1
EXHIBIT 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
PAGE
NUMBER
------
Consolidated Financial Statements:
Independent Auditors' Report...................................................... 2
Consolidated Balance Sheets as of March 31, 1996 and 1995......................... 3
Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and
1994........................................................................... 4
Consolidated Statements of Stockholders' Equity for the Years Ended March 31,
1996, 1995 and 1994............................................................ 5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and
1994........................................................................... 6
Notes to Consolidated Financial Statements........................................ 7
1
2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Health Data Sciences Corporation
San Bernardino, California
We have audited the accompanying consolidated balance sheets of Health Data
Sciences Corporation and subsidiary (the "Company") as of March 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
March 31, 1996. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 31, 1996 and
1995, and the results of its operations and its cash flows for each of the years
in the three-year period ended March 31, 1996, in conformity with generally
accepted accounting principles.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Health Data Sciences Corporation
and subsidiary as of March 31, 1994 and 1993 and September 30, 1992 and 1991,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the six months ended March 31, 1993 and the years ended September
30, 1992 and 1991 (none of which are presented herein); and we expressed
unqualified opinions on those consolidated financial statements.
In our opinion, the information set forth in the selected financial data of the
Company for each of the three years in the period ended March 31, 1996, for the
six months ended March 31, 1993, and for each of the two years in the period
ended September 30, 1992 appearing on page 45 is fairly stated, in all material
respects, in relation to the consolidated financial statements from which it has
been derived.
DELOITTE & TOUCHE LLP
Los Angeles, California
May 23, 1996
2
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 1)................................ $14,167,000 $ 3,724,000
Accounts receivable, net of allowance for doubtful accounts of
$475,000 (1996) and $75,000 (1995) (Notes 4 and 12)............ 10,377,000 6,109,000
Contractual accounts receivable (Note 1).......................... 8,001,000 26,871,000
Prepaid expenses and other current assets......................... 106,000 731,000
----------- -----------
Total current assets...................................... 32,651,000 37,435,000
SOFTWARE DEVELOPMENT COSTS, Net (Notes 1 and 2)..................... 7,768,000 8,014,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
Net (Notes 1 and 3)............................................... 687,000 330,000
ACCOUNTS RECEIVABLE, Long-term (Note 4)............................. 423,000 750,000
CONTRACTUAL ACCOUNTS RECEIVABLE -- LONG-TERM (Note 1)............... 13,514,000
----------- -----------
TOTAL..................................................... $55,043,000 $46,529,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 6)...................................... $ $ 3,000,000
Accounts payable and accrued expenses............................. 7,430,000 10,609,000
Accrued salaries, payroll taxes and pension (Note 10)............. 992,000 654,000
Deferred revenue (Note 1)......................................... 540,000 412,000
----------- -----------
Total current liabilities................................. 8,962,000 14,675,000
----------- -----------
DEFERRED INCOME TAXES (Notes 1 and 9)............................... 1,300,000 3,000,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 8, 10, 12 and 13)
VOLUNTARILY/MANDATORILY REDEEMABLE PREFERRED STOCK (Note 7)
Series E, 830,000 shares authorized; 735,567 shares issued
and outstanding................................................ 6,565,000
STOCKHOLDERS' EQUITY (Notes 6, 7 and 8)
Convertible preferred stock, $.10 par value, authorized, 5,000,000
shares:
Series B, issued and outstanding, 742,000 shares............... 74,000 74,000
Series C, issued and outstanding, 1,312,500 shares............. 131,000 131,000
Series F, issued and outstanding, 1,605,353 shares............. 161,000
Common stock, authorized, 10,000,000 shares, issued and
outstanding, 4,081,990 shares (1996) and 4,079,990 shares
(1995), stated at.............................................. 274,000 274,000
Additional paid-in capital........................................ 42,314,000 15,985,000
Notes receivable from directors (Note 12)......................... (180,000) (180,000)
Retained earnings................................................. 2,132,000 6,095,000
Cumulative translation adjustment (Note 1)........................ (125,000) (90,000)
----------- -----------
Total stockholders' equity................................ 44,781,000 22,289,000
----------- -----------
TOTAL..................................................... $55,043,000 $46,529,000
========== ==========
See notes to consolidated financial statements.
