UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-25474
MEDCOM USA, INCORPORATED
(Name of small business issuer as specified in its charter)
DELAWARE 65-0287558
State of Incorporation IRS Employer Identification No.
7975 NORTH HAYDEN ROAD, SUITE C-260, SCOTTSDALE, AZ 85258
(Address of principal executive offices)
Registrant's telephone number, including Area Code: (480) 675-8865
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
YES NO X
------- -------
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Registrant's revenues for the most recent fiscal year were $2,199,823.
The aggregate market value of the common stock held by non-affiliates computed
based on the closing price of such stock on June 30, 2003, was approximately
$5,749,267.
1
PART I
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ITEM 1. Description of Business
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
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ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Management's Discussion and Analysis or Plan of Operation
ITEM 7. Financial Statements
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.
PART III
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ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management
ITEM 12. Certain Relationships and Related Transactions
ITEM 13. Exhibits and Reports
ITEM 14. Controls and Procedures
ITEM 15. Signatures
PART I
2
ITEM 1. DESCRIPTION OF BUSINESS.
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations.
Actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed elsewhere in this Form 10-KSB or incorporated herein by
reference, including those set forth in Management's Discussion and Analysis or
Plan of Operation.
OVERVIEW
MedCom USA, Inc.(the "Company") a Delaware corporation was formed in August
1991 with the name Sims Communications, Inc. The Company's primary business was
providing telecommunications services. In 1996 the Company introduced four
programs to broaden the Company's product and service mix: (a) cellular
telephone activation, (b) sale of prepaid calling cards, (c) sale of long
distance telephone service and (d) rental of cellular telephones using an
overnight courier service. With the exception of the sale of prepaid calling
cards, these four programs were discontinued in December 1997. During the fiscal
year of 1998, the Company diversified its operations and moved into the area of
medical information processing.
The Company changed its name to MedCom USA, Inc. in October 1999. During
the fiscal years of 1999 and continuing through 2000, the Company directed its
efforts in medical information processing. As of June 30, 2003, the Company
currently operates the MedCard System (MedCard) that is deployed through a
point-of-sale terminal or personal computer offering electronic transaction
processing, as well as insurance eligibility verification. The Company has
aggressively focused on its primary operations in Electronic Data Interchange
(EDI) and core business in electronic Medical Transaction Processing.
MEDCARD SYSTEM
The Company provides innovative technology-based solutions for the
healthcare industry that enable users to efficiently collect, use, analyze and
disseminate data from payers, health care providers and patients. The MedCard
System currently operates through a point-of-sale terminal or a personal
computer. The point-of-sale terminals are purchased from Hypercom Corporation
(Hypercom) and EFS Concord. The MedCard System also operates in a PC version and
an on-line version. The Company is in the process of assessing the feasibility
of offering a service bundled package that would have the capability of
processing unlimited claims and eligibility verification for monthly service
fees.
FINANCIAL SERVICES
The Company's credit card center and check services, provides the
healthcare industry an unprecedented combination of services designed to improve
collection and approvals of credit/debit card payments along with the added
benefit and convenience of personal check guarantee from financial institutions.
3
Flex-pay is an accounts receivable management program that allows a
provider to swipe a patient's credit card and store the patient's signature in
the terminals, and bill the patient's card at a later date when it is determined
what services rendered were not covered by the patient's insurance. Also, an
easy-pay option is offered which allows patient's the added benefit and
convenience of a one-time payment option or a recurring installment payments
that will be processed on a specified date determined by the provider and
patient. These options insure providers that payments are timely processed with
the features of electronic accounts receivable management. These services are
all deployed thorough point-of-sale terminals or a personal computer. Using the
MedCard system, medical providers are relieved of the problems associated with
billings and account management, and results in lower administrative
documentation and costs.
PATIENT ELIGIBILITY
The MedCard System is also an electronic processing system that
consolidates insurance eligibility verification, processes medical claims, and
monitors referrals. The MedCard System allows a patient's primary care
physician to request approval from the patient's insurance carrier or managed
care plan for a referral to a secondary physician or specialist. The secondary
physician or specialist can use the MedCard system to verify referrals are
approved by the patient's insurance carrier. The MedCard system's referral
capabilities reduce documentation and administrative costs which results in
increased productivity and greater patient information for the specialist, as
well as a written record of the referral authorization.
The MedCard System can record and track encounters between patients and
health care providers for performance evaluation and maintenance of records.
After examining a patient the physician enters a patient's name, procedure code
and diagnostic code at a nearby terminal. This information is then uploaded to
MedCom's computer network, processed and transmitted back to the provider
formatted in both summary and/or detailed reports, and as a result healthcare
providers' reimbursements are accelerated and account receivables are reduced.
The average time it takes the healthcare providers to collect payments from
insurance carriers and plans decreases from an average of 89 days to 7-21 days.
Health care providers will benefit from a 100% paperless claim processing
system.
As of June 30, 2003 the MedCard system was able to retrieve on-line
eligibility and authorization information from approximately 150 medical
insurance companies and electronically process and submit billings for its
healthcare providers to over 1,700 companies. These insurance providers include
CIGNA, Prudential, Oxford Health Plan, United Health Plans, Blue Cross,
Medicaid, Aetna, Blue Cross/Blue Shield, and Prudential.
COMPETITION
Competing health insurance claims processing and/or benefit verification
systems include WebMD(HLTH), NDCHealth(NDC), Per-se Technologies(PSTI). There
are similar companies that compete with the Company with respect to its
financial transaction processing services performed by the MedCard system.
These companies compete with the Company directly or to some degree. Many of
these competitors are better capitalized than the Company, and maintain a
significant market share in their respective industries.
4
REGULATORY COMPLIANCE
With the passage of the Health Insurance Portability and Accountability Act
(HIPAA) of 1996, the United States Congress has mandated the establishment of
standards for the privacy of individually identifiable health information.
Specifically, the regulation entitled, Standards for Privacy of Individually
Identifiable Health Information ("the Privacy Rule") promulgated by the
Department of Health and Human Services (HHS), provides for a comprehensive
federal protection for the privacy of health information. The Rule applies only
to health plans, health care clearinghouses, and certain health care providers,
which must comply with the new requirements. The Company's core operating
business is not subject to the Privacy Rule, which defines the Company as a
"business associate". A business associate is an entity that provides certain
functions, activities, or services for or to a covered entity. These covered
entities typically obtain contractual assurances that the business associate
will use the information only for the purposes for which they were contracted
and not for independent use by the business.
