 28,683
Proceeds from exercise of incentive stock options.................. 10,818 136,070
Payment of preferred stock dividends............................... (109,782)
----------- ----------
Net cash flows provided by (used in) financing
activities............................................. 936,858 (57,431)
----------- ----------
Net increase (decrease) in cash and cash equivalents..... 225,707 (1,519,180)
Cash and cash equivalents, beginning of period..................... 10,173 2,290,366
----------- ----------
Cash and cash equivalents, end of period........................... $ 235,880 $ 771,186
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE> 72
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(A) UNAUDITED FINANCIAL STATEMENTS:
The accompanying unaudited Condensed Consolidated Balance Sheet as of June
30, 1996, Condensed Consolidated Statements of Operations and of Cash Flows for
the six month periods ended June 30, 1995 and 1996, have been prepared by
management in conformity with generally accepted accounting principles for
interim financial statements and with instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments and accruals considered necessary for fair
presentation of financial information have been included. Operating results for
the six month period ended June 30, 1996, are not necessarily indicative of the
operating results which may be expected for the year ending December 31, 1996.
(B) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Dynamic
Healthcare Technologies, Inc. and DMI Acquisition Corporation, its newly formed
wholly owned subsidiary from inception of May 1, 1996 (collectively hereafter
referred to as the "Company" or "Registrant"). All significant intercompany
transactions and accounts have been eliminated in consolidation.
(C) ACQUISITION OF DIMENSIONAL MEDICINE, INC.:
On May 1, 1996, Dimensional Medicine, Inc. ("DMI") was purchased by and
merged into DMI Acquisition Corporation ("DMIAC"), a newly formed wholly-owned
subsidiary of the Registrant. The transaction was consummated by purchasing all
of the outstanding common stock, and retiring and assuming certain debt
obligations of DMI. The funds used for the purchase of DMI were obtained from
available cash and cash equivalents of the Registrant. Components of the payment
for the purchase of DMI on May 1, 1996 were:
<TABLE>
<S> <C>
Purchase of Common Stock......................................... $ 550,200
Satisfaction of DMI debt Obligations............................. 879,636
----------
Cash Paid........................................................ 1,429,836
Less: Cash Acquired.............................................. (30,447)
----------
Purchase of DMI, net of cash acquired.................. $1,399,389
==========
</TABLE>
F-23
<PAGE> 73
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition has been accounted for using the purchase method. The
purchase price was allocated to assets and liabilities presented in the
accompanying condensed consolidated balance sheet based upon their estimated
fair values. A summary of these allocations on May 1, 1996 is as follows:
<TABLE>
<S> <C>
Accounts receivable, net of allowance for doubtful accounts
of $142,902................................................... $ 570,836
Unbilled receivables............................................ 198,665
Lease receivables-current....................................... 205,981
Other current assets............................................ 502,911
-----------
Total current assets.................................. 1,478,393
Property & equipment............................................ 223,729
Capitalized software development costs.......................... 1,628,522
Lease receivables............................................... 285,118
Other assets.................................................... 3,760
-----------
Total assets acquired................................. 3,619,522
-----------
Accounts payable and accrued expenses........................... (1,139,995)
Deferred revenue................................................ (89,159)
Advanced billings............................................... (275,878)
Notes payable -- current maturities............................. (458,858)
-----------
Total current liabilities............................. (1,963,890)
Notes payable................................................... (256,243)
-----------
Net liabilities assumed............................... (2,220,133)
-----------
Purchase of DMI, net of cash acquired........................... $ 1,399,389
==========
</TABLE>
(D) UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION:
The unaudited pro forma combined financial information, for the six months
ended June 30, 1995 and 1996, presented below (in thousands, except for per
share information), gives effect to the acquisition of DMI, 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 had
been effective on these dates, or of results that may be obtained in the future.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------
1995 1996
------ -------
<S> <C> <C>
Total operating revenues.............................. $7,242 $ 7,323
Operating income (loss)............................... (475) (1,537)
Net income (loss)..................................... (733) (1,632)
Net income (loss) per share........................... (0.12) (0.25)
</TABLE>
F-24
<PAGE> 74
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(E) LEASE RECEIVABLES:
Prior to the merger date of May 1, 1996, DMI financed the sale of computer
equipment under lease contracts on behalf of certain of its customers. These
leases provided for monthly principal and interest payments and typically
provided for an initial five year term. Lease receivables, as shown in the
accompanying condensed consolidated balance sheet, represent the minimum lease
payments receivable less unearned interest. The future minimum lease payments to
be received (including interest) are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING JUNE 30, AMOUNT
--------------------------------------------------------------- --------
<S> <C>
1997........................................................... $225,160
1998........................................................... 171,973
1999........................................................... 81,236
2000........................................................... 11,094
2001 and thereafter............................................ --
--------
$489,468
========
</TABLE>
(F) NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------
(IN THOUSANDS)
<S> <C>
First Union note payable.................................... $2,761
Other notes payable......................................... 428
-------
3,189
Less -- current maturities.................................. (274)
-------
$2,915
===========
</TABLE>
The First Union note payable is payable in fixed monthly payments of
principal and interest of $29,911, and a balloon payment equal to the remaining
unpaid principal balance and accrued interest on March 31, 1998. Interest on the
outstanding principal balance accrues at First Union's prime rate plus two
percent per annum (10.25% as of June 30, 1996). Under the applicable credit
agreement, First Union has a security interest in all of the assets of the
Company.