3
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
NET SALES (Notes 1 and 12).............................. $22,727,000 $30,454,000 $26,040,000
COST OF SALES (Note 2).................................. 15,185,000 13,767,000 11,875,000
----------- ----------- -----------
GROSS MARGIN............................................ 7,542,000 16,687,000 14,165,000
----------- ----------- -----------
EXPENSES:
Research and development.............................. 1,793,000 1,754,000 1,775,000
Sales and marketing (Note 12)......................... 4,870,000 3,672,000 3,028,000
General and administrative (Note 11).................. 6,107,000 2,194,000 3,219,000
Interest.............................................. 265,000 232,000 129,000
----------- ----------- -----------
Total expenses................................ 13,035,000 7,852,000 8,151,000
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS........................... (5,493,000) 8,835,000 6,014,000
INTEREST INCOME......................................... 620,000 202,000 73,000
----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES......... (4,873,000) 9,037,000 6,087,000
(BENEFIT) PROVISION FOR INCOME TAXES (Notes 1 and 9).... (1,700,000) 3,000,000
----------- ----------- -----------
NET (LOSS) INCOME....................................... $(3,173,000) $ 6,037,000 $ 6,087,000
========== ========== ==========
See notes to consolidated financial statements.
4
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HEALTH DATA SCIENCES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
PREFERRED PREFERRED PREFERRED PREFERRED
SERIES B STOCK SERIES C STOCK SERIES D STOCK SERIES F STOCK
---------------- ------------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- --------- -------- -------- -------- --------- --------
BALANCE, APRIL 1, 1993.................... 742,000 $74,000 1,312,500 $131,000 583,333 $ 58,000
Conversion of preferred Series D to
preferred Series E stock............... (583,333) (58,000)
Accretion of redemption value (Note 7)...
Common stock repurchased.................
Common stock options exercised...........
Common stock issued......................
Translation adjustment...................
Net income...............................
------- ------- --------- -------- -------- -------- --------- --------
BALANCE, MARCH 31, 1994................... 742,000 74,000 1,312,500 131,000
Accretion of redemption value (Note 7)...
Common stock repurchased.................
Common stock issued......................
Translation adjustment...................
Net income...............................
------- ------- --------- -------- -------- -------- --------- --------
BALANCE, MARCH 31, 1995................... 742,000 $74,000 1,312,500 $131,000 -- $ --
======== ======== ========== ========= ========= ========= ========== ========
Accretion of redemption
(Note 7)...............................
Preferred stock issued................... 1,605,353 $161,000
Common stock issued......................
Translation adjustments..................
Net income (loss)........................