SERVICE AND PRODUCTS
The Company offers its healthcare providers, and health plan groups, a
simple solution to expedite its Healthcare and financial transactions
electronically through a processing terminal, and the Company maintains its
website www.MedCard.com. The features of the terminals are as follows:
---------------
The Company's credit card center and check services, provides the
healthcare industry an unprecedented combination of services designed to improve
collection and approvals of credit/debit card payments along with the added
benefit and convenience of personal check guarantee from financial institutions.
Flex-pay is an accounts receivable management program that allows a
provider to swipe a patient's credit card and store the patient's signature in
the terminals, and bill the patient's card at a later date when it is determined
what services rendered were not covered by the patient's insurance. Also, an
easy-pay option is offered which allows patient's the added benefit and
convenience of a one-time payment option or a recurring installment payments
that will be processed on a specified date determined by the provider and
patient. These options insure providers that payments are timely processed with
the features of electronic accounts receivable management. These services are
all deployed thorough point-of-sale terminals or a personal computer. Using the
MedCard system, medical providers are relieved of the problems associated with
billings and account management, and results in lower administrative
documentation and costs.
The MedCard System is also an electronic processing system that
consolidates insurance eligibility verification, processes medical claims, and
monitors referrals. The MedCard System allows a patient's primary care
physician to request approval from the patient's insurance carrier or managed
care plan for a referral to a secondary physician or specialist. The secondary
physician or specialist can use the MedCard system to verify referrals are
approved by the patient's insurance carrier. The MedCard system's referral
capabilities reduce documentation and administrative costs which results in
increased productivity and greater patient information for the specialist, as
well as a written record of the referral authorization.
5
LICENSING AGREEMENTS
In May 2000 the license agreement with Dream Technologies, LLC, was amended
whereby the Company acquired direct ownership of the MedCard System including
all software programs, intellectual property, trade names and existing
contracts. The amendment effectively terminated the original license agreement,
except for the royalty provisions of the original license agreement.
Subsequently, on January 14, 2002, the Company changed the terms of the
royalties included in the original agreement with Dream Technologies, and as a
result past royalties were waived in good faith, for the exception of $30,000,
which was agreed and payable in equal monthly installments. In connection with
the past royalties, Dream Technologies, LLC was issued a certificate
representing one-million unregistered shares of common stock with a par value of
$.001.
The Company is required to pay royalties to Dream equal to twenty percent
of the first $1,000,000 of net monthly revenue and ten percentMWMark WeberI
thought it was just a flat 20% of net monthly revenue in excess of $1,000,000.
The term net revenues is defined as gross revenues received from the use of the
MedCard software less (a) terminal lease costs (b) commissions payable to agents
that place terminals with end users (c) network costs that include: i) claim
fees payable to data vendors, ii) charges for verification of insurance coverage
iii) similar telecommunications charges related to obtaining claims processing
and/or benefits verification information; and (d) cost of the terminal and
shipping/handling.
SERVICE AGREEMENTS
During September 1998, the Company entered into a service agreement with
WebMD/Envoy. This agreement encompasses the process of Electronic Data
Interchange (EDI) and related services. The services provided are complimentary
to the Company's core business, and accomplishes transaction processing services
that allows healthcare providers and payers to process medical transactions
quickly and accurately, and results in reduced administrative costs with the
benefit of accelerated reimbursements to healthcare providers.
During January 2002, the Company has entered into a service agreement with
MedUnite. This alliance will encompass the utilization of proprietary
technologies and will enhance the existing network of healthcare constituents.
Strategically both companies share the same vision of transforming the
healthcare transactions systems affecting how healthcare providers, health
plans, and other groups transacting business with one another by significantly
reducing claim and payment processing time, and reducing healthcare
administrative costs.
During February 2003, the Company has entered into a service agreement with
HD Brous & Company. This agreement provides that HD Brous & Company act as
financial advisor and investment banking representative on the Company's behalf.
Upon the execution of the contract the Company granted to HD Brous & Company
warrants to purchase up to four hundred thousand shares of the Company's common
stock at an exercise price of $.50 per common share. The warrants will expire
five years from the date of issuance.
PROCESSING TERMINAL LEASING AGREEMENTS
6
The Company has entered into leasing agreements with LADCO Financial Group
for the purpose of leasing processing terminals. The Company has pledged in
collateral in connection with the lease agreements one-million restricted common
shares of stock. These common stock shares would be surrendered upon the
default of such leasing agreements. This pledge and granting of security
interest was executed on January 3, 2002.
The Company has arranged its terms with this credit facility as an
equipment lessor whereby the Company sells terminals to the lessor when it has
obtained a service contract with a provider. Under these agreements, the
Company is leasing back the processing terminals from the lessor and in turn
leases them to the purchaser for a period of 48-60 months however; the customer
may terminate the agreement after 12 months. The Company is accounting for the
transactions as sale-leasebacks. The leases with the customers are inclusive
with the monthly service contracts and are effectively accounted for as
operating leases. Gains on terminal sales under sale-leaseback transactions are
deferred and are being amortized to income in proportion to amortization of the
assets, generally over the term of the lease with the credit facility generally
for a period of 48-60 months. At June 30, 2003, the remaining deferred equipment
gain of $2,904,848 is shown as "Deferred Revenue" in the Company's Balance
Sheet. For the year ended June 30, 2003, the total interest expense incurred by
the Company under these leases was $407,200.
GROWTH STRATEGY
The Company's strategy is to become one of the dominant electronic
transaction processing vendors in the Healthcare markets. MedCom USA will focus
on providing Health Plan Administrators, Healthcare Clearinghouses, and
Healthcare Providers, financial as well as verification electronic transaction
processing solutions. The Company's strategy to date has included large select
markets for its products and services, however the Company will work with
partners who will ensure national distribution of its products and services.
On January 14, 2003 the Company announced a partnering with Paymentech to
launch a national sales program for the Medcard system and Paymentech Financial
Services. Significant elements of the partnering include marketing the Medcard
system to Paymentech's existing healthcare customers, and also training to
market the Medcard system.
On June 3, 2003 the Company announced a service solutions partnering with
Global eTelecom a leader in the Electronic Check Conversion (ECC) industry. This
customized technology will enable subscribers of the Medcard system the ease and
convenience to accept and process paper checks electronically. This process is
similar to ease of processing of credit card transactions. Integrating this
enhancement increases efficiencies for healthcare providers and insurers
nationwide. Announced on June 4, 2003, LML Payment Systems in accord with Global
eTelecom the licensor for check services from LML Payment Systems is pleased to
accommodate this alliance.