Other notes payable represent installment obligations payable in monthly
amounts of between $2,300 and $10,000 each. The notes bear fixed rate interest
ranging from 7.3% -- 11% and are secured by assignments of the lease
receivables. (See also Note E).
Maturities of long-term debt at June 30, 1996 are anticipated to
approximate the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING JUNE 30,
--------------------------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997........................................................... $ 274
1998........................................................... 2,853
1999........................................................... 51
2000........................................................... 11
2001 and thereafter............................................ --
-------
$3,189
===========
</TABLE>
F-25
<PAGE> 75
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(G) PREFERRED DIVIDENDS:
On May 21, 1996 the Company's Board of Directors declared and paid the
March 31, 1996 accumulated dividends on Series A Preferred Stock and Series B
Preferred Stock of $17,438 and $67,500, respectively. As of July 31, 1996, the
June 30, 1996 accumulated dividend preferences on Series A Preferred Stock and
Series B Preferred Stock of $17,438 and $67,500, respectively, had not been
declared by the Company's Board of Directors.
(H) SUBSEQUENT EVENT:
On July 29, 1996 the Registrant merged with and into DHT Florida, Inc., a
newly formed Florida corporation, then a wholly-owned subsidiary of the
Registrant. In connection with the merger, DHT Florida, Inc. changed its name to
Dynamic Healthcare Technologies, Inc. Each share of the Registrant's Common
Stock, Series A Preferred Stock and Series B Preferred Stock outstanding
immediately prior to the merger was converted into one share of fully paid and
non-assessable similar stock in the surviving corporation upon identical terms
and conditions. The purpose of the merger was to effect a reincorporation in the
State of Florida for the Registrant as authorized by shareholders at the
Company's Annual Shareholders' Meeting held on May 21, 1996.
F-26
<PAGE> 76
INDEPENDENT AUDITORS REPORT
To the Stockholders of
Dimensional Medicine, Inc.
We have audited the accompanying balance sheets of Dimensional Medicine,
Inc. as of March 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the years then ended. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Dimensional Medicine, Inc.
at March 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the years then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
May 24, 1996
F-27
<PAGE> 77
DIMENSIONAL MEDICINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 71,215 $ 153,425
Accounts receivable, less allowance for doubtful accounts of
$29,181 and $138,715 at March 31, 1995 and 1996,
respectively................................................. 1,356,298 566,458
Unbilled and other receivables.................................. 344,296 244,057
Tax benefit receivable.......................................... 172,044 64,627
Short-term lease receivables.................................... 111,960 101,677
Inventory....................................................... 186,720 71,028
Other current assets............................................ 119,126 68,360
----------- -----------
Total current assets.................................... 2,361,659 1,269,632
----------- -----------
Property.......................................................... 2,335,358 2,412,952
Accumulated depreciation.......................................... (2,060,015) (2,175,102)
----------- -----------
275,343 237,850
Other assets:
Capitalized software............................................ 470,893 460,787
Long-term tax benefit receivable................................ -- 119,542
Long-term lease receivables..................................... 284,876 182,032
----------- -----------
Total assets............................................ $ 3,392,771 $ 2,269,843
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit................................. $ 500,000 $ 500,000
Accounts payable and other accrued expenses..................... 543,424 504,568
Due to NCS...................................................... 81,691 126,527
Accrued salaries and benefits................................... 157,169 100,879
Deferred revenue................................................ 164,269 111,098
Customer deposits............................................... 59,715 106,625
Advance billings................................................ 45,835 108,583
Government overpayments......................................... 193,419 193,419
Rent abatement.................................................. 106,683 35,561
Current portion -- note payable to NCS.......................... 200,000 541,983
Current portion capital leases.................................. 7,032 19,104
Current portion other long-term debt............................ 96,173 104,466
----------- -----------
Total current liabilities............................... 2,155,410 2,452,813
----------- -----------
Long-term note payable to NCS..................................... 655,000 --
Long-term note payable............................................ 257,891 153,426
Income taxes payable.............................................. 68,875 --
Rent abatement long-term.......................................... 35,561 --
Capital leases.................................................... 2,287 10,972
----------- -----------
1,019,614 164,398
----------- -----------
Shareholders' equity:
Common Stock, $0.15 par value
Authorized shares -- 50,000,000
Issued and outstanding shares -- 32,533,460 -- 1995 and 1996.... 4,880,019 4,880,019
Additional paid-in capital...................................... 8,633,407 8,633,407
Deficit......................................................... (13,295,679) (13,860,794)
----------- -----------
Total shareholders' equity.............................. 217,747 (347,368)
----------- -----------
Total liabilities and shareholders' equity.............. $ 3,392,771 $ 2,269,843
=========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 78
DIMENSIONAL MEDICINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues:
Hardware revenue.................................................. $1,198,860 $ 778,186
Hardware support revenue.......................................... 993,894 672,012
Software application revenue...................................... 2,012,618 1,438,753
Software support revenue.......................................... 1,150,216 1,192,924
Other revenue..................................................... 585,996 421,600
---------- ----------
5,941,584 4,503,475
Costs and expenses:
Cost of products sold............................................. 1,190,871 950,680
Client service expense............................................ 1,879,067 1,583,591
Software development.............................................. 1,259,858 1,128,751
Sales and marketing............................................... 845,876 715,016
General and administrative........................................ 534,050 846,892
---------- ----------
Total costs and expenses............................................ 5,709,722 5,224,930
---------- ----------
Operating income (loss)............................................. 231,862 (721,455)
Other income (expense):
Interest expense.................................................. (129,649) (116,088)
Other............................................................. 37,641 23,662
---------- ----------
(92,008) (92,426)
---------- ----------
Income (loss) before income taxes................................... 139,854 (813,881)
Income tax benefit.................................................. 34,610 248,766
---------- ----------
Net income (loss)................................................... $ 174,464 $ (565,115)
========= =========
Net income (loss) per share......................................... $ 0.01 $ (0.02)
========= =========
Weighted average number of shares outstanding during the year....... 32,553,460 32,553,460
</TABLE>
See accompanying notes.
