ITEM 7 - FINANCIAL STATEMENTS
Sandata, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public
Accountants
Financial Statements
Consolidated Balance Sheets as of May 31, 1996
and 1995
Consolidated Statements of Income for the years
ended May 31, 1996 and 1995
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years
ended May 31, 1996 and 1995
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Sandata, Inc.
We have audited the accompanying consolidated balance sheets of
Sandata, Inc. and Subsidiaries as of May 31, 1996 and 1995, and
the related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These
consolidtated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
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 consolidated financial statements are free of material
misstatement. As audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by amangement, as well as evaluating the overall
financial statement presentation. We believe our audits provide
a reasonable basis for our opinion.
As more fully described in Notres 4, 5, 7, 8, 9 and 11 to the
consolidated financial statements, the company has had certain
transactions with companies affiliated with the Company's
Oifficers and Chairman of the Board.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Sandata, Inc. and
Subsidiaries as of may 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting
principles.
Marcum & Kliegman LLP
Woodbury, New York
August 16, 1996
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
May 31,
ASSETS (Notes 4 and 8) 1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $368,400 $102,613
Accounts receivable, net of allowance
for doubtful accounts of $350,000
and $304,000 at 1996 and 1995,
respectively 1,180,905 784,808
Receivables from affiliates (Note 8) 190,635 1,058,757
Receivable from former affiliate
(Note 9) 26,258 77,459
Note receivable from former affiliate,
net of allowance for doubtful accounts
of $119,000 in 1996 (Note 9) 77,100 240,000
Notes receivable - officers (Notes 8
and 13) 102,867 -0-
Note receivable - officer (Note 8) -0- 150,000
Inventories 27,972 26,222
Income taxes receivable (Note 6) -0- 66,000
Prepaid expenses and other current assets 172,897 88,153
------- ---------
Total Current Assets 2,147,034 2,594,012
FIXED ASSETS, NET (Notes 2, 3, 7
and 11) 9,399,625 3,564,208
OTHER ASSETS
Note receivable from former affiliate,
net of allowance for doubtful accounts
of $119,000 in 1995 (Note 9) -0- 58,199
Advances to affiliates (Note 8) -0- 61,000
Notes receivable - officers (Notes 8
and 13) -0- 102,867
Cash surrender value of officer's life
insurance, security deposits and other 410,683 327,766
------- -------
Total Assets $11,957,342 $6,708,052
----------- ----------
----------- ----------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
expenses $1,022,058 $601,106
Current portion of long-term debt
(Note 4) 768,354 250,000
Note payable - affiliate (Note 5 ) 1,000,000 -0-
Deferred/unearned revenue 4,299 34,751
Deferred income (Note 11) 205,252 143,821
--------- ---------
Total Current Liabilities 2,999,963 1,029,678
LONG-TERM DEBT (Note 4) 4,322,234 1,679,166
NOTES PAYABLE - AFFILIATES (Note 5 ) 462,000 -0-
DEFERRED INCOME (Note 11) 177,530 205,642
DEFERRED INCOME TAXES (Note 6) 83,000 140,444
------ -------
Total Liabilities 8,044,727 3,054,930
--------- ---------
COMMITMENTS AND CONTINGENCIES
(Notes 4, 7, 8 and 14)
SHAREHOLDERS' EQUITY (Note 10)
Common stock; par value $.001; authorized
3,000,000 shares in 1996 and 1995, 816,727
issued; 763,955 shares outstanding 816 816
Additional paid in capital 1,279,710 1,279,710
Retained earnings 2,768,975 2,509,482
--------- ---------
4,049,501 3,790,008
Less Treasury stock - at cost (52,772
shares in 1996 and 1995) (136,886) (136,886)
--------- --------
Total Shareholders' Equity 3,912,615 3,653,122
--------- ---------
Total Liabilities and Shareholders'
Equity $11,957,342 $6,708,052
----------- ----------
----------- ----------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended May 31,
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Service fees (Notes 1, 2 and 8) $8,964,335 $7,546,454
Real estate rental income 285,048 ---
Other income (Note 11) 277,982 75,523
Interest income (Notes 8 and 9) 34,858 91,969
------- ------
$9,562,223 $7,713,946
---------- ----------
COSTS AND EXPENSES:
Service Fees:
Operating (Note 3) 5,038,472 4,795,157
Selling, general and administrative 1,988,115 1,958,617
Depreciation and amortization 1,093,264 680,910
Interest expense 216,862 179,809
--------- --------
$8,336,713 $7,614,493
--------- ---------
Real Estate:
Operating 472,310 ---
Depreciation and amortization 88,779 ---
Interest expense 289,629 ---
Real estate taxes 123,299 ---
------- ------
974,017 ---
------- ------
TOTAL COSTS AND EXPENSES $9,310,730 $7,614,493
--------- ---------
Earnings from operations before
income taxes 251,493 99,453
Income tax expense (benefit) (Note 6) (8,000) 74,444
------- ------
NET EARNINGS $259,493 $25,009
-------- -------
-------- -------
EARNINGS PER COMMON SHARE $0.16 $0.03
Weighted average common shares
outstanding (Note 1) $1,586,423 $763,955
--------- --------
--------- --------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended May 31, 1996 and 1995
Add'l
Common Stock paid-in Retained Treasury Total
Shares Amount capital Earnings Stock
------ ----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at
June 1, 1994 816,727 816 1,279,710 2,484,473 136,886)3,628,113
Net earnings --- --- --- 25,009 --- 25,009
------- ---- --------- --------- -------- ---------
Balance at
May 31, 1995 816,727 816 1,279,710 2,509,482 (136,886) 3,653,122
Net earnings --- --- --- 259,493 --- 259,493