On June 16, 2003 the Company announces a joint-service offering with
Moneris Solutions a comprehensive HIPAA-compliant solution for insurance
eligibility verification, electronic referrals and electronic claims transaction
processing. Moneris will integrate its bankcard platform with Medcom's POS
hardware and delivery will be provided by United Processing Corporation. Both
Moneris and United Processing Corporation are leaders in their respective
industries.
7
ADDITIONAL INFORMATION
The Company files reports and other materials with the Securities and
Exchange Commission. These documents may be inspected and copied at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.,
20549. You can obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. You can also get copies of
documents that the Company files with the Commission through the Commission's
Internet site at www.sec.gov.
-----------
ITEM 2. DESCRIPTION OF PROPERTY.
As of fiscal year end June 30, 2003, the Company maintains its executive
offices in Scottsdale, Arizona. The Company leases 1,317 square feet of office
space for approximately $32,000 annually. The Company entered into a three-year
lease in May 2002 for the Scottsdale facility. The Company also maintains a
lease as of August 2003 in Irvine, California, for executive office space for
approximately $775 a month. The Company also leases 5,906 square feet of office
space in Islandia, New York, for approximately $104,389 annually; the lease
expires March 31, 2008. In conjunction with the New York lease the Company
maintains a sub-lease with Commercial Capital, Inc., which was executed on
December 1, 2001, for approximately $24,000
As of fiscal year end June 30, 2003, the Company had 34 employees of which
approximately 29 are full-time equivalent employees as of June 30, 2003.
ITEM 3. LEGAL PROCEEDINGS
Subsequent to June 30, 2001, several former employees filed complaints
against the Company alleging unpaid payroll and breach of employment agreements.
The total known claims being sought by the former employees at June 30, 2001 was
approximately $175,000. The Company believes that it has settled all former
employee claims in amounts aggregating to an amount approximating the accrued
amount of $104,000. A former officer has a claim remaining with the Company. The
Company is attempting to settle this claim. At June 30, 2003, there was $164,000
accrued relating to this matter.
Several landlords are seeking damages from the Company due to the Company
defaulting on several lease agreements. Certain landlords have obtained legal
judgments against the Company. The total amount of such claims was $634,000. The
Company and its legal counsel believe that ultimate settlement will result in a
much lower payout. The Company has accrued $208,000 associated with these claims
at June 30, 2003. This amount was estimated on the basis of advice from legal
counsel whom has settled several similar suits. However, the ultimate result of
any settlement could vary significantly from this estimate.
The Company had obligated shares of the Company's common stock and warrants
exercisable into common stock under numerous consulting and fund raising
agreements. Some such agreements obligated shares in cases of the occurrence of
substantial dilution or price drop in the trading value of the Company's common
stock. Management believes that it has fulfilled all such obligations. However,
the Company has received claims related to these matters. One such claim alleges
8
1,066,666 shares of the Company's common stock is owed. Management believes that
this claim has no merit.
The Company may be subject other unasserted claims associated with the
abandonment of its operations. The Company is also involved in various claims
and legal actions arising in the ordinary course of business. In the opinion of
management, except as discussed above, the ultimate disposition of these matters
will not have a material adverse effect on the Company's financial position,
results of operations, or liquidity.
At June 30, 2003, there was approximately $553,000 estimated and accrued for
claims related to the litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted no matters to a vote of its security holders during
the fiscal year ended June 30, 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MedCom common stock is traded in the over-the-counter market, and quoted in
the National Association of Securities Dealers Inter-dealer Quotation System
("Electronic Bulletin Board) and can be accessed on the Internet at
www.otcbb.com under the symbol "EMED."
-------------
At June 30, 2003, there were 36,792,878 shares of common stock of MedCom
outstanding and there were approximately 476 shareholders of record of the
Company's common stock.
The following table sets forth for the periods indicated the high and low
bid quotations for MedCom's common stock. These quotations represent
inter-dealer quotations, without adjustment for retail markup, markdown or
commission and may not represent actual transactions.
FISCAL 2003 HIGH BID LOW BID
----------- -------- -------
Quarter Ended June 30, 2003 $ 1.05 $0.39
Quarter Ended March 31, 2003 0.50 0.14
Quarter Ended December 31, 2002 0.35 0.14
Quarter Ended September 30, 2002 0.35 0.19
9
FISCAL 2002 HIGH BID LOW BID
----------- -------- -------
Quarter Ended June 28, 2001 $ 0.25 $ 0.25
Quarter Ended March 28, 2001 0.18 0.14
Quarter Ended December 28, 2000 0.03 0.03
Quarter Ended September 28, 2000 0.11 0.10
MedCom has never paid dividends on any of its common stock shares. MedCom
does not anticipate paying dividends at any time in the foreseeable future and
any profits will be reinvested in MedCom's business. MedCom's Transfer Agent
and Registrar for the common stock is Corporate Stock Transfer located in
Denver, Colorado.
SALE OF UNREGISTERED SECURITIES
During February 2003, the Company has entered into a service agreement with
a consultant, whereby the consultant will act as financial advisor and
investment banking representative on the Company's behalf. Upon the execution
of the contract the Company granted the consultant warrants to purchase up to
four hundred thousand shares of the Company's common stock at an exercise price
of $.50 per common share. The warrants expire five years from date of issuance.
The persons who acquired these warrants were fully informed and advised about
matters concerning the Company, including the Company's business, financial
affairs and other matters.
STOCK SPLITS
Share data in this report have been adjusted to reflect the following stock
splits relating to the Company's common stock: June 1995: 2-for-1 forward split,
February 1996: 1-for-10 reverse split, February 1998: 1-for-4 reverse split, May
2001: 1-for-5 reverse split.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's discussion and analysis contains statements that are
forward-looking and involve risks and uncertainties. Several factors could
cause actual results to differ materially from those described in such
forward-looking statements. This includes the Company's ability to manage
growth, involvement in litigation, competition in the health electronic
transaction processing, ongoing contractual relationships, dependence upon key
personnel, changes in customer demand for product and services, and the adoption
of new, or changes in, accounting policies, practices and estimates and the
application of such policies, practices, and estimates, and federal and state
governmental regulation, specifically in the areas of electronic transaction
processing in the health care industries.
The following financial data should be read in conjunction with the
consolidated financial statements of MedCom USA and related notes and other
financial information appearing elsewhere in this report.