F-29
<PAGE> 79
DIMENSIONAL MEDICINE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ESOP
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
---------- ---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1994.................... 32,533,460 $4,880,019 $8,690,454 $(13,470,143) $ (96,847) $ 3,483
ESOP allocation......... -- -- (57,047) -- 96,847 39,800
Net income.............. -- -- -- 174,464 -- 174,464
---------- ---------- ---------- ------------ ---------- ---------
Balance at March 31,
1995.................... 32,533,460 4,880,019 8,633,407 (13,295,679) -- 217,747
Net loss................ -- -- -- (565,115) -- (565,115)
---------- ---------- ---------- ------------ ---------- ---------
Balance at March 31,
1996.................... 32,533,460 $4,880,019 $8,633,407 $(13,860,794) $ -- $(347,368)
========= ========= ========= =========== ======== =========
</TABLE>
See accompanying notes.
F-30
<PAGE> 80
DIMENSIONAL MEDICINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1995 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss).................................................... $ 174,464 $(565,115)
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization..................................... 285,986 297,103
Changes in operating assets and liabilities:
Decrease in receivables......................................... 114,539 991,081
(Increase) decrease in inventories and other current assets..... (67,805) 166,458
(Decrease) increase in accounts payable and accrued expenses.... 415,359 (119,185)
Other........................................................... (285,834) (50,196)
--------- ---------
Net cash provided by operating activities.............................. 636,709 720,146
--------- ---------
Investing activities:
Purchases of property, plant and equipment........................... (151,957) (44,646)
Capitalization of software development costs......................... (167,927) (171,910)
--------- ---------
Net cash used in investing activities.................................. (319,884) (216,556)
--------- ---------
Financing activities:
Principal payments on notes payable and capitalized lease
obligations....................................................... (285,233) (421,380)
--------- ---------
Net cash used in financing activities.................................. (285,233) (421,380)
--------- ---------
Increase in cash and cash equivalents.................................. 31,592 82,210
Cash and cash equivalents at beginning of year......................... 39,623 71,215
--------- ---------
Cash and cash equivalents at end of year............................... $ 71,215 $ 153,425
========= =========
</TABLE>
See accompanying notes.
F-31
<PAGE> 81
DIMENSIONAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Dimensional Medicine, Inc. ("DMI") designs, develops and markets
application software and imaging workstations for the radiology medical market.
The Company sells its products throughout the United States.
REVENUE RECOGNITION
System Sales: Contracts for the sale of the Company's Maxifile systems
generally require modification of the systems to meet customer requirements, may
take up to twelve months to complete and require periodic progress payments
throughout the contract by the customer. Revenue is recognized based on
completion of contract milestones measured by the delivery of contractual
elements. Sales of the Company's Maxiview system are recognized upon delivery.
Costs of products sold include the estimated costs of post contract support.
Service and Support: Agreements for service and support are recognized
over the period in which support services are provided. The costs of providing
these services are presented in the costs and expenses section of the statement
of operations.
Other: All other revenue is recognized upon the performance of services.
WARRANTIES
Software products generally carry an initial 90 day warranty. Initial
hardware warranties are provided by the original manufacturer. An additional
warranty is available in the form of maintenance contracts for both software and
hardware. Revenue for these contracts is recognized over the contract life on a
straight-line basis.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventory balances at March 31, 1995 and 1996 were comprised of raw
materials and component parts.
SOFTWARE
Software costs capitalized include the cost of the Maxifile software system
purchased from NCS on March 31, 1987 (original cost of $1,275,000). The Company
amortizes the software costs based on the greater of the ratio of current
revenues to total expected revenues or the straight-line method over the
estimated economic life. Accumulated amortization was $1,204,000 and $1,280,000
at March 31, 1995 and 1996, respectively.
The Company capitalized software production costs related to additional
products of $168,000 and $172,000 in 1995 and 1996, respectively. The ongoing
assessment of recoverability of these costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic life and
changes in software and hardware technology. Amortization of these costs is
based on the greater of the ratio of current revenues to total estimated
revenues or the straight-line method over the estimated economic life, but not
to exceed five years. Accumulated amortization was $551,000 and $657,892 at
March 31, 1995 and 1996, respectively.
Amortization of software charged to cost of products sold in 1995 and 1996
was $140,000 and $182,016, respectively.
F-32
<PAGE> 82
DIMENSIONAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LEASE RECEIVABLES
Lease receivables represent product sold under sales-type leases with a
five-year term. The lease receivables are carried at their fair market value.
In addition, the Company has sold leases without recourse to NCS and other
financial institutions, subject to limited obligations by the Company. Customers
are in compliance with the lease contracts at March 31, 1996. At March 31, 1996,
$221,510 remains outstanding on these sold leases.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. The Company
provides for amortization and depreciation at rates calculated to amortize the
cost of the property over its estimated useful life (ranging from 3 to 10 years)
using the straight-line method.