------- ---- --------- --------- -------- ---------
Balance at
May 31, 1996 816,727 $816 1,279,710$2,768,975$(136,886)$3,912,615
------- ---- --------- --------- -------- ---------
------- ---- --------- --------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $259,493 $25,009
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 1,182,043 680,910
(Gain) on disposal of fixed assets (242,552) 353,706)
Provision for losses on accounts
receivable 45,516 192,748
Recognition of deferred income (209,233) (75,522)
Recognition of deferred revenue (91,886) 272,977)
Deferred tax provision (benefit) (57,444) 95,444
(Increase) decrease in operating
assets
Accounts receivable (441,613) 232,886
Receivables from affiliates 868,122 (567,484)
Receivable from former affiliate 51,201 (3,227)
Inventories (1,750) 66,288
Prepaid expenses and other current
assets (84,744) 29,685
Income taxes receivable 66,000 (41,000)
Other assets (82,917) (85,273)
Increase (decrease) in operating
liabilities
Accounts payable and accrued
expenses 420,952 (189,116)
Deferred revenue 61,434 211,123
Deferred income 242,552 353,706
------- -------
Net cash provided by operating
activities 1,985,174 299,494
--------- -------
Cash flows from investing activities:
Purchases of fixed assets (3,457,703) (2,992,460)
Proceeds from sale/leaseback
transactions 825,935 859,334
Issuance of notes receivable
- officer, net -- (102,867)
Collection of note receivable
- officer 150,000 340,000
Collection of note receivable
- former affiliate 221,099 266,822
Advances to affiliates 61,000 431,529
Net cash used in investing
activities (2,199,669) (1,197,642)
--------- ---------
Cash flows from financing
activities:
Proceeds from term loans 979,166 --
Proceeds from notes payable
- affiliates 1,462,000 --
Principal payments on term loan (1,319,718) (20,834)
Proceeds from line of credit 1,500,000 2,875,000
Principal payments on line of
credit (2,141,166) (2,125,000)
--------- ---------
Net cash provided by financing
activities 480,282 729,166
------- -------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 265,787 (168,982)
Cash and cash equivalents at beginning
of year 102,613 271,595
------- -------
Cash and cash equivalents at end
of year $368,400 $102,613
------- -------
------- -------
<FN>
<F1>
Supplemental Disclosure of Noncash Investing and Financing
Activities:
The Company assumed $4,143,140 of debt in 1996 as disclosed in
the Notes to the Consolidated Financial Statements in
conjunction with the acquisition of a facility.
</FN>
</TABLE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of
Sandata, Inc. and its wholly owned subsidiaries: Sandsport
Data Services, Inc., Sandata Home Health Systems, Inc.,
Sandata Spectrum, Inc., SanTrax Systems, Inc., SanTrax
Productivity, Inc. and Sandata Inteck, Inc. Sandata Inteck,
Inc. is an inactive subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
b. Nature of Business and Economic Dependency
Sandata, Inc. and Subsidiaries (the "Company") are primarily
engaged in the business of providing computerized data
processing services using Company-developed and licensed
software principally to the healthcare industry. The Company
primarily operates in the New York metropolitan area. During
fiscal 1996 and 1995, the Company received revenues from a
group of customers who are all funded by one governmental
agency, amounting to approximately $6,218,000 and $4,662,000,
respectively.
c. Fixed Assets
Fixed assets are recorded at cost. Depreciation and amortization are
computed principally by the straight-line method over the lesser of the
estimated useful lives or lease terms of the related assets.
d. Income Taxes
The primary objectives of accounting for income taxes are to (a) recognize
the amount of tax payable for the current year and (b) recognize the amount
of deferred tax liability or asset based on management's assessment of the
tax consequences of events that have been reflected in the Company's
financial statements or tax returns.
e. Software Costs
The Company capitalizes expenditures incurred for the development of existing
software which has already reached technological feasibility and expenses all
other costs. Amortization is computed on the straight-line method over the
estimated useful life of the software.
f. Inventories
Inventories, consisting of computer equipment held for resale, are stated at
the lower of cost or market; cost is determined using the specific
identification method.
g. Net Earnings Per Common Share
Net earnings per common share is computed by dividing net
earnings by the weighted average number of common shares
outstanding. Earnings per common share for the fiscal year
1996 includes the dilutive effect of outstanding stock
options and warrants. The number of common stock equivalents
determined by applying the modified treasury stock method
included in the calculation of earnings per common share for
the year ended May 31, 1996 was 822,468. The effect of stock
options and warrants on the calculation of earnings per
common share was antidilutive in fiscal year 1995.
h. Revenue Recognition
The Company recognizes revenues and direct costs as the
contractual service is rendered and the expense associated with
such service is incurred. Included in accounts receivable are
unbilled amounts approximating $3,000 and $53,000 at May 31,
1996, and 1995, respectively. Revenues from hardware and
software maintenance contracts are deferred and recognized over
the life of the contracts.
i. Statement of Cash Flows
The Company paid income taxes of approximately $4,000 and
$35,000 and interest of approximately $506,000 and $180,000
for the years ended May 31, 1996 and 1995, respectively.