10
Statement of Operations Data:
-----------------------------
Years Ended June 30,
--------------------------
2003 2002
------------ ------------
Revenues $ 2,199,823 $ 647,514
Cost of Sales and Services (222,181) (193,767)
Operating and other
Expenses (5,701,779) (3,350,466)
Loss from Discontinued Operations -0- (244,561)
------------ ------------
Net Loss $(3,724,137) $(3,141,280)
============ ============
Balance Sheet Data:
---------------------
June 30,
--------------------------
2003 2002
------------ ------------
Current Assets $ 443,222 $ 219,431
Total Assets $ 5,104,010 $ 2,131,806
Current Liabilities $ 4,706,744 $ 3,247,094
Non-Current Liabilities $ 5,960,775 $ 898,685
Total Liabilities $10,667,519 $ 4,145,799
Working Capital (Deficit) $(4,263,522) $(3,027,663)
Shareholders' Equity (Deficit) $(5,563,509) $(2,013,973)
The Company has declared no common stock dividends since its inception.
FISCAL 2003 OPERATIONS
------------------------
General. As of June 30, 2003, the Company currently utilizes the MedCard System
that is deployed through a processing terminal, PC software, or online
processing, and offers electronic transaction processing to the health care
industries. MedCom USA continues to focus on its primary operations and core
business in medical transaction processing.
YEAR ENDED JUNE 30, 2003
----------------------------
RESULTS OF OPERATIONS
FISCAL YEAR END JUNE 30, 2003, COMPARED TO FISCAL YEAR END JUNE 30, 2002.
Revenues for Fiscal 2003 increased to $2,199,823 from $647,514 during
Fiscal 2002. This increase in revenue is directly the result of changes in the
Company's strategic direction in core operations. This included discontinuing
declining or unprofitable business sectors and officer and management changes.
The Company continues to aggressively pursue and devote its resources and focus
its direction in electronic transaction processing. The Company's agreement
with its credit facility in connection with the sale-leaseback transactions
therewith, the Company must defer revenue gains on the sale of the terminals.
Those gains are generally recognized over a period of 48-60 months.
11
Selling expenses for Fiscal 2003 increased to $1,135,364 from $141,162
during Fiscal 2002. This increase is primarily the result of marketing efforts
and includes commissions to outside Independent Sales Organizations ("ISO's")
that markets the Company's products and services.
General and administrative expenses for Fiscal 2003 increased to $2,623,642
from $2,325,184 during Fiscal 2002. This increase is attributed to the Company's
hiring of additional employees as growth has occurred in the area of providing
technical support for our products and services in relation to the increases in
sales.
Professional and consulting expenses for Fiscal 2003 increased to $253,155
from $108,364 during Fiscal 2002. These expenses primarily are the result of the
recognition of stock/warrants granted for various services to the Company. The
expense recognized is determined from the bid and ask price of the common stock
at the date of the transaction.
Interest expense for Fiscal 2003 increased to $438,099 from $30,654 for
Fiscal 2002. This increase is a result of increased sales volume and
sales-leaseback transactions with the Company's credit facility. Also, expenses
were incurred and paid on notes the Company has outstanding.
The loss for Fiscal 2003 was ($3,724,137) from ($3,141,280) for Fiscal
2002. Sales and marketing expenses along with interest expenses have increased
for Fiscal 2003. The Company has incurred these marketing and sales expenses in
relation to increased demand for the Company's products and services.
As of June 30, 2003, MedCom had a federal net operating loss carry forward
of $56,215,000 expiring 2011 to 2022. MedCom had a state net operating loss
carry forward of $51,214,000 expiring from 2004 to 2007. MWMark WeberDoug:
You are supposed to leave in the discussion on the comparison of 2000 to 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements from the
sale-leaseback transactions and selling shares of its common stock in private
placements. Cash used in operating activities for Fiscal 2003 was ($3,303,080)
compared to ($2,042,289) for Fiscal 2002. The Company experienced losses from
discontinued operations and abandonment of assets attributable to discontinued
business segments. The Company's pared down operations will result in lower
accounts receivable and inventory levels. The Company receives payments from
customers automatically through electronic fund transfers. Collection cycles
are generally less than thirty days.
Cash provided by investing activities was $754,489 for Fiscal 2003,
compared to cash used in investing activities of ($50,058) for Fiscal 2002.
Streamlining operations and capital budget curtailment practices promoted a
reduction in equipment purchases for the Company.
Cash provided by financing activities was $2,575,623 in Fiscal 2003,
compared to $2,119,775 for Fiscal 2002. Financing activities primarily
consisted of proceeds from the sale-leaseback transactions during the fiscal
period.
12
The Company has relied upon a significant shareholder to fund its operating
cash flow deficiencies since August 2001. An entity that is controlled by the
Company's chairman and chief executive officer has funded $1,022,600 as of June
30, 2002, to the Company in the form of common stock purchased at the closing
price as of the date the funds are transferred to the Company.
As of June 30, 2003 the Company maintains a note payable to this entity for
the amount of $778,300 including accrued interest. The Company requires capital
to finance the purchases of the electronic terminals, and the future amounts of
such requirements will be dependent upon the rate of growth experienced. The
Company has been successful in obtaining lease financing for its equipment. The
nature of the business is such that large accounts receivable balances are not
carried. Management believes that current trends in its electronic transaction
processing to the health care industries business will provide cash flow to be
self-sustaining from operations.
The Company is delinquent on operating lease obligations as well as
obligations to other creditors as of June 30, 2003. The Company is attempting
to negotiate settlements or make counter claims against most of these creditors.
There can be no assurances that the Company will be successful in negotiating
settlements and preventing creditors from filing claims and litigating for
claims.
OTHER CONSIDERATIONS
There are numerous factors that affect the business and the results of its
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of business activities, the level of
demand for product services, the level and intensity of competition in the
healthcare electronic transaction processing industry, and the ability to
develop new services based on new or evolving technology and the market's
acceptance of those new services, the Company's ability to timely and
effectively manage periodic product transitions, the services, customer and
geographic sales mix of any particular period, and our ability to continue to
improve our infrastructure including personnel and systems to keep pace with the
Company's anticipated rapid growth.
ITEM 7. FINANCIAL STATEMENTS
13
MEDCOM USA, INC.