LOSS/EARNINGS PER SHARE
Loss/earnings per share is computed by dividing the net loss/income for the
period by the weighted average number of common shares outstanding during the
period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has not determined the impact of the new statement on
its financial statements.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the 1996
presentation.
2. FINANCIAL CONDITION AND RELATIONSHIP WITH NATIONAL COMPUTER
SYSTEMS, INC.
During recent periods, National Computer Systems, Inc. (NCS) has provided
substantial financial support to the Company in the form of debt financing and
extended payment terms on payables to NCS. On December 20, 1993, NCS converted
$3,752,746 of notes and accounts payable into 27,533,441 common
F-33
<PAGE> 83
DIMENSIONAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shares of the Company, increasing NCS's ownership from 3% to 85%. Certain other
indebtedness to NCS was replaced by a $1,105,000 long-term note payable. The
Company's bank line of credit is guaranteed by NCS.
3. TRANSACTIONS WITH NATIONAL COMPUTER SYSTEMS, INC.
In June 1992, under a Debt Restructuring Agreement ("the 1992 Agreement")
with NCS, two outstanding promissory notes totaling $3,900,000 were replaced by
a single Promissory Note. Interest on the new note was charged at an annual rate
of 3%, such rate increasing to 8% if an event of default occurred (no interest
was charged on the Promissory Notes in the year ended March 31, 1992). The
Company defaulted on the principal and interest payments due April 30, 1993,
making the entire amount due on demand with an 8% interest rate after that date.
On December 20, 1993, the remaining balance on this note was part of a
restructuring under which NCS acquired 27,533,441 shares of the Company's common
stock in exchange for indebtedness totaling $3,752,746. Of the total amount
remaining after the forgiveness ($1,169,627), $1,105,000 was converted to a
long-term note. The note was due in quarterly installments of $50,000 plus
interest at 6% beginning March 31, 1994 through September 30, 1995, with the
balance due December 31, 1995. This note was replaced at March 31, 1995 with a
new note in the amount of the existing principal of $855,000. The note is due in
quarterly installments of $50,000 plus interest at 6% with the balance due on
April 30, 1996.
In connection with the 1993 stock purchase agreement with NCS, the Company
obtained concessions from third party vendors on accounts payable of
approximately $342,000. Under the 1992 Agreement, NCS agreed to forgive, against
accounts payable delinquent at the Agreement date ($464,000), an amount equal to
15% of the payables currently arising and due in a given month if such payables
were paid on a timely basis. Approximately $342,000 of such forgiveness was
included in the statement of operations as extraordinary gains in 1994.
In February 1993, NCS exercised its right under the 1992 Agreement to have
all cash received in the Company's bank lockbox account transferred to a
collateral account under the control of NCS. Through March 31, 1996, NCS
continues to advance monies to the Company from the collateral account receipts.
NCS provides field engineering services and other services to the Company
at specified fees, which are not significantly different from the fees charged
to unrelated parties. Fees for field engineering services provided by NCS for
maintenance of hardware for all installed systems totaled approximately $429,000
and $234,000 in 1995 and 1996, respectively.
The components of the amounts owed National Computer Systems, Inc. are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Due to National Computer Systems, Inc.:
Current portion of note payable................................ $200,000 $541,983
Accounts payable............................................... 81,691 126,527
Net receivable for income tax benefit (Note 8)................. (103,169) (184,169)
-------- --------
$178,522 $484,341
======== ========
Long-term note payable........................................... $655,000 $ --
======== ========
</TABLE>
The promissory note and accounts payable to NCS are secured by
substantially all assets of the Company.
Total interest paid, including interest paid on capital leases, for the
years ended March 31, 1995 and 1996 was approximately $130,000 and $116,000,
respectively.
F-34
<PAGE> 84
DIMENSIONAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE
The Company has obtained a bank line of credit through June 30, 1996 with a
total credit facility of $500,000. The outstanding balance at March 31, 1996 was
$500,000. This line is unsecured, bears interest at the bank's base rate and is
guaranteed by NCS.
The Company has a note payable to a finance company with a balance of
$257,892 at March 31, 1996 (current portion of $104,466). The note has an
effective interest rate of 8.3%, is payable in monthly installments of $10,163
through July 1998, is secured by the proceeds of a customer financing lease and
is guaranteed by NCS.
5. CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease agreements for various computer and
office equipment.
The present value of future minimum lease payments required on the leases
is as follows:
<TABLE>
<S> <C>
1997....................................................................... $19,104
1998....................................................................... 10,972
-------
$30,076
=======
</TABLE>
6. STOCK OPTIONS
Under the Company's stock option plans, options to acquire up to 1,000,000
shares of the Company's Common Stock may be granted to officers and key
employees at no less than 100% of the fair market value on the grant date.
Additionally, the Company has granted non-qualified stock options outside of the
plans to a director and a former president. Information concerning options
outstanding is as follows:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING PRICE PER SHARE
----------- ----------------
<S> <C> <C>
Balance March 31, 1994................................. 728,082 $0.125 to $0.531
Options granted...................................... -- --
Options canceled..................................... (130,833) 0.250 to 0.531
--------
Balance March 31, 1995................................. 597,249 0.125 to 0.500
Options granted...................................... -- --
Options canceled..................................... (360,999) 0.125 to 0.500
--------
Balance March 31, 1996................................. 236,250 $0.250 to $0.344
========
</TABLE>
At March 31, 1996, outstanding options covering 236,250 shares were
exercisable at $0.250 to $0.344 per share (566,863 shares at $0.125 to $0.500
per share at March 31, 1995). At March 31, 1996, 600,500 shares remain available
for grant.