------- ------- --------- -------- -------- -------- --------- --------
BALANCE, MARCH 31, 1996................... 742,000 $74,000 1,312,500 $131,000 -- -- 1,605,353 $161,000
======== ======== ========== ========= ========= ========= ========== ========
COMMON COMMON NOTES RETAINED
STOCK STOCK ADDITIONAL RECEIVABLE EARNINGS CUMULATIVE TOTAL
--------- ------- PAID-IN FROM (ACCUMULATED TRANSLATION SHAREHOLDERS
SHARES AMOUNT CAPITAL DIRECTORS DEFICIT) ADJUSTMENT EQUITY
--------- ----------- ----------- ---------- ------------ ---------- -----------
BALANCE, APRIL 1, 1993.................... 4,033,190 $ 270,000 $22,737,000 $(5,519,000) $(167,000) $17,584,000
Conversion of preferred Series D to
preferred Series E stock............... (6,942,000) (7,000,000)
Accretion of redemption value (Note 7)... (204,000) (204,000)
Common stock repurchased................. (11,600) (1,000) (6,000) (7,000)
Common stock options exercised........... 400 1,000 1,000
Common stock issued...................... 50,000 5,000 145,000 $ (120,000) 30,000
Translation adjustment................... 63,000 63,000
Net income............................... 6,087,000 6,087,000
--------- ----------- ----------- ---------- ------------ --------- -----------
BALANCE, MARCH 31, 1994................... 4,071,990 274,000 15,935,000 (120,000) 364,000 (104,000) $16,554,000
Accretion of redemption value (Note 7)... (306,000) (306,000)
Common stock repurchased................. (17,000) (2,000) (22,000) (24,000)
Common stock issued...................... 25,000 2,000 72,000 (60,000) 14,000
Translation adjustment................... 14,000 14,000
Net income............................... 6,037,000 6,037,000
--------- ----------- ----------- ---------- ------------ --------- -----------
BALANCE, MARCH 31, 1995................... 4,079,990 $ 274,000 $15,985,000 $ (180,000) $ 6,095,000 $ (90,000) $22,289,000
========= ============ ============ ========== ============= ========= ============
Accretion of redemption
(Note 7)............................... (790,000) (790,000)
Preferred stock issued................... 26,327,000 26,488,000
Common stock issued...................... 2,000 2,000 2,000
Translation adjustments.................. (35,000) (35,000)
Net income (loss)........................ (3,173,000) (3,173,000)
--------- ----------- ----------- ---------- ------------ --------- -----------
BALANCE, MARCH 31, 1996................... 4,081,990 $ 274,000 $42,314,000 $ (180,000) $ 2,132,000 $(125,000) $44,781,000
========= ============ ============ ========== ============= ========= ============
See notes to consolidated financial statements.
5
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ (3,173,000) $ 6,037,000 $ 6,087,000
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization.............................. 3,436,000 3,104,000 2,886,000
Deferred income taxes...................................... (1,700,000) 3,000,000
Provision of doubtful accounts............................. 1,237,000 51,000 12,000
Changes in operating assets and liabilities:
Accounts receivable and contractual accounts
receivable............................................ (149,000) (11,031,000) (11,402,000)
Prepaid expenses and other assets........................ 625,000 (73,000) (438,000)
Accounts payable and accrued expenses.................... (3,448,000) 2,709,000 5,061,000
Accrued salaries, payroll taxes and pension.............. 338,000 (14,000) (127,000)
Deferred revenue......................................... 128,000 (4,000) (69,000)
------------ ------------ ------------
Net cash (used in) provided by operating activities... (2,706,000) 3,779,000 2,010,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in software development costs....................... (3,052,000) (3,135,000) (3,478,000)
Long-term customer (financing) payments, net................. 327,000 130,000 258,000
Purchase of equipment and leasehold improvements............. (226,000) (38,000) (74,000)
------------ ------------ ------------
Net cash used in investing activities................. (2,951,000) (3,043,000) (3,294,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings (repayments)................................. (3,000,000) 1,500,000
Common stock issued and repurchased, net..................... (9,000) 23,000
Repurchase of Series E preferred stock....................... (7,355,000) (651,000) (294,000)
Issuance of Series F preferred stock......................... 26,488,000
Exercise of stock options.................................... 2,000 1,000
------------ ------------ ------------
Net cash provided by (used in) financing activities... 16,135,000 (660,000) 1,230,000
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................ (35,000) 14,000 63,000
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS.......................... 10,443,000 90,000 9,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................... 3,724,000 3,634,000 3,625,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR......................... $ 14,167,000 $ 3,724,000 $ 3,634,000
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest....................... $ 288,000 $ 185,000 $ 118,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
During fiscal 1995, the Company issued 25,000 common shares to one director
in exchange for $60,000 in the form of a note and $15,000 in cash. During fiscal
1994, the Company issued 50,000 common shares to two directors in exchange for
$120,000 in notes and $30,000 in cash.