TABLE OF CONTENTS PAGE
----------------- ----
INDEPENDENT AUDITORS' REPORT: F-2
Epstein, Weber & Conover, PLC
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at June 30, 2003 F-3
Consolidated Statements of Operations for the years ended
June 30, 2003 and 2002 F-4
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2003 and 2002 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and Board of Directors of
MedCom USA, Inc.:
We have audited the accompanying consolidated balance sheet of MedCom USA, Inc.
as of June 30, 2003 and the related statements of operations, stockholders'
equity and cash flows for the each of the two years in the period 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 our audit provides 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 MedCom USA, Inc. as of June 30,
2003, and the results of its operations and cash flows for each of the two years
in the period ended June 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company continues to incur
operating losses and has limited working capital reserves. The Company has
begun to generate revenue from its electronic transaction business segment but
expects to face many operating challenges in the future. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are discussed in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ Epstein, Weber & Conover, PLC
Scottsdale, Arizona
September 18, 2003
F-2
MEDCOM USA, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 54,460
Accounts receivable, net of allowance of $37,530 189,612
Inventories 196,023
Prepaid expenses and other current assets 3,127
-------------
Total current assets 443,222
PROPERTY AND EQUIPMENT, net 268,656
PROCESSING TERMINALS, net 3,938,052
GOODWILL, net of accumulated amortization of $322,575 436,423
OTHER ASSETS 17,657
-------------
TOTAL ASSETS $ 5,104,010
=============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,359,049
Accrued expenses and other liabilities 1,344,802
Deferred revenue 817,077
Dividend payable 23,750
Notes payable - current portion 109,437
Capital lease obligations - current portion 1,052,629
-------------
Total current liabilities 4,706,744
CAPITAL LEASE OBLIGATIONS - long-term portion 3,094,696
DEFERRED REVENUE - long-term portion 2,087,771
NOTE PAYABLE - affiliate 778,308
-------------
Total liabilities 10,667,519
-------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, Series A $.001par value, 52,900 shares
designated, 4,250 issued and outstanding 4
Convertible preferred stock, Series D $.01par value, 50,000 shares
designated, 2,850 issued and outstanding 29
Common stock, $.0001 par value, 80,000,000 shares authorized,
36,979,865 issued and 36,792,878 outstanding 3,698
Paid in capital 63,278,188
Accumulated deficit (68,845,428)
-------------
Total stockholders' deficit (5,563,509)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,104,010
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2003 AND JUNE 30, 2002
---------------------------------------------------------------------------------------------------
2003 2002
------------ ------------
REVENUES:
Terminal sales $ 769,883 $ 164,807
Service 905,142 443,762
Equipment lease income 524,798 38,945
------------ ------------
2,199,823 647,514
COST OF SALES AND SERVICE 222,181 193,767
------------ ------------
GROSS PROFIT 1,977,642 453,747
------------ ------------
OPERATING EXPENSES:
General and administrative expenses 2,623,642 2,325,184
Sales and marketing expenses 1,135,364 141,162
Royalties 282,056 229,826
Professional and consulting fees 253,155 108,364
Depreciation and amortization 969,463 454,476
------------ ------------
Total operating expenses 5,263,680 3,259,012
------------ ------------
OPERATING LOSS (3,286,038) (2,805,265)
------------ ------------
OTHER (INCOME) AND EXPENSES
Legal settlement and contingency expenses 60,800
Interest expense 438,099 30,654
------------ ------------
Total other expense 438,099 91,454
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND INCOME TAXES (3,724,137) (2,896,719)
INCOME TAX (BENEFIT) PROVISION - -
------------ ------------
LOSS FROM CONTINUING OPERATIONS (3,724,137) (2,896,719)
LOSS FROM DISCONTINUED OPERATIONS
Loss from abandonment of discontinued segments, no income tax effect - (244,561)
------------ ------------
Total - (244,561)
------------ ------------
NET LOSS $(3,724,137) $(3,141,280)
============ ============
NET LOSS PER SHARE:
Basic:
Continuing operations $ (0.10) $ (0.11)
Discontinued operations - (0.01)
------------ ------------
Total Basic $ (0.10) $ (0.12)
============ ============
Diluted:
Continuing operations $ (0.10) $ (0.11)
Discontinued operations - (0.01)
------------ ------------
Total Diluted $ (0.10) $ (0.12)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 36,954,659 27,439,138
============ ============
Diluted 36,954,659 27,439,138
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
----------------------------------------------------------------------------------------------------------
\ ----------- PREFERED STOCK -----------\
COMMON STOCK PREFERRED A & B PREFERRED C PREFERRED D PAID -IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ------ ------- ------ ------- ------ ------- ------------
BALANCE JULY 1, 2001 13,858,773 $ 1,386 4,250 $ 4 - $ - 2,850 $ 29 $61,227,466
Common stock issued to consultants
for services rendered 1,050,000 105 116,500
Common stock issued for cash 9,638,462 964 1,241,636
Stock issued to employees
and officers for compensation 5,786,500 579 518,650
Common stock issued for penalties
and dilution protection 6,546,130 655 (655)
Net loss
---------- ------- ------ ------- ------ ------- ------ ------- ------------
BALANCE
JUNE 30, 2002 36,879,865 $ 3,688 4,250 $ 4 - $ - 2,850 $ 29 $63,103,597
========== ======= ====== ======= ====== ======= ====== ======= ============
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENT TOTAL
------------- ----------- ------------
BALANCE JULY 1, 2001 $(61,980,011) $ - $ (751,126)
Common stock issued to consultants
for services rendered 116,605
Common stock issued for cash 1,242,600
Stock issued to employees
and officers for compensation 519,229
Common stock issued for penalties
and dilution protection (0)
Net loss (3,141,280) (3,141,280)
------------- ----------- ------------
BALANCE
JUNE 30, 2002 $(65,121,291) $ - $(2,013,973)
============= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements
F-5
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 (CONTINUED)
--------------------------------------------------------------------------------
\ ----------- PREFERED STOCK -----------\
COMMON STOCK PREFERRED A & B PREFERRED C PREFERRED D PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ------ ------- ------ ------- ------ ------- -----------
BALANCE JULY 1, 2002 36,879,865 $ 3,688 4,250 $ 4 - $ - 2,850 $ 29 $63,103,597
Common stock issued to settle claims 100,000 10 23,990
Imputed value of warrants issued to
consultant for services to be rendered 150,600
Net loss
---------- ------- ------ ------- ------ ------- ------ ------- -----------
BALANCE
JUNE 30, 2003 36,979,865 $ 3,698 4,250 $ 4 - $ - 2,850 $ 29 $63,278,187
========== ======= ====== ======= ====== ======= ====== ======= ===========
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENT TOTAL
------------- ----------- ------------
BALANCE JULY 1, 2002 $(65,121,291) $ - $(2,013,973)
Common stock issued to settle claims 24,000
Imputed value of warrants issued to
consultant for services to be rendered 150,600
Net loss (3,724,137) (3,724,137)
------------- ----------- ------------
BALANCE
JUNE 30, 2003 $(68,845,428) $ - $(5,563,510)
============= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements
F-5 (Continued)
MEDCOM USA, INC.