For purposes of the statement of cash flows, the Company
considers all short-term investments with an original
maturity of three months or less to be cash equivalents.
j. Use of Estimates in the Financial Statements
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.
NOTE 2 - SALE OF DME SOFTWARE
a. On May 1, 1994, the Company sold its Durable Medical
Equipment System business ("DME") to an unaffiliated third
party for $64,690, consisting of $44,000 in cash ($7,000 net
of expenses of sale) and $20,690 in receivables from the
purchaser. As a condition of the sale, the purchaser agreed
to assume the Company's obligations under the previously
existing DME software support and maintenance agreements.
The Company has also retained the right to sell the DME
software Source Code to certain former DME customers and is
entitled to receive royalties from the purchaser based upon
future software sales for which the Company expects to
recover the related capitalized software costs with a net
book value of $88,000 and $122,000 as of May 31, 1996, and
1995, respectively, which are classified as fixed assets in
the accompanying balance sheets.
b. In September 1994, the agreement between the Company and
the purchaser was amended to specifically terminate the
purchaser's right and obligation under the DME software
support and maintenance agreements for a majority of the DME
customers at a cost to the Company of $25,000. In addition,
the purchaser was required to return to the Company all
copies of the DME software Source Code and agreed that the
DME Source Code is confidential and proprietary to the
Company.
Simultaneously with the amendment to the agreement with the
purchaser, the Company sold the right and obligation under
the DME software support and maintenance agreements to an
unaffiliated third party for $67,850 ($46,425 net of expenses
of sale). In addition, the Company also issued an exclusive
license to sell the DME Source Code throughout the United
States to the third party. In consideration for the license,
the Company is entitled to receive a minimum royalty of
$50,000, payable at a rate of $2,941 per month commencing
January 1995. The Company has received payments through June
1996.
<TABLE>
<CAPTION>
NOTE 3 - FIXED ASSETS
Fixed assets consist of the following:
Useful May 31,
Life 1996 1995
------ ---- ----
<S> <C> <C> <C>
Computer equipment and
software costs 5 years $7,622,391 $5,451,140
Furniture, fixtures and
automobiles 4-7 years 289,218 376,428
Leasehold improvements 10 years 726,737 862,804
Building and improvements 39 years 4,085,620 ---
Land 791,280 ---
--------- -------
$13,515,246 $6,690,372
Less accumulated depreciation
and amortization 4,115,621 3,126,164
---------- ---------
$9,399,625 $3,564,208
---------- ----------
<FN>
<F1>
Depreciation and amortization expense relating to fixed assets (other than
software costs) amounted to approximately $673,000 and $297,000 in 1996 and
1995, respectively.
The cost of assets under capital leases and accumulated amortization on these
assets amounted to $4,876,900 and $88,779, respectively, at May 31, 1996.
Unamortized software costs amounted to approximately $1,890,000 and
$1,399,000 at May 31, 1996 and 1995, respectively. Amortization expense for
these costs totaled approximately $509,000 and $384,000 in 1996 and 1995,
respectively.
Research and development expenses amounted to approximately $201,000 and
$288,000 in 1996 and 1995, respectively.
</FN>
</TABLE>
NOTE 4 - DEBT
On February 10, 1993, the Company entered into a secured revolving credit
agreement (the "Credit Agreement") as amended, with a bank (the "Bank") to
borrow up to $2,000,000 which was payable on February 10, 1995 at 3/4% above
the prime lending rate. In June 1994, the Credit Agreement was amended
restating the Company's requirements to maintain a stated net worth amount
and a maximum net loss amount, plus specific working capital and liquidity
ratios, capital expenditure limitations and restrictions on the payment of
dividends.
On April 20, 1995, the Credit Agreement with the Bank was amended extending
the due date for a period of two years. Upon maturity, the Company may, at
its option, convert the then outstanding principal balance of the advances
under the Credit Agreement into a five (5) year term loan payable in
sixty (60) equal monthly principal installments plus interest at 3/4% above
the Bank's prime rate. The amended Credit Agreement also revised the
Company's requirements to maintain a stated net worth amount, a maximum net
loss amount, plus specific working capital and liquidity ratios,
capital expenditure limitations and restrictions on the payment of dividends.