During fiscal 1994, the Company exchanged Series E preferred stock for
Series D preferred stock.
During the years ended March 31, 1996, 1995 and 1994, $790,000, $306,000
and $204,000, respectively, of the excess of the redemption amount over the
stated value were recorded as a charge to retained earnings.
During fiscal 1996, the Company acquired $269,000 of computer equipment
under capital lease arrangements.
See notes to consolidated financial statements.
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- Health Data Sciences Corporation and its wholly-owned
subsidiary, Health Data Sciences, Ltd. (collectively, the "Company"), are
engaged in the development, marketing, installation and maintenance of a
computerized health care information system. Health Data Sciences, Ltd. was
formed for the purpose of developing and marketing the health care information
system in Canada. Due to the specialized nature of the Company's product, a
significant amount of sales in any given year is attributable to a small number
of major customers in the health care industry. During the years ended March 31,
1996, 1995 and 1994, four, three and one customers accounted for approximately
60%, 52% and 44%, respectively, of the Company's revenues. Customers
representing 10% or more of the Company's revenues were Candler Hospital, Inc.,
Graduate Health Systems, New York City Health and Hospital Corporation (NYCHHC)
and Toronto Hospital Corporation (1996); Genesis Health Ventures, Health Systems
International and NYCHHC (1995) and NYCHHC (1994).
Principles of Consolidation -- The consolidated financial statements
include the accounts of Health Data Sciences Corporation and Health Data
Sciences, Ltd. All intercompany transactions and balances have been eliminated.
Foreign Currency Translation -- Assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at the exchange rate in effect at
the close of the period. Revenues and expenses of the subsidiary are translated
at the average exchange rate in effect during the year. The aggregate effect of
translating the financial statements of the foreign subsidiary is included in a
separate component of stockholders' equity.
Use of Estimates in the Preparation of 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.
Concentration of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, accounts receivable and contractual accounts receivable.
The Company performs ongoing credit evaluations of its customers and maintains
an allowance for potential losses.
Cash and Cash Equivalents -- Cash and cash equivalents include cash and
commercial paper with maturities of 90 days or less.
Software Development Costs -- The Company capitalizes certain software
development costs related to enhancements to the software system. The
amortization of software development costs is computed on the straight-line
method based on the estimated useful life of the software and enhancements to
software over approximately five years.
Equipment and Leasehold Improvements -- Equipment and leasehold
improvements are recorded at cost. Depreciation and amortization are computed
using the straight-line method based on the estimated useful lives of the
related assets, ranging from five to ten years.
Revenue Recognition -- The Company recognizes software license revenues
when the software is delivered and there are no further significant vendor
obligations. The Company accrues an estimate of the costs of completing any
remaining insignificant obligations.
Software maintenance revenues are recognized ratably over the term of the
maintenance agreement.
Hardware sales are recognized on shipment of the hardware.
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred revenue arises from advance payments received from customers.
The Company recognizes revenue on one contract in progress as the work is
performed using the percentage of completion method. The Company has applied the
percentage of completion method to appropriately match revenues and costs over
an extended installation period. The basis for the percentage of completion
measurement is time incurred on the installation compared to estimated time to
complete. The majority of the revenues recognized under the contract are
included in contractual accounts receivable which are unbilled.
Income Taxes -- Deferred income taxes are determined based on the temporary
differences between the financial statement carrying amounts and income tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
Research and Development -- In June 1995, the Company was awarded a $7.5
million cooperative agreement by the Department of Commerce to fund product
development for a five-year period. Funding under this agreement began during
the year ended March 31, 1996 and amounted to $912,000, which is reflected in
the accompanying statement of operations as a reduction in research and
development expenses. Receipt of additional funding is dependent upon
satisfactory performance under the agreement.