A total of 836,750 shares were reserved for options at March 31, 1996.
7. OPERATING LEASE
The Company leases office space and manufacturing facilities under a
non-cancelable operating lease having a remaining term through July 1996. The
lease provided for an abatement of base rent payments through January 1992 and
an abatement of the lessee's share of real estate taxes and operating expenses
through July 1991. The Company is recognizing the benefit of these abatements on
a straight-line basis over the life of the lease. In addition, the Company has
entered into other operating leases for office equipment.
F-35
<PAGE> 85
DIMENSIONAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum base rental payments under these operating leases consist of
the following at March 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31:
----------------------------------------------------------------
<S> <C>
1997..................................................... $94,000
1998..................................................... 2,000
------
$96,000
======
</TABLE>
Total rental expense to unrelated third parties for the years ended March
31, 1995 and 1996 was approximately $267,000 and $272,000, respectively.
8. INCOME TAXES
As a result of the issuance of stock to NCS in December 1993, the Company
had a change in ownership under the net operating loss limitation rules. Net
operating losses incurred through the change in ownership date are no longer
available to offset future taxable income.
Subsequent to December 20, 1993, the Company is included in the
consolidated income tax return of NCS. Under a tax sharing agreement between the
Company and NCS, the Company will be reimbursed for its share of tax return
savings resulting from the use of its operating losses. Pursuant to the
agreement, NCS owes the Company $65,000 on or before October 15, 1996 and
$120,000 before October 15, 1997.
Deferred income taxes are due to temporary differences between the carrying
values of certain assets and liabilities for financial reporting and income tax
purposes. Significant components of deferred taxes are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
-------- ---------
<S> <C> <C>
Deferred assets:
Accrued vacation.............................................. $ 36,000 $ 31,000
Rental abatement.............................................. 50,000 12,000
Allowance for doubtful accounts............................... 10,000 49,000
Inventory reserve............................................. 134,000 195,000
Other......................................................... 35,000 --
-------- ---------
265,000 287,000
Deferred liabilities:
Capitalized software.......................................... 165,000 161,000
Other......................................................... 18,000 11,000
-------- ---------
183,000 172,000
-------- ---------
Net deferred tax assets before valuation allowance.............. 82,000 115,000
Valuation allowance for net deferred tax assets................. (82,000) (115,000)
-------- ---------
Net deferred taxes.............................................. $ -- $ --
======== =========
</TABLE>
9. EMPLOYEE STOCK OWNERSHIP PLAN
Effective September 28, 1990, the Dimensional Medicine, Inc. Employee Stock
Ownership Plan and Trust was established. Employees who have completed six
consecutive months of employment and have met other criteria are eligible to
participate. Prior to March 31, 1995, officers, certain members of senior
management and commission based salespersons were not eligible to participate.
The Plan was amended at March 31, 1995 to allow participation by these employee
groups.
F-36
<PAGE> 86
DIMENSIONAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contributions to the Plan are at the discretion of the Company and may be
in the form of cash or Company stock. There were 300,000 shares allocated to the
Plan in prior years, with no contributions to the Plan in 1996. Shares held by
the ESOP are included in the weighted average shares outstanding for purposes of
computing earnings per share.
If Company securities are not readily tradeable on an established market,
Plan participants have the right to require the Company to repurchase shares at
book value.
10. SIGNIFICANT CUSTOMERS
Revenues under contracts with U.S. Government facilities approximated 11%
and 9% of total revenues in fiscal 1995 and 1996, respectively.
11. SUBSEQUENT EVENTS
On April 29, 1996, the shareholders of the Company voted to merge with
Dynamic Healthcare Technologies, Inc. The shareholders of the Company received
$550,000 in exchange for all of the outstanding shares of the Company's common
stock.
Effective April 29, 1996, the Employee Stock Ownership Plan and Trust
(ESOP) of Dimensional Medicine, Inc. will terminate and the Plan shall
distribute to each participant his or her ESOP account in a single lump sum
following the effective date of the merger between DMI and Dynamic Healthcare
Technologies, Inc.
F-37
<PAGE> 87
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations have been prepared based upon certain pro forma adjustments to the
historical financial statements of the Company set forth elsewhere in this
Prospectus, as described below. The pro forma condensed consolidated statements
of operations should be read in conjunction with the notes thereto and the
historical financial statements and notes of Dynamic Healthcare Technologies,
Inc. and DMI included elsewhere in this prospectus.
The historical information for the year ended December 31, 1995 combines
operating information of Dynamic Healthcare Technologies, Inc. for its year
ended December 31, 1995 with operating information of DMI for the first nine
months ended December 31, 1995 (of its fiscal year ended March 31, 1996), and
the fourth quarter of its fiscal year ended March 31, 1995. The historical
consolidated operating information for the six months ended June 30, 1996
combines the first two quarters of unaudited consolidated financial information
of Dynamic Healthcare Technologies, Inc., the fourth quarter of DMI's fiscal
year ended March 31, 1996, and DMI's operations from April 1, 1996 until May 1,
1996 (the acquisition date).
The Pro Forma Condensed Consolidated Statements of Operations for the year
ended December 31, 1995 and for the six months ended June 30, 1996 give effect
to the acquisition of DMI as if the acquisition occurred on January 1, 1995.