Also on April 20, 1995, a two-year term loan (the "Term
Loan") in the amount of $500,000 was advanced by the Bank to
the Company. The proceeds of the Term Loan were used to
partially repay outstanding advances against the Company's
Credit Agreement. The Term Loan is payable in twenty-four
(24) monthly principal installments of $20,834 plus interest
at 3/4% above the Bank's prime rate, through April 1997.
Both the Credit Agreement and the Term Loan are
collateralized by all the assets of the Company. The Term
Loan is guaranteed on an unlimited basis by the Company's
Chairman and the Credit Agreement is guaranteed on a limited
basis by the Company's Chairman, to a maximum of $1,000,000.
In addition, the Company has assigned its right to the
promissory note due from Compuflight, Inc. and its security
interest in the assets of Compuflight, Inc. to the Bank as
additional collateral.
At May 31, 1996 and 1995 the Company failed to meet certain
financial covenants required under the Credit Agreement and
Term Loan, for which the Bank has granted waivers.
On June 1, 1994, BFS, an affiliate substantially owned by
the Company's Chairman, borrowed $3,350,000 in the form of
Industrial Development Revenue Bonds ("Bonds") to finance
costs incurred in connection with the acquisition,
renovation and equipping of the Company's new office space
located at 26 Harbor Park Drive, Port Washington, New York
(the "Facility" or the "Building") from the NCIDA. These
Bonds were subsequently purchased by a bank (the "Bank").
The Bonds bore interest at prime plus 3/4 of 1% until August
11, 1995, at which time the interest rate became fixed at 9%
for a five-year term through September 1, 2000. At that
time, the interest rate will be adjusted (at the Company's
option) to a rate of either prime plus 3/4 of 1%, or the
applicable fixed rate if offered by the Bank. Commencing
October 1, 1995, principal, together with interest, is being
repaid in equal monthly installments based on a 15 year
amortization, with the balance of unpaid principal due
September 1, 2005.
On June 21, 1994 (as of June 1, 1994), the Company and its
Chairman guaranteed the full and prompt payment of principal
and interest of the bonds and the Company granted the Bank a
security interest and lien on all the assets of the Company.
In connection with the issuance and sale of the bonds, the
Company entered into a lease agreement (the "Sublease") with
BFS, whereby the Company leased the Facility for the conduct
of its business and, in consideration therefor, was obligated
to make lease payments that at least equal amounts due to
satisfy the underlying Bond obligations.
As of July 31, 1995, by an Assignment and Assumption and
First Amendment to Lease between the Company and BFS, the
Company assumed certain indebtedness owed to affiliates of
the Company's Chairman as follows: (i) the $364,570
remaining balance of a 48-month term loan bearing interest
at 8.7% per annum, and (ii) the $428,570 remaining balance
of a 42-month term loan bearing interest at 8.91%. Each of
the foregoing loans were incurred in connection with the
construction of improvements to the Building, are
collateralized by the assets of the primary obligor and are
guaranteed by the Company's Chairman.
On August 11, 1995, the Company entered into a $750,000 loan
agreement with the Long Island Development Corporation
("LIDC"), under a guarantee by the U.S. Small Business
Administration ("SBA"). The entire $750,000 proceeds have
been used to repay a portion of the Bond indebtedness to the
Bank. The Company entered into the Assignment Transaction
primarily to satisfy certain requirements of the SBA. The
Term Loan is payable in 240 monthly installments of $6,255, which
includes principal and interest at a rate of 7.015%.
In connection with the February 1995 sale/leaseback, the
Company has issued irrevocable letters of credit in the
amount of $375,000 for the benefit of the lessor. One
letter of credit in the amount of $225,000 is cancellable on
January 31, 1997 if the Company meets certain financial
targets. The remaining letter of credit expires upon the
termination of the lease.
<TABLE>
<CAPTION>
Maturities of long term debt at May 31, 1996 are as follows:
Principal
Year ending May 31, Repayments
----------
<C> <C>
1997 $768,354
1998 668,911
1999 424,800
2000 404,067
2001 405,743
Thereafter 2,418,713
---------
$5,090,588
---------
---------
</TABLE>
NOTE 5 - NOTES PAYABLE - AFFILIATES
The note payable - affiliates which is evidenced by a note
represents amounts borrowed from a company affiliated with the
Company's Chairman. Subsequent to May 31, 1996, $850,000 of the
demand note, which is non-interest bearing, was repaid.
The notes payable - affiliates represents amounts borrowed from
two companies affiliated with the Company's Chairman. The notes
bear interest at prime plus 3/4% and are due December 2000 and
May 2001, respectively.