STATEMENT OF CASH FLOWS FOR THE
YEARS ENDED JUNE 30, 2003 AND 2002
--------------------------------------------------------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(3,724,137) $(3,141,280)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Loss on abandonment of net assets of discontinued operations - 244,561
Depreciation and amortization 969,463 454,476
Issuance of warrants as consideration for services 150,600 -
Issuance of common stock as compensation for services - 635,834
Issuance of common stock for settlement of claims 24,000 -
Changes in assets and liabilities (net of discontinued business segments):
Trade accounts receivable (148,309) (17,067)
Inventories (687,275) (97,879)
Prepaid and other current assets 825 77,601
Other assets - 47,142
Accounts payable 240,470 (114,452)
Accrued liabilities 396,081 (235,121)
Deferred revenue (524,798) (38,945)
------------ ------------
Cash used in continuing operations (3,303,080) (2,185,130)
Cash provided by discontinued operations - 142,841
------------ ------------
Net cash (used in) operating activities (3,303,080) (2,042,289)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment - (2,000)
Purchases of software upgrades (105,819) (6,058)
Advances from/(to) affiliates 860,308 (82,000)
Proceeds from sale of assets in discontinued segments 40,000
------------ ------------
Net cash provided by/(used in) investing activities 754,489 (50,058)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft - (60,574)
Principal repayments on capital leases (607,988) (58,526)
Proceeds from sale of common stock - 1,242,812
Proceeds from capital sale-leaseback transactions 3,183,611 996,063
------------ ------------
Net cash provided by financing activities 2,575,623 2,119,775
------------ ------------
INCREASE IN CASH 27,032 27,428
CASH, BEGINNING OF YEAR 27,428 -
------------ ------------
CASH, END OF YEAR $ 54,460 $ 27,428
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, (CONTINUED)
FOR THE YEAR ENDED JUNE 30, 2003 AND 2002
-----------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION: 2003 2002
-------- -------
Interest paid $411,984 $25,615
======== =======
Income taxes paid $ -0- $ -0-
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Terminals capitalized under sales/leaseback transactions $3,612,057 $1,108,378
========== ==========
Extinguishment of capital lease obligations by
foreclosure on related equipment $ -0- $1,092,174
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6 (Continued)
MEDCOM USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2002
--------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
MedCom USA, Inc. (the "Company"), formally Sims Communications, Inc.,
provides point-of-sale transaction terminals and personal computer based
software to perform medical insurance eligibility verification, claims
processing, and credit card/ATM charges and payments. The Company's
customers are health care providers, primarily physicians' offices
throughout the United States.
The accompanying financial statements represent the consolidated financial
position and results of operations of the Company and includes the accounts
and results of operations of the Company and its wholly owned subsidiaries.
The results of operations for the year ended June 30, 2003 included only
the active entity of MedCom USA, Inc., whereas the results of operations
for the year ended June 30, 2002 included Medcom USA, Inc. and the
discontinued entity of New View Technologies, Inc. New View Technologies,
Inc. was discontinued in the year ended June 30, 2002.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company continues to incur
operating losses, has failed to generate positive cash flow from operations
and has limited working capital reserves. The Company has a working capital
deficit of $4,263,522 at June 30, 2003. The Company has generated cash flow
through sale-leaseback transactions to fund its operations. Management
believes that the Company has begun to generate a level of volume in the
sales and service contracts of its processing terminals that will allow the
Company to meet operating cash flow requirements. The Company has recently
changed some of its operations that may allow the Company to better manage
cash flows.
The Company has begun to experience increased sales of its MedCard System
and has generated cash through the use of sale-leaseback transactions
connected to the sales of the terminals for the MedCard System. Management
is attempting to attain a sustaining level of operating cash flow from the
Company's MedCard operations. The Company will then attempt to raise
additional capital to grow the MedCard operations.
Cash reserves and working capital at June 30, 2003 were insufficient to
fund currently due obligations. As discussed above, the Company is
generating cash flow from sales activities and sale-leaseback transactions.
Such cash flow is only recently provided some evidence that it is
sufficient to cover current operating expenses. However, this level of cash
flow does not permit the Company to retire many older debts or expand its
operations. The Company believes that it needs additional cash, either from
outside financing or expanded sales activities, in order to retire past due
debts and significantly expand the Company's operations. If the Company is
unable to produce sales as planned and/or raise additional investment
capital to fully implement its business plan, it may jeopardize the ability
of the Company to continue as a going concern.
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash includes all short-term highly liquid investments that are readily
----
convertible to known amounts of cash and have original maturities of three
months or less. Net bank overdrafts are recorded as current liabilities.
Principles of Consolidation: The consolidated financial statements include
----------------------------
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions are eliminated.
Inventories consist primarily POS terminals and spare parts that are held
-----------
for sale. Inventories are recorded at the lower of cost or market on a
first-in, first-out basis.
Property and Equipment and Terminals is stated at cost less accumulated
------------------------------------
depreciation. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the assets ranging from 3 to 5 years.
Depreciation expense for the years ended June 30, 2003 and 2002 was
$969,463 and $302,676, respectively.
Revenue Recognition - The Company's revenue is generated by the sale of POS
-------------------
terminals and transaction fees generated through those terminals. Revenue
from the sale of POS terminals is recognized when delivered to the customer
and installed. Transactions fees are recognized upon completion of the
transaction processing. Sales commissions are determined on the basis of
the total contract value and are payable and expensed when the terminal is
installed.
Gains are deferred on sale-leaseback transactions of terminals and are
amortized in proportion to the amortization of the leased terminals,
generally over the term of the related capital leases.
Income Taxes - The Company provides for income taxes based on the
------------
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which, among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
Financial Instruments - Financial instruments consist primarily of accounts
---------------------
receivable, and obligations under accounts payable, accrued expenses,
capital lease obligations and notes payable. The carrying amounts of
accounts receivable, accounts payable, accrued expenses and notes payable
approximate fair value because of the short maturity of those instruments.
The carrying value of the Company's capital lease arrangements approximates
fair value because the instruments were valued at the retail cost of the
equipment at the time the Company entered into the arrangements.
The Company has applied certain assumptions in estimating these fair
values. The use of different assumptions or methodologies may have a
material effect on the estimates of fair values.
F-8
Net Loss Per Share is calculated using the weighted average number of
------------------
shares of common stock outstanding during the year. The Company has adopted
the provisions of SFAS No. 128 Earnings Per Share.
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.
Stock-Based Compensation - Statements of Financial Accounting Standards No.