These statements do not purport to be indicative of the results of operations
which actually would have occurred had the acquisition of DMI occurred on
January 1, 1995, or which may be expected to occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------
PRO FORMA NOTE
HISTORICAL ADJUSTMENTS REF. PRO FORMA
---------- ----------- ------ -----------
<S> <C> <C> <C> <C>
Operating revenues:
Computer system equipment sales and support.......................... $2,619,414 $ -- $ 2,619,414
Application software licenses........................................ 4,477,008 -- 4,477,008
Software support..................................................... 4,897,441 -- 4,897,441
Services and other................................................... 2,155,693 -- 2,155,693
----------- --------- -----------
Total revenues................................................. 14,149,556 -- 14,149,556
----------- --------- -----------
Costs and expenses:
Cost of products sold................................................ 1,886,565 -- 1,886,565
Client services expense.............................................. 4,434,250 (48,000) (2) 4,386,250
Software development costs........................................... 2,897,358 126,000 (2)(3) 3,023,358
Sales and marketing.................................................. 2,704,437 (15,000) (2) 2,689,437
General and administrative........................................... 2,404,174 (21,000) (2) 2,383,174
----------- --------- -----------
Total costs and expenses....................................... 14,326,784 42,000 14,368,784
----------- --------- -----------
Operating income (loss)................................................ (177,228) (42,000) (219,228)
Other income (expense)................................................. (515,018) 88,000 (4) (427,018)
----------- --------- -----------
Net earnings (loss) before income taxes................................ (692,246) 46,000 (646,246)
Provision for income taxes benefit (cost).............................. 180,969 (180,969) (5) --
----------- --------- -----------
Net earnings (loss).................................................... $ (511,277) $(134,969) $ (646,246)
=========== ========= ===========
Net earnings (loss) per share.......................................... $ (0.10)
===========
Weighted average number of common shares............................... 6,443,294
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------
PRO FORMA NOTE
HISTORICAL ADJUSTMENTS REF. PRO FORMA
----------- ----------- ------ -----------
<S> <C> <C> <C> <C>
Operating revenues:
Computer system equipment sales and support......................... $ 2,037,491 $ -- $ 2,037,491
Application software licenses....................................... 1,468,036 (128,610) (1) 1,339,426
Software support.................................................... 2,728,458 -- 2,728,458
Services and other.................................................. 1,217,164 -- 1,217,164
----------- --------- -----------
Total revenues................................................ 7,451,149 (128,610) 7,322,539
----------- --------- -----------
Costs and expenses:
Cost of products sold............................................... 1,737,748 -- 1,737,748
Client services expense............................................. 2,583,459 (16,000) (2) 2,567,459
Software development costs.......................................... 1,200,429 42,000 (2)(3) 1,242,429
Sales and marketing................................................. 1,749,377 (5,000) (2) 1,744,377
General and administrative.......................................... 1,574,639 (7,000) (2) 1,567,639
----------- --------- -----------
Total costs and expenses...................................... 8,845,652 14,000 8,859,652
----------- --------- -----------
Operating income (loss)............................................... (1,394,503) (142,610) (1,537,113)
Other income (expense)................................................ (139,151) 44,000 (4) (95,151)
----------- --------- -----------
Net earnings (loss) before income taxes............................... (1,533,654) (98,610) (1,632,264)
Provision for income taxes benefit (cost)............................. 293,884 (293,884) (5) --
----------- --------- -----------
Net earnings (loss)................................................... $(1,239,770) $(392,494) $(1,632,264)
=========== ========= ===========
Net earnings (loss) per share......................................... $ (0.25)
===========
Weighted average number of common shares.............................. 6,619,190
</TABLE>
See notes to pro forma condensed consolidated statements of operations.
F-38
<PAGE> 88
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The Pro Forma Condensed Consolidated Statements of Operations give effect
to the following pro forma adjustments:
(1) Reflects an adjustment to conform the revenue recognition
principles of DMI to those of the Company.
(2) Reflects the decrease in depreciation expense resulting from the
change in the depreciable basis of the assets assumed acquired on January
1, 1995.
(3) Reflects the increase in the amortization of software development
costs resulting from the increased basis in the assets assumed acquired on
January 1, 1995.
(4) Reflects the elimination of interest expense from interest bearing
debt extinguished by the assumed purchase of DMI, net of the elimination of
interest earned on cash equivalents used by the assumed purchase.
(5) Reflects the elimination of the income tax benefit previously
recognized by DMI through a tax sharing agreement with DMI's previous
majority owner.
F-39
<PAGE> 89
[Color Photographs Inside back cover page]
[The color photograph is of a diagram of the technical architectural
environment relating to Registrant's healthcare information systems]
<PAGE> 90
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS; ANY
INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY OF THE SECURITIES COVERED BY THIS PROSPECTUS BY THE COMPANY IN
ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE COMPANY TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 12
Capitalization........................ 13
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 24
Management............................ 33
Certain Transactions.................. 39
Principal and Selling Shareholders.... 40
Description of Capital Stock.......... 43
Shares Eligible for Future Sale....... 44
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 47
Available Information................. 47
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,000,000 SHARES
DYNAMIC HEALTHCARE TECHNOLOGIES (LOGO)
COMMON STOCK
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES &
ASSOCIATES, INC.