New Accounting Pronouncements -- In March 1995, the Financial Accounting
Standards Board ("FASB") released Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." This statement, effective for fiscal years
beginning after December 15, 1995, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company is currently in
the process of determining the impact of adopting this statement.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," effective for transactions entered into in fiscal years beginning
after December 15, 1995. The Company plans to elect to continue to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, and to
provide appropriate disclosures as permitted by SFAS No. 123.
2. SOFTWARE DEVELOPMENT COSTS
Software development costs capitalized for the years ended March 31, 1996
and 1995 were $3,052,000 and $3,135,000, respectively. Amortization of deferred
software development costs for 1996, 1995 and 1994 was $3,296,000, $2,943,000
and $2,561,000, respectively. The amortization is included in cost of sales.
8
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
ESTIMATED MARCH 31,
USEFUL -----------------------
LIVES 1996 1995
--------- ---------- ----------
Computer equipment................................. 5 years $2,901,000 $2,424,000
Furniture and equipment............................ 5 years 1,368,000 1,368,000
Office equipment................................... 5 years 499,000 483,000
Leasehold improvements............................. 10 years 368,000 368,000
---------- ----------
5,136,000 4,643,000
Less accumulated depreciation and amortization..... 4,449,000 4,313,000
---------- ----------
$ 687,000 $ 330,000
========= =========
4. ACCOUNTS RECEIVABLE LONG-TERM
During 1991, the Company financed the sale of a software license to one
customer. Payments under this arrangement are to be made over an eight-year
period. As of March 31, 1996 and 1995, accounts receivable -- current include
$600,000 due from this sale. Accounts receivable, long-term of $423,000 and
$750,000 at March 31, 1996 and 1995, respectively, represent the present value
of the payments due monthly through 2002, discounted at the rate of 7.75%.
5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, bank
line of credit, accounts payable and deferred revenue approximate fair value due
to the short maturities of such instruments.
The fair value of long-term accounts receivable is estimated by discounting
the future cash flows using the Company's incremental borrowing rate. The
carrying and fair values of the long-term accounts receivable were $1,080,000
and $1,016,000, respectively, at March 31, 1996.
It was not practicable to estimate the fair value of contractual accounts
receivable, as the timing of the future cash flows from this receivable is not
determinable. No interest applies to this receivable, which has a carrying
amount of $21,515,000 in the consolidated balance sheet at March 31, 1996.
6. BANK LINE OF CREDIT
Health Data Sciences Corporation has an unsecured line of credit of
$3,000,000. Outstanding borrowings under the line at March 31, 1996 and 1995
were $0 and $3,000,000, respectively. Interest is payable on the outstanding
balance at a rate of 8.25% and 9% at March 31, 1996 and 1995, respectively. The
line of credit agreement contains, among other restrictions, covenants for
various financial ratios, as well as provisions limiting the issuance of
additional debt and the payment of dividends. At March 31, 1996, the Company was
not in compliance with certain covenants and has obtained a waiver of default
from the lender. The line expires on October 1, 1997.
7. PREFERRED STOCK
Convertible preferred Series B, C and F stock are convertible to common
shares at the option of the stockholder on a one-for-one basis. A total of
3,659,853 shares are subject to conversion. The Series B, C and F preferred
shares carry no guaranteed dividend features and have no mandatory redemption
features. The Series B, C and F preferred shares have equal preference rights
over common stock to the proceeds, if any,
9
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from a voluntary or involuntary liquidation; however, such proceeds are limited
to the amount invested. On August 5, 1993, the Company exchanged Series D
preferred stock for Series E preferred stock as part of a settlement of a
lawsuit. The Series E preferred stock consisted of 830,000 shares redeemable at
$10 per share. On November 1, 1994 and 1993, 65,083 and 29,350 shares,
respectively, were redeemed. The excess of the redemption amount of Series E
over the stated value of Series D was $1.3 million and has been accreted through
equal annual charges to retained earnings over the mandatory redemption period.