NOTE 6 - INCOME TAXES
The income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
Year ended May 31,
1996 1995
------ ------
<S> <C> <C>
Current
Federal $(98,000) $(66,000)
State 8,000 27,000
Deferred - Federal and state 82,000 113,444
------- -------
$(8,000) $74,444
------- -------
------- -------
</TABLE>
The Company's effective income tax rate differs from the
statutory U.S. Federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
Year ended May 31,
1996 1995
----- -----
<S> <C> <C>
Statutory U.S. Federal tax rate 34.0% 34.0%
State taxes 3.2 17.9
Nondeductible items 37.4 22.6
Current benefit - tax expense in
excess of book (110.3) --
Net change in items giving rise to
deferred taxes 32.5 0.4
----- -----
(3.2)% 74.9%
----- -----
----- -----
<FN>
<F1>
As of May 31, 1996 and 1995, depreciation gave rise to
deferred tax liabilities of approximately $696,000 and
$407,000, respectively, allowance for doubtful accounts,
vacation accruals, deferred gains, net operating loss
carryforwards, credits and contribution carryovers gave rise
to deferred tax assets of approximately $613,000 and
$267,000, respectively, net of a valuation allowance of
$86,000 and $210,000, respectively. These amounts are
presented net in the consolidated balance sheet as of May
31, 1996 and 1995, as a noncurrent deferred tax liability.
</FN>
</TABLE>
NOTE 7- COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment. Until July
31, 1995, the office space was sublet from an affiliate of
the Company substantially owned by the Company's Chairman
(the "Affiliate"), under a sublease agreement expiring on
September 1, 2005. The sublease agreement provides for
rental payments to be made to the lessor in an amount equal
to the principal and interest requirement on the bonds of the
lessor (see Note 7). Such amount was $97,200 and $545,382
for the years ended May 31, 1996 and 1995, respectively, and
includes all real estate taxes and operating costs.
As of July 31, 1995, by an Assignment and Assumption and
First Amendment to Lease between the Company and the
Affiliate, the Company is the beneficial owner of and leases
the premises from the Nassau County Industrial Development
Agency ("NCIDA"). The Company currently pays rent for the
facility to NCIDA in the amount of $48,600 per month for a
term expiring in September, 2005. Such amount was $486,000
for the year ended May 31, 1996.
The equipment is leased on a monthly basis at a rate of
approximately $31,000 per month from a company owned by a
shareholder of the Company (See Note 8).
In September 1989, the Company entered into a sale/leaseback
transaction whereby certain fixed assets, including computer
hardware and software, were sold for $700,000 and
concurrently leased back by the Company (See Note 11). The
lease was noncancellable for four years and required annual
minimum rental payments of $230,000 through September 1993.
In March 1995, these assets were purchased by the Company
from an affiliated company for $300,000.
In February 1993, the Company entered into two separate
sale/leaseback transactions whereby certain fixed assets were
sold in the aggregate, for $492,000 and concurrently leased
back by the Company (See Note 11). The leases are
noncancellable for four years and require annual minimum
rental payments of $144,000 through 1997. Rental expense in
connection with these operating leases amounted to
approximately $144,000 in fiscal 1996 and 1995, respectively.
In December 1994, the Company entered into a sale/leaseback
transaction whereby certain fixed assets were sold for
$300,000 and concurrently leased back by the Company (See
Note 11). The lease is noncancellable for three years and
requires annual minimum rental payments of $81,156 through
1997.
In February 1995, the Company entered into two separate
sale/leaseback transactions whereby certain fixed assets were
sold, in the aggregate, for approximately $559,000 and
concurrently leased back by the Company (See Note 11). The
leases are noncancellable for three years and require annual
minimum rental payments of $173,520 through 1998.
Rental expense in connection with these December 1994 and
February 1995 sale/leaseback operating leases amounted to
approximately $254,700 and $105,000 in fiscal 1996 and 1995,
respectively.
In June 1995, the Company entered into a sale/leaseback
transaction whereby certain fixed assets were sold for
$500,000 and concurrently leased back by the Company (See
Note 11). The lease is noncancellable for thirty-eight (38)
months and requires annual minimum rental payments of
$149,280 through 1998.
In September 1995, the Company entered into a sale/leaseback
transaction whereby certain fixed assets were sold for
approximately $326,000 and concurrently leased back by the
Company (See Note 110). The lease is noncancellable for five
years and requires annual minimum rental payments of $66,216
through 2000.
Rental expense in connection with these June 1995 and
September 1995 sale/leaseback operating leases amounted to
approximately $204,000 in fiscal 1996.
Total office space and equipment rental expense amounted to
approximately $1,163,000 and $1,180,000 in fiscal 1996 and
1995, respectively.
Future minimum lease payments for all noncancellable
operating leases at May 31, 1996 are as follows:
<TABLE>
<CAPTION>
Amount
------
<C> <C>
Year ending May 31,
1997 $1,306,936
1998 1,078,144
1999 774,536
2000 748,074
2001 657,170
Thereafter 2,529,066
----------
$7,093,926
----------
----------
<FN>
<F1>
The Company is involved in litigation through the normal
course of business. The Company believes that the resolution
of these matters will not have a material adverse effect on
the financial position of the Company.