------------------------
123, Accounting for Stock-Based Compensation, ("SFAS 123") established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation. In accordance with SFAS
123, the Company has elected to continue accounting for stock based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The proforma effect of the fair value method is discussed in
Note 15.
Intangible Assets at June 30, 2003 consist of goodwill associated with the
-----------------
Company's acquisition of MedCard for the difference between the purchase
price of the acquired business and the fair value of the identifiable net
assets. The Company adopted Statement of Financial Accounting Standard
("SFAS") No. 142, Goodwill and Other Intangible Assets, effective July 1,
2002. As a result, the Company discontinued amortization of goodwill, and
instead annually evaluates the carrying value of goodwill for impairment,
in accordance with the provisions of SFAS No. 142. The Company believes
that there has been no impairment of the carrying value of goodwill of
$436,423 as of June 30, 2003.
Goodwill had been amortized over 5 years. Had the Company amortized
goodwill in the year ended June 30, 2003, the related amortization expense
would have been $151,800.
Research and Development costs are expensed as incurred.
------------------------
Impairment of Long-Lived Assets is assessed by the Company for impairment
-------------------------------
whenever there is an indication that the carrying amount of the asset may
not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted cash flows generated by those assets
to the assets' net carrying value. The amount of impairment loss, if any,
is measured as the difference between the net book value of the assets and
the estimated fair value of the related assets.
Recently Issued Accounting Pronouncements: In June 2001, the FASB issued
-----------------------------------------
SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Goodwill and certain intangible assets will
remain on the balance sheet and not be amortized. On an annual basis, and
when there is reason to suspect that their values have been diminished or
impaired, these assets must be tested for impairment, and write downs may
be necessary. The Company has adopted SFAS No. 141, without material effect
on financial condition or results of operations.
F-9
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this statement. The Company is required to implement
SFAS No. 142 on July 1, 2002 and as a result would not amortize goodwill.
The Company adopted SFAS No. 141, see discussion on intangible assets.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement obligations in the period in which they
are incurred. The statement applies to a company's legal obligations
associated with the retirement of a tangible long-lived asset that results
from the acquisition, construction, and development or through the normal
operation of a long-lived asset. When a liability is initially recorded,
the company would capitalize the cost, thereby increasing the carrying
amount of the related asset. The capitalized asset retirement cost is
depreciated over the life of the respective asset while the liability is
accreted to its present value. Upon settlement of the liability, the
obligation is settled at its recorded amount or the company incurs a gain
or loss. The statement is effective for fiscal years beginning after June
30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived
assets. The statement provides a single accounting model for long-lived
assets to be disposed of. New criteria must be met to classify the asset as
an asset held-for-sale. This statement also focuses on reporting the
effects of a disposal of a segment of a business. This statement is
effective for fiscal years beginning after December 15, 2001. The adoption
of SFAS No. 144 did not have a material impact to the Company's financial
position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities". This Standard requires costs
associated with exit or disposal activities to be recognized when they are
incurred. The requirements of SFAS No. 146 apply prospectively after June
30, 2003, and as such, the Company cannot reasonably estimate the impact of
adopting these new rules.
3. ACCOUNTS RECEIVABLE
The Company's accounts receivable at June 30, 2003 consisted of:
Medcard trade accounts receivable $ 181,017
Other 46,125
Total 227,142
----------
Less: Allowance for doubtful accounts ( 37,530)
$ 189,612
----------
F-10
The Company estimates uncollectible account balances and provides an
allowance for such estimates. The allowance for doubtful accounts at June
30, 2003, consists of an estimate for potentially uncollectible accounts in
the MedCard division.
4. IMPAIRMENT OF LONG-LIVED ASSETS
In connection with the Company's determination that it divest of or abandon
numerous business segments, the Company analyzed the carrying cost of its
long-lived assets in those segments. The Company analyzed any write-down
considering factors such as the potential sale of such business segments,
collateral value for obligations and out right abandonment. During the year
ended June 30, 2001, the Company recognized impairment write-downs or
write-offs of approximately $4,700,000. There were no additional impairment
losses recorded in the year ended June 30, 2002, nor were there long-lived
assets for sale remaining at June 30, 2002.
The impairment losses above have been included in discontinued operations
for the year ended June 30, 2001. The $16,847 in vending equipment was
disposed of in the year ended June 30, 2002.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2003:
Software $ 924,058
Software upgrades 111,819
Office and computer equipment 201,262
Furnishings and fixtures 128,933
Leasehold improvements 4,439
------------
Total 1,370,511
Less accumulated depreciation (1,101,855)
------------
Property and equipment, net $ 268,656
============
Software represents the cost of software acquired for the operation of the
Company's MedCard System. The capitalized cost of the software is amortized
on a straight-line basis over five years. Additional costs capitalized as
software development during the years ended June 30, 2003 and 2002 were
$105,819 and $6,058, respectively. These upgrades are amortized on a
straight-line basis over three years.
6. TERMINALS
The Company capitalizes the value of the point of sale terminals that are
sold under capital sale-leaseback transactions (Note 8). The terminals are
purchased from third party vendors
F-11
and are recorded as inventory at that time. The Company enters into sale
and service agreements with its customers at which time the terminal is
programmed with the Company's proprietary software and installed with the
customer. Many of those terminals are the basis for the sale-leaseback
transactions discussed in Note 8. The terminals are capitalized at the
value determined by the lessor on the basis of the cash flow under the
terms of the sale and service agreements with the customers.
Terminals $4,720,435
Less accumulated amortization (782,383)
-----------
Terminals, net $3,938,052
===========
7. NOTES PAYABLE
Notes payable at June 30, 2003 comprise the following:
Convertible note payable to individual. The note
bears interest at 8% per annum and is payable
quarterly. The note is convertible to common
stock at $6.25 per share. The note had an original
maturity date of February 1998 and is currently in $ 25,000
default.
Note payable to landlord. Collateralized by
leasehold improvements. Original principal
balance of $95,000. The note bears interest at 9%
per annum and requires monthly principal and
interest payments of $1,999. The Company has
defaulted on the note, and the landlord has
obtained a judgment which is being appealed.
84,437
--------
Totals $109,437
========
Both of the notes payable are in default as of June 30, 2003. A former
landlord has obtained a court ordered judgment against the Company for the
past due note, unpaid rent and legal fees. The Company is attempting to
renegotiate and settle this obligation.
8. CAPITAL LEASE OBLIGATIONS AND SALE-LEASEBACK TRANSACTIONS
The Company leases many of its MedCard terminals under capital lease
agreements. The Company also leases certain office and computer equipment
under capital leases.