During the years ended March 31, 1996, 1995 and 1994, $790,000, $306,000 and
$204,000, respectively, of the excess was recorded as a charge to retained
earnings. On June 30, 1995, the Company redeemed all of the remaining shares of
Series E preferred stock outstanding (735,567) at $10 per share. During the year
ended March 31, 1996, the Company issued 1,605,353 shares of Series F
convertible preferred stock at $16.50 per share. There are certain defaults on
the part of the Company with respect to the delivery by the Company of its
financial statements and other information to the other parties thereto. The
agreements do not contain any provisions with respect to such parties' remedies
upon such defaults.
8. STOCK OPTIONS
The Company has a stock option plan for the benefit of key employees. The
plan is administered by the Board of Directors. At March 31, 1996, the aggregate
number of shares for which options may be granted is 725,000, of which 187,950
and 397,050 were available for grant at March 31, 1996 and 1995, respectively.
The exercise price is determined by the Board of Directors but may not be less
than the estimated fair market value of the shares at the date of grant. The
options must be exercised within ten years of the date of grant. At March 31,
1996, options to purchase 175,650 shares were exercisable under the plan.
A summary of changes in stock options is as follows:
NUMBER OF PRICE
SHARES RANGE
--------- ---------
Outstanding at March 31, 1993.................................. 237,050 .80-3.00
Options canceled............................................... (31,200) .80-3.00
Options exercised.............................................. (400) 2.00
---------
Outstanding at March 31, 1994.................................. 205,450 .80-3.00
Options canceled............................................... (15,100) 2.00-3.00
Outstanding at March 31, 1995.................................. 190,350 .80-3.00
Options granted................................................ 387,400 3.00
Options canceled............................................... (40,700) 1.60-3.00
Options exercised.............................................. (2,000) 1.60-3.00
---------
Outstanding at March 31, 1996.................................. 535,050
=======
In 1987, the Company offered to sell 80,000 shares of the Company's common
stock to various employees at an exercise price of $1.60 per share, which
represented the then-current fair market price as determined by the Board of
Directors at the time. At March 31, 1996, certain employees, representing 39,750
shares, had not accepted the Company's offer.
9. INCOME TAXES
The income tax benefit for the year ended March 31, 1996 was $1,700,000,
primarily attributable to the net taxable loss for the current year. The
provision for income taxes for the year ended March 31, 1995 was $3,000,000 due
to the exhaustion of the net operating loss carryforwards for financial
reporting purposes in 1995. There was no provision for income taxes for the year
ended March 31, 1994 due to the income tax benefit arising from the utilization
of the net operating loss carryforwards of approximately $2,105,000.
10
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1996 and 1995, the Company had deferred income tax liabilities
of $15,320,000 and $13,466,000, respectively, and deferred income tax assets of
$14,020,000 and $10,466,000, respectively.
The components of the provision for income taxes are:
MARCH 31,
------------------------
1996 1995
----------- ----------
Deferred:
Federal.................................................... $(1,445,000) $2,550,000
State...................................................... (255,000) 450,000
----------- ----------
Total.............................................. $(1,700,000) $3,000,000
========== =========
The components of deferred income taxes are as follows:
MARCH 31,
-------------------------
1996 1995
----------- -----------
Capitalized software development costs...................... $(8,321,000) $(7,007,000)
Capitalized software amortization........................... 5,119,000 3,801,000
Unbilled revenues........................................... (6,999,000) (6,469,000)
Net operating loss carryforward............................. 7,361,000 5,597,000
Research and development credit............................. 1,078,000 1,078,000
Other....................................................... 462,000
----------- -----------
Net deferred tax liability.................................. $(1,300,000) $(3,000,000)
========== ==========
The following are the Company's net operating loss and tax credit
carryforwards as of March 31, 1996 for income tax purposes:
RESEARCH
AND
YEAR U.S. CANADA DEVELOPMENT
EXPIRATION TAX TAX CREDITS
--------------------------------------------------- ----------- -------- -----------
1998............................................. $ 21,000
1999............................................. $ 76,000 77,000
2000............................................. 2,517,000 108,000
2001............................................. 3,137,000 195,000
2002............................................. 5,305,000 210,000
2003............................................. 1,147,000 273,000
2004............................................. 1,368,000 $405,000 194,000
2005............................................. 2,000
2006.............................................