</FN>
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
a. The Company derives revenue from a company affiliated
with the Company's Chairman of the Board for data processing
services and computer software design. The revenues
generated from this company, which are included in operating
revenue, amounted to $1,883,000 and $1,869,000 for the years
ended May 31, 1996 and 1995, respectively. At May 31, 1996,
the Company was owed approximately $192,000 by such
affiliate, of which $100,000 was received subsequent to May
31, 1996.
b. On July 1, 1992, the Company loaned $1,000,000 to the
Company's Chairman, bearing interest at the prime rate plus
1-1/4% and was due July 1, 1995. On September 1, 1993, the
Company was issued a new note for the then outstanding
balance of $490,000, bearing interest at prime plus 1-1/4%
and being due April 30, 1994. On May 1, 1994, the Company
extended the due date of the note to the earlier of April
30, 1995 or as the Company may demand at any time after the
effective date of the then proposed privatization transaction.
The Chairman paid $340,000 of the outstanding loan to the
Company during the year ended May 31, 1995. On May 1, 1995,
the Company extended the due date of the note to October 31, 1995.
On July 31, 1995, the Chairman, as a result of the assignment of
the lease with the Nassau County Industrial Development Agency
("NCIDA") from BFS Sibling Realty Inc., formerly known as Brodsky
Sibling Realty Inc. ("BFS"), an affiliate substantially owned
by the Company's Chairman, to Sandata, Inc., repaid $129,000.
The remaining balance of the note receivable was repaid by the Chairman
during the quarter ended February 29, 1996.
c. On June 1, 1994, BFS, an affiliate substantially owned by
the Company's Chairman, borrowed $3,350,000 in the form of
Industrial Development Revenue Bonds ("Bonds") to finance
costs incurred in connection with the acquisition,
renovation and equipping of the Company's new office space
located at 26 Harbor Park Drive, Port Washington, New York
(the "Facility" or the "Building") from the NCIDA. These
Bonds were subsequently purchased by a bank (the "Bank").
The aggregate cost incurred by BFS in conjunction with such
acquisition, renovation and equipping was approximately
$4,377,000. In addition, the Company incurred approximately
$500,000 in connection with additional capital improvements.
The Bonds bore interest at prime plus 3/4 of 1% until August
11, 1995, at which time the interest rate became fixed at 9%
for a five-year term through September 1, 2000. At that
time, the interest rate will be adjusted (at the Company's
option) to a rate of either prime plus 3/4 of 1%, or the
applicable fixed rate if offered by the Bank. Commencing
October 1, 1995, principal, together with interest, is being
repaid in equal monthly installments based on a 15 year
amortization, with the balance of unpaid principal due
September 1, 2005.
d. On June 21, 1994 (as of June 1, 1994), the Company and
its Chairman guaranteed the full and prompt payment of
principal and interest of the Bonds and the Company granted
the Bank a security interest and lien on all the assets of
the Company. In connection with the issuance and sale of
the Bonds, the Company entered into a lease agreement (the
"Sublease") with BFS, whereby the Company leased the
Facility for the conduct of its business and, in
consideration therefor, was obligated to make lease payments
that at least equal amounts due to satisfy the underlying
Bond obligations.
As of July 31, 1995, by an Assignment and Assumption and
First Amendment to Lease between the Company and BFS, the
Company became the beneficial owner of and leases the
Facility from the NCIDA (collectively the "Assignment
Transaction"). In connection with the Assignment
Transaction, the Sublease was terminated. The Company
currently pays rent for the Facility to the NCIDA in the
amount of $48,600 per month, subject to adjustment based
upon the then effective interest rate, among other things,
for a term expiring in September, 2005. The expiration of
the lease term coincides with the maturity date of the
existing Bond financing through the NCIDA. Upon the
expiration of such term, the Company currently intends to
exercise its rights to become record owner of the Facility.
In connection with the Assignment Transaction, the Company
assumed certain indebtedness owed to affiliates of the
Company's Chairman as follows: (i) the $364,570 remaining
balance of a 48-month term loan bearing interest at 8.7% per
annum, and (ii) the $428,570 remaining balance of a 42-month
term loan bearing interest at 8.91%. Each of the foregoing
loans were incurred in connection with the construction of
improvements to the Building, are collateralized by the
assets of the primary obligor and are guaranteed by the
Company's Chairman.
On August 11, 1995, the Company entered into a $750,000 loan
agreement with the Long Island Development Corporation
("LIDC"), under a guarantee by the U.S. Small Business
Administration ("SBA"). The entire $750,000 proceeds have
been used to repay a portion of the Bond indebtedness to the
Bank. The Company entered into the Assignment Transaction
primarily to satisfy certain requirements of the SBA. The
Term Loan is payable in 240 monthly installments of $6,255,
which includes principal and interest at a rate of 7.015%.
e. During fiscal 1995, the Company advanced $60,000 to an
affiliate substantially owned by several officers of the
Company. These advances, which were non-interest bearing,
were paid back to the Company by May 31, 1996.
f. Due from Officers in the amount of $102,867, which is
evidenced by notes, represents the amount advanced by the
Company to pay certain fees arising from the proposed
privatization. These notes bear interest at prime plus 1%
and are due January 1, 1997.
g. The Company makes various lease payments to certain
affiliated companies. The payments are for: equipment
rental, which was $381,113 and $385,206 in fiscal 1996 and
1995, respectively, consulting services which was -0- in
fiscal 1996 and $199,800 in fiscal 1995, respectively, and
building rent which was $97,200 and $545,382 in fiscal 1996
and 1995, respectively.
h. In September 1989, the Company entered into a
sale/leaseback transaction whereby certain fixed assets
including computer hardware and software were sold for
$700,000 and concurrently leased back by the Company. In
March 1995, these assets were purchased by the Company from
an affiliated company for $300,000.