VECTOR SECURITIES
INTERNATIONAL, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities being registered, all of which
are being borne by the Registrant:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 10,953
NASD filing fee........................................................... 3,677
Legal fees and expenses................................................... 200,000
Accounting fees and expenses.............................................. 75,000
Printing fees............................................................. 150,000
Blue Sky qualification fees and expenses.................................. 10,000
Miscellaneous............................................................. 50,370
----
TOTAL........................................................... $500,000
====
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Company's Articles of Incorporation, Bylaws and applicable state
law, the Company will indemnify its directors, officers, employees and agents
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement which are actually and reasonably incurred in connection with
any threatened, pending or actually completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, to which any such
person becomes subject as a result of having served in such role, as an employee
or agent of the Company, or at the Company's request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. However, except as described below, such indemnification will
be made only if such person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent will not, of itself, create a
presumption that such person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Company, or with respect to any criminal action or proceeding, did not have
reasonable cause to believe that his or her conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following transactions were considered exempt from the registration
requirements of the 1933 Act under Section 4(2):
On June 2, 1996, the Company granted Nikhil Bhatt options to purchase
150,000 shares of Common Stock in accordance with a vesting schedule, in
consideration of services to be provided pursuant to his employment
agreement.
On December 5, 1995 and December 29, 1995, the Company sold 3,750,000
shares of Series B Preferred Stock to private investors for aggregate
consideration of $3,000,000 and, in connection therewith, warrants to
purchase 210,000 shares of the Company's common stock for an aggregate of
$25,000.
On August 23, 1994, the Company granted each of Mitchel J. Laskey and
David M. Pomerance options to purchase 250,000 shares of Common Stock in
accordance with a vesting schedule in consideration of services to be
provided pursuant to their employment agreements.
On August 23, 1993, a total of 600,000 shares were issued to the
shareholders of Dynamic Technical Resources, Inc. ("DTR") in connection
with the merger of DTR into the Company. On March 15, 1995, 610,000 shares
of Common Stock were issued to the shareholders of DTR to resolve an
acquisition contingency.
II-1
<PAGE> 92
During the period from January 1, 1993 through the present, warrants
to purchase an aggregate of 157,000 shares of Common Stock have been
granted to the Company's directors in consideration for their service as
such, 51,000 of which have been purchased upon exercise of these warrants
for aggregate consideration to the Company of $122,655.
The transactions were considered exempt from the registration requirement
of the 1933 Act under Sections 4(2) and 3(a)(9), respectively:
On July 31, 1995, the Company sold $775,000 of Subordinated
Convertible Notes, together with warrants to purchase 155,000 shares of the
Company's common stock, for aggregate consideration of $775,000. On
November 28, 1995 all of the Subordinated Convertible Notes were converted
into 968,750 shares of Series A Preferred Stock.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ ---------------------------------------------------------------------------------
<C> <S> <C>
1.01 -- Form of Underwriting Agreement****
1.02 -- Form of Selected Dealer Agreement****
1.03 -- Form of Agreement Among Underwriters****
2.01 -- Agreement and Plan of Merger, dated July 29, 1996***
3.01 -- Articles of Incorporation of Registrant***
3.02 -- Amendment to Articles of Incorporation***
3.03 -- Bylaws of Registrant***
4.01 -- Specimen of Common Stock Certificate*
4.02 -- Form of Representatives' Warrant****
5.01 -- Opinion of Cohen, Berke, Bernstein, Brodie & Kondell, P.A.****
10.01 -- Revolving Credit and Security Agreement, dated October 12, 1994, between First
Union National Bank of Florida and Registrant****
10.02 -- Amendment to Revolving Credit and Security Agreement, dated February 9, 1995****
10.03 -- Second Amendment to Revolving Credit and Security Agreement, dated December 8,
1995****
10.04 -- Employment Agreement, dated August 23, 1994, between Registrant and Mitchel J.
Laskey****
10.05 -- Employment Agreement, dated August 23, 1994, between Registrant and David M.
Pomerance****
10.06 -- Amendment to the Employment Agreement, dated effective August 1, 1996, between
Registrant and David M. Pomerance****
10.07 -- Employment Agreement, dated May 16, 1996, between Registrant and Nikhil Bhatt****
10.08 -- Sublease Agreement, dated January 31, 1995, between Registrant and John Alden
Life Insurance Company****
10.09 -- Amendment to Sublease Agreement, dated as of October 27, 1995, between Registrant
and John Alden Life Insurance Company****
10.10 -- Lease Agreement, dated July 2, 1996, between Registrant and MBP Partners****
21.01 -- Subsidiaries****
23.01 -- Consent of Cohen, Berke, Bernstein, Brodie & Kondell, P.A. (included in Exhibit
5.01)****
23.02 -- Consents of KPMG Peat Marwick LLP*
23.03 -- Consent of Deloitte & Touche LLP*
23.04 -- Consent of Ernst & Young LLP*
24.01 -- Reference is made to the Signature section of this Registration Statement for the
Power of Attorney contained therein****
</TABLE>
- ---------------
* Filed herewith
** To be filed by amendment
*** Incorporated by Reference in Form 8-B, filed by Registrant on August 9,
1996
**** Previously filed
II-2
<PAGE> 93
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona-fide
offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-3
<PAGE> 94
2. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona-fide offering thereof.
II-4
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Maitland, Florida on the 29th day of August, 1996.