2007............................................. 4,488,000
2008............................................. 1,934,000
----------- -------- -----------
$19,974,000 $405,000 $ 1,078,000
========== ======== =========
10. PENSION AND PROFIT-SHARING PLAN
The Company has a profit-sharing/401(k) plan covering substantially all
employees who meet certain length-of-service requirements. Participants begin
vesting after their third year of service. Pension costs, net of capitalized
portion (see Note 2) for the years ended March 31, 1996, 1995 and 1994, were
approximately $138,000, $139,000 and $190,000, respectively.
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HEALTH DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FOREIGN CURRENCY TRANSACTIONS
During the years ended March 31, 1996, 1995 and 1994, the Company
experienced foreign currency transaction gains (losses) of approximately
$121,000, ($63,000) and ($494,000), respectively. Such losses result from the
effects of currency fluctuations on the intercompany balances between Health
Data Sciences Corporation and Health Data Sciences, Ltd. and on payables not
denominated in the subsidiary's functional currency. The amounts are included in
general and administrative expenses.
12. RELATED PARTIES
During the year ended March 31, 1995, the Company sold 25,000 common shares
to a director in exchange for $15,000 in cash and $60,000 in notes receivable.
During the year March, 31, 1994, the Company sold 50,000 common shares to
directors in exchange for $30,000 in cash and $120,000 in notes receivable. The
sale of these shares were in accordance with the terms of agreements dated
August 24, 1993. The notes receivable are due on August 24, 1996. Interest at
9%, subject to certain adjustments as defined, is payable yearly. The notes are
secured by the related common stock.
In connection with the preferred stock issuance that occurred on June 30,
1995 (see Note 7), two of the Company's customers became preferred shareholders
of the Company. A Series C preferred shareholder is also a customer of the
Company. Sales to these affiliates were $2,277,000, $12,698,000 and $2,000,000
for the years ended March 31, 1996, 1995 and 1994, respectively. Accounts
receivable from these affiliates were $6,124,000 and $8,762,000 at March 31,
1996 and 1995, respectively.
During 1994 the Company executed a consulting agreement for strategic
planning with a nonemployee stockholder of the Company. The agreement required
annual payments of $696,000 due on November 1 through 1997 and a down payment of
$232,000. On June 30, 1995, the Company terminated this agreement. During 1996,
1995 and 1994, $324,000, $754,000 and $314,000, respectively, were expensed and
are included in sales and marketing expenses in the accompanying consolidated
statements of income.
13. COMMITMENTS
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense, net of capitalized portion (see Note 2) for
1996, 1995 and 1994, was $611,000, $539,000 and $623,000, respectively. Future
minimum rental payments are as follows:
EQUIPMENT
YEAR ENDING MARCH 31, BUILDINGS AND OTHER TOTAL
---------------------------------------------------- ---------- --------- ----------
1997......................................... $ 779,000 $32,000 $ 811,000
1998......................................... 798,000 24,000 822,000
1999......................................... 821,000 22,000 843,000
2000......................................... 846,000 10,000 856,000
2001......................................... 872,000 4,000 876,000
Thereafter................................... 3,505,000 3,505,000
---------- --------- ----------
Total................................... $7,621,000 $92,000 $7,713,000
========= ======== =========
14. SUBSEQUENT EVENTS
Beginning in May 1996, the Company and a major provider of business
management services and systems to the health care industry engaged in
substantive discussions regarding a possible business combination. As currently
proposed, at the consummation of the merger, the Company would become a wholly
owned subsidiary of the acquirer.
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