NOTE 9 - NOTE RECEIVABLE FROM FORMER AFFILIATE
On July 31, 1993, the Company received a promissory note
from Compuflight, Inc. ("Compuflight"), a former affiliate
(the Company's Chairman was a principal stockholder and
Chairman of Compuflight through December 1, 1993) to
evidence the Company's accounts receivable from Compuflight.
The note was payable in increments of $20,000 per month
including interest at the rate of one percent above prime on
the unpaid balance and was due April 1, 1994. On November
1, 1993, the note was amended. The amended note is payable
in minimum increments of $20,000 per month with interest at
ten percent (10%) per annum and contains provisions for
accelerated payments based upon Compuflight achieving
certain results. Payments commenced on February 28, 1994 and
are to continue until such time as the indebtedness and any
accrued interest are paid in full. In connection with the
promissory note, the Company received a security interest in
substantially all the then existing assets of Compuflight,
which has been assigned to the Bank as collateral for the
Company's Credit Agreement with the Bank. At the present
time, Compuflight is indebted to the Company in the amount
of $222,139, of which $195,881 represents the balance due on
the note and $26,258 represents accounts receivable.
NOTE 10 - SHAREHOLDERS' EQUITY
a. Common Stock Purchase Warrants
In February 1991, the Company issued 400,000 common stock
purchase warrants to the Company's Chairman. The warrants
are exercisable in equal annual amounts over a ten-year
period. For each warrant, the Chairman may purchase one
share of common stock at an exercise price of $2.64 per
share, representing the fair market value of such stock on
the date the warrants were issued. On January 25, 1995, the
Chairman exchanged these warrants (which were previously
exchanged on August 10, 1992 at an exchange price of $1.79
per share) for warrants to purchase one share of common
stock at an exchange price of $1.38 per share, representing
the fair market value of such stock at January 24, 1995.
b. Changes in Authorized Shares
In May 1995, the Company's Certificate of Incorporation was
amended, pursuant to stockholder vote, to decrease the
number of authorized shares of Common Stock of the Company
from 10,000,000 to 3,000,000 and eliminate all authorized
shares of Preferred Stock.
c. Stock Options
In October 1984, the Company adopted an incentive stock
option plan which reserved 161,444 shares of common stock.
The plan requires that all options be granted at exercise
prices not less than the fair market value at the date of
grant. In April 1989, the Company amended its incentive
stock option plan to reflect revisions necessitated by the
Tax Reform Act of 1986 and to increase the number of shares
subject to the plan from 161,444 to 278,110. In December
1990, the Company's Incentive Plan was amended pursuant to
stockholder vote by increasing the number of shares
available for options to 416,667.
In November 1986, the Company adopted a nonqualified stock
option plan which reserved 111,111 shares of common stock
that may be granted to employees, officers and directors. In
April 1989, the Company amended its nonqualified stock
option plan by increasing the number of shares from 111,111
shares to 227,778 shares.
In January 1995, the Company adopted a stock option plan
providing for both incentive and nonqualified stock options,
which reserves 1,000,000 shares of common stock for grant
under the plan. The plan requires that all options be
granted at exercise prices not less than the fair market
value at the date of grant, over a ten-year period. In
addition, the Company granted officers of the Company
incentive options to purchase 82,000 shares of the Company's
common stock at an exercise price of $1.51 per share. These
options are exercisable over a five-year period. In March
1996, the Company granted officers of the Company incentive
options to purchase 100,000 shares of the Company's common
stock at an exercise price of $2.34. These options are
exercisable over a five-year period.
Summary information with respect to the stock option plans
follows:
<TABLE>
<CAPTION>
Range of Outstanding Outstanding
exercise options options
prices granted exercisable
-------- ----------- -----------
<S> <C> <C> <C>
Balance, June 1, 1994 1.79 - 1.875 276,593 276,593
Granted 1.38 - 1.753 58,334 233,334
Canceled 1.79 - 1.875 (33,890) (33,890)
Balance, May 31, 1995 1.38 - 1.875 601,037 476,037
Granted 2.34 100,000 100,000
Canceled 1.75 - 1.875 (125,778) (778)
Balance, May 31, 1996 1.38 - 2.34 575,259 575,259
</TABLE>
NOTE 11 - SALE/LEASEBACK TRANSACTIONS
In September 1989, the Company consummated a sale/leaseback of
certain fixed assets (principally furniture, fixtures, computer
hardware and software and equipment). The fixed assets, which
had a net book value of approximately $440,000 were sold for
$700,000. The resulting gain of $260,000 was recorded as
deferred income and is being recognized over the life of the
lease. In March 1995, these assets were purchased by the
Company from an affiliated company for $300,000.