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
By: /s/ PAUL S. GLOVER
------------------------------------
Paul S. Glover,
Vice President of Finance, Chief
Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ----------------
<C> <S> <C>
/s/ DAVID M. POMERANCE Chairman of the Board and
- --------------------------------------------- Secretary
David M. Pomerance
/s/ MITCHEL J. LASKEY President, Chief Executive
- --------------------------------------------- Officer, Treasurer and
Mitchel J. Laskey Director
/s/ PAUL S. GLOVER Vice President of Finance,
- --------------------------------------------- Principal Financial Officer
Paul S. Glover and Principal Accounting
Officer
By: /s/ MITCHEL J. LASKEY
- ---------------------------------------------
Mitchel J. Laskey as attorney in fact
for the following members of the Board of
Directors: Thomas J. Martinson, Jerry L.
Carson, Bret R. Maxwell, Daniel Raynor
and Richard W. Truelick
</TABLE>
II-5
<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
------ --------------------------------------------------------------------------- ----
<C> <S> <C> <C>
1.01 -- Form of Underwriting Agreement****
1.02 -- Form of Selected Dealer Agreement****
1.03 -- Form of Agreement Among Underwriters****
2.01 -- Agreement and Plan of Merger, dated July 29, 1996***
3.01 -- Articles of Incorporation of Registrant***
3.02 -- Amendment to Articles of Incorporation***
3.03 -- Bylaws of Registrant***
4.01 -- Specimen of Common Stock Certificate*
4.02 -- Form of Representatives' Warrant****
5.01 -- Opinion of Cohen, Berke, Bernstein, Brodie & Kondell, P.A.****
10.01 -- Revolving Credit and Security Agreement, dated October 12, 1994, between
First Union National Bank of Florida and Registrant****
10.02 -- Amendment to Revolving Credit and Security Agreement, dated February 9,
1995****
10.03 -- Second Amendment to Revolving Credit and Security Agreement, dated December
8, 1995****
10.04 -- Employment Agreement, dated August 23, 1994, between Registrant and Mitchel
J. Laskey****
10.05 -- Employment Agreement, dated August 23, 1994, between Registrant and David
M. Pomerance****
10.06 -- Amendment to the Employment Agreement, dated effective August 1, 1996,
between Registrant and David M. Pomerance****
10.07 -- Employment Agreement, dated May 16, 1996, between Registrant and Nikhil
Bhatt****
10.08 -- Sublease Agreement, dated January 31, 1995, between Registrant and John
Alden Life Insurance Company****
10.09 -- Amendment to Sublease Agreement, dated as of October 27, 1995, between
Registrant and John Alden Life Insurance Company****
10.10 -- Lease Agreement, dated July 2, 1996, between Registrant and MBP
Partners****
21.01 -- Subsidiaries****
23.01 -- Consent of Cohen, Berke, Bernstein, Brodie & Kondell, P.A. (included in
Exhibit 5.01)****
23.02 -- Consents of KPMG Peat Marwick LLP*
23.03 -- Consent of Deloitte & Touche LLP*
23.04 -- Consent of Ernst & Young LLP*
24.01 -- Reference is made to the Signature section of this Registration Statement
for the Power of Attorney contained therein****
</TABLE>
- ---------------
* Filed herewith
** To be filed by amendment
*** Incorporated by Reference in Form 8-B, filed by Registrant on August 9,
1996
**** Previously filed
<PAGE> 1
Exhibit 4.01
COMMON SHARES COMMON SHARES
DYNAMIC
HEALTHCARE TECHNOLOGIES
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
See reverse for certain definitions
CUSIP 267927101
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01 EACH OF
THE COMMON STOCK OF DYNAMIC HEALTHCARE TECHNOLOGIES, INC. transferable on the
books of the Corporation by the holder hereof in person or by Attorney upon
surrender of this Certificate properly endorsed. This certificate is not valid
unless countersigned by the Transfer Agent-Registrar.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers.
Dated:
AUTHORIZED SIGNATURE
David M. Pomerance Mitchel J. Laskey
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
(MINNEAPOLIS, MINNESOTA) TRANSFER AGENT AND REGISTRANT
<PAGE> 1
Exhibit 23.02
KPMG Peat Marwick LLP
111 North Orange Avenue, Suite 1600
P.O. Box 3031
Orlando, FL 32802
Board of Directors
Dynamic Healthcare Technologies, Inc.
We consent to the use of our audit report dated March 6, 1996 on the financial
statements of Dynamic Healthcare Technologies, Inc. as of December 31, 1994 and
1995 and for each of the years then ended included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
August 29, 1996
<PAGE> 2
KPMG Peat Marwick LLP
111 North Orange Avenue, Suite 1600
P.O. Box 3031
Orlando, FL 32802
Dynamic Healthcare Technologies, Inc.
Maitland, Florida
Ladies and Gentlemen:
Re: Registration Statement on Form S-1
With respect to the subject registration statement, we acknowledge our
awareness of the use therein of our report dated July 30, 1996 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG Peat Marwick LLP
Orlando, Florida
August 29, 1996
<PAGE> 1
Exhibit 23.03
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-10605 on Form S-1 of Dynamic Healthcare Technologies, Inc. of our
report on Terrano Corporation dated March 16, 1994 (January 11, 1995 as to the
restated financial statements), appearing in the Prospectus, which is
part of such Registration Statement, and of our report dated March 16, 1994
(January 11, 1995 as to the restated Allowance for Doubtful Accounts Receivable
Information) relating to the financial statement schedule appearing elsewhere
in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
August 29, 1996
Orlando, Florida
<PAGE> 1
Exhibit 23.04
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 24, 1996 in the Registration Statement (Form S-1
No. 333-10605) and related Prospectus of Dynamic Healthcare Technologies, Inc.
dated August 29, 1996.
/s/ Ernst & Young
Minneapolis, Minnesota
August 28, 1996