In February 1993, the Company entered into two separate
sale/leaseback transactions of certain fixed assets
(principally computer hardware and software). The fixed
assets, which had a net book value of approximately $389,000,
were sold for $492,000. The resulting gain on the sale of
$103,000 was recorded as deferred income and is being
recognized over the lives of the leases. Approximately
$26,000 of the deferred gain was recognized for fiscal 1996
and 1995, respectively.
In December 1994, the Company entered into a sale/leaseback
of certain fixed assets (principally computer hardware and
software). The fixed assets, which had a net book value of
approximately $115,000 were sold for $300,000. The resulting
gain of approximately $185,000 was recorded as deferred
income and is being recognized over the life of the lease.
Approximately $62,000 and $31,000 of the deferred gain was
recognized for fiscal 1996 and 1995, respectively.
In February 1995, the Company entered into two separate
sale/leaseback transactions of certain fixed assets
(principally leasehold improvements and equipment). The fixed
assets, which had a net book value of approximately $391,000,
were sold for approximately $559,000. The resulting gain on
the sale of approximately $168,000 was recorded as deferred
income and is being recognized over the lives of the leases.
Approximately $56,000 and $19,000 of the deferred gain was
recognized for fiscal 1996 and 1995, respectively.
In June 1995, the Company entered into a sale/leaseback
transaction of certain fixed assets (principally furniture,
fixtures, computer hardware and software and equipment). The
fixed assets, which had a net book value of approximately
$332,000 were sold for $500,000. The resulting gain of
$168,000 was recorded as deferred income and is being
recognized over the life of the lease, which is thirty-eight
(38) months. Approximately $52,900 of the deferred gain was
recognized for fiscal 1996.
In September 1995, the Company entered into a sale/leaseback
transaction of certain fixed assets (principally computer
hardware). The fixed assets, which had a net book value of
approximately $251,000, were sold for approximately $326,000.
The resulting gain of approximately $75,000 was recorded as
deferred income and is being recognized over the life of the
lease, which is sixty (60) months. Approximately $12,500 of
the deferred gain was recognized for fiscal 1996.
NOTE 12 - LITIGATION SETTLEMENT
The Company was a plaintiff in an action seeking payment of
past due accounts receivable in the amount of approximately
$262,000. The defendant interposed a counterclaim seeking
damages in the aggregate of $12,000,000 alleging false
billings, improper maintenance and the insertion by the
Company of a so-called "time bomb" into computer systems
sold by the Company to the defendant. The action was settled
in fiscal 1995 whereby the Company received $169,000 in
settlement of the outstanding accounts receivable. The
remaining balance was written off to the allowance account.
NOTE 13 - PROPOSED PRIVATIZATION OF THE COMPANY
The Company filed a Form 8-K with the Securities and
Exchange Commission, announcing the acceptance by the Board
of Directors of the Company of a proposal by Bert E.
Brodsky, Hugh Freund, Gary Stoller, Leland H. Freund and
Emily B. Freund (collectively the "Proponents") to take the
Company "private" for purposes of Federal securities law. At
that time the Board of Directors also appointed two of its
members to a committee of independent directors for the
purpose of reviewing the proposed transaction to consider
the fairness of the transaction with respect to the
stockholders of the Company and to make recommendations to
the Board. The offer proposed to all outside stockholders of
the Company was $2.50 for each of their shares, which
approximated 229,800 shares in the aggregate.
In December 1994, the Board of Directors of the Company was
informed by the Proponents that they had withdrawn their
proposal to take the Company "private". In notifying the
Company of their decision to withdraw their proposal, the
Proponents informed the Board of Directors that their
decision had been based on several factors, including the
substantial delays created by the need to comply with legal
and regulatory requirements, the costs associated with such
compliance and such delays and the uncertainty regarding the
timing of the possible consummation of the proposed
transaction. The Company advanced certain fees on behalf of
the Proponents arising from the proposed transaction, which
are payable in January 1997 (See Note 8).
NOTE 14 - Retirement Plan
The Company has a 401(k) savings plan covering all eligible
employees in which the Company matches a portion of the
employees' contribution. The amount of this match was
$14,409 and $14,736 in fiscal 1996 and 1995, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 368,400
<SECURITIES> 0
<RECEIVABLES> 1,753,140
<ALLOWANCES> 468,877
<INVENTORY> 27,972
<CURRENT-ASSETS> 2,147,034
<PP&E> 13,515,248
<DEPRECIATION> 4,115,623
<TOTAL-ASSETS> 11,957,342
<CURRENT-LIABILITIES> 2,999,963
<BONDS> 0
<COMMON> 816
0
0
<OTHER-SE> 3,911,799
<TOTAL-LIABILITY-AND-EQUITY> 11,957,342
<SALES> 8,964,335
<TOTAL-REVENUES> 9,562,223
<CGS> 0
<TOTAL-COSTS> 8,804,239
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 506,91
<INCOME-PRETAX> 251,493
<INCOME-TAX> (8,000)
<INCOME-CONTINUING> 259,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259,493
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