The Company has entered into an arrangement with a third party lessor
whereby the Company sells its terminals that are placed with customers to
the lessor. The lessor in turn
F-12
leases back the terminals. These transactions are recorded as
sale-leaseback transactions. The leases between the Company and the lessor
are accounted for as capital leases. The Company generates revenue from the
terminals through monthly service fees and transaction fees. The value of
the sale transaction between the Company and lessor is determined by
Company's agreement with the customer relative to the number of terminals,
length of the customer contract and monthly service fee due from the
customer. The Company acquires terminals from its suppliers, programs the
terminals with its software and sells the terminals to the lessor when it
enters into an agreement with a customer for those specific terminals. Any
gain on the sale transaction with the lessor is deferred and amortized
proportionately with the capitalized asset. That period is generally four
or five years, the typical length of the lease agreement. At June 30, 2003,
the amount of deferred gain on sale-leaseback transactions was $2,904,848.
Generally, the terms of repayment for the capital lease obligations
approximates the monthly rental charged the customer by the Company. These
leases are collateralized by the underlying equipment and, in addition,
1,000,000 shares of the Company's common stock.
The following presents future minimum lease payments under the capital
leases by year and the present value of minimum lease payments as of June
30, 2003:
Years ended June 30:
Other
Terminals Equipment Total
------------ ----------- ------------
2004 $ 1,523,868 $ 31,418 $ 1,555,286
2005 1,523,868 1,523,868
2006 1,468,921 1,468,921
2007 567,578 567,578
2008 138,472 138,472
------------ ----------- ------------
Total minimum lease payments 5,222,707 31,418 5,254,125
Lees: amount representing interest (1,105,530) (1,270) (1,106,800)
------------ ----------- ------------
Present value of minimum
lease payments $ 4,117,177 $ 30,148 $ 4,147,325
============ =========== ============
The Company defaulted on two capital lease agreements with an originally
determined present value of minimum lease payments of $1,156,794 at June
30, 2001. The lessors foreclosed on this equipment in the year ended June
30, 2002. The Company estimated that the fair value of the equipment
approximated the carrying value of obligations. However, the carrying value
of the assets was greater than the fair value at the time of the
foreclosure. The Company recognized a loss of $206,790 on the foreclosure
of these assets and the related extinguishment of the obligations in the
year ended June 30, 2002.
The capitalized cost of terminals under capital leases for the year ended
June 30, 2003 and 2002 was $4,720,435 and $1,108,378 respectively. The
related accumulated amortization on these assets was $782,383 and $63,261
as of June 30, 2003 and 2002, respectively.
F-13
9. DISCONTINUED OPERATIONS
In the year ended June 30, 2001, the Company determined that it would
divest of or abandon the following operations and business segments:
Revenues for
the year
ended
Segment Method of Remaining Assets Remaining Liabilities June 30,
Identification Disposal at June 30,2001 at June 30,2001 2001
---------------------- ---------------------- ----------------------- --------------------- ---------
DCB Abandonment NONE NONE $ 157,955
Healthcare
Information Capital lease
Software Abandon/Sale Equipment $1,651,863 Obligations $995,175 $ 685,991
Vending Sale Accounts Accounts $ 731,831
Receivable $91,000 Payable $ 53,000
Inventory 17,000
Equipment 17,000
In August 2001, the Company sold the Vending segment to a former employee
for $50,000 cash and the assumption of certain trade accounts payable. The
Company maintained title to certain accounts receivable. The Company
recognized an additional loss on this disposal of $31,715 in the year ended
June 30, 2002. The Company has completed is disposal of this business
segment as of June 30, 2002.
Any other net assets of the above named segments were written -off because
there was no expected realization from the carrying value of those net
assets. The loss from these write-offs is included in the loss from
abandonment of discontinued segments in the accompanying statement of
operations for the year ended June 30, 2001. The Company is attempting to
negotiate the capital lease obligations of the Healthcare Information
Software segment by returning the equipment to the lessors. The Company is
also attempting to sell the remaining equipment. In the year ended June 30,
2002, the Company recognized an additional loss on this disposal of
$212,846. The Company has completed is disposal of this business segment as
of June 30, 2002.
The Company determined it would discontinue these operations in June 2001.
Therefore, the operating losses determined from the date the determination
was made to discontinue these operations through June 30, 2001, is not
significant.
10. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the years ended June 30, consisted of the following:
F-14
2003 2002
------------ ------------
Current tax (benefit) provision $(1,590,930) $(1,584,102)
Deferred tax (benefit) provision 1,590,930 1,584,102
------------ ------------
Total income tax provision $ - 0 - $ - 0 -
============ ============
Net deferred tax assets of $24,201,137 less a valuation allowance of
$24,201,137, relate primarily to net operating loss carryforwards and
differences in book and tax bases of property and equipment, intangible
assets and certain accruals. The net deferred income tax asset at June 30,
2003 is comprised of:
Allowance for losses on accounts receivable $ 15,012
Warrants 60,240
Contingency 250,238
Impairment of intangible assets 1,780,460
Net operating loss carryforwards 22,185,821
-------------
Deferred income tax asset $ 24,297,711
Less: valuation allowance (24,201,137)
-------------
Total deferred income tax asset 96,574
Deferred income tax liability related to
book/tax differences in bases of property and equipment (96,574)
-------------
Net deferred income tax asset $ - 0 -
=============
Federal net operating loss carryforwards of $56,215,000 expire from 2011 to
2022. State net operating loss carryforwards of $51,214,000 expire from
2004 to 2007. Due to the conditions discussed in Note 1, future utilization
of the net operating losses is uncertain. The valuation allowance on the
deferred income tax asset was increased by $1,471,014 in the year ended
June 30, 2003.
The differences between the statutory and effective tax rates is as follows
for the years ended June 30:
2003 2002
---- ----
Federal statutory rates $(1,266,207) (34)% $(1,068,035) (34)%
State income taxes (223,448) (6)% (188,477) (6)%
Valuation allowance for
operating loss carryforwards 1,471,014 39% 1,231,242 39%
Other 18,641 1% 25,270 1%
----------------------------------------
Effective rate $ ( - 0 -) 0% $ ( - 0 -) 0%
========================================
11. OPERATING LEASES
The Company leases its office space under long-term operating leases
expiring through 2008. Rent expense under these leases was $140,481 and
$189,323 for the years ended June 30, 2003 and 2002, respectively.
F-15
Future minimum annual lease payments and sublease rentals under operating
lease agreements for years ended June 30:
2004 160,094
2005 158,750
2006 132,914
2007 130,566
2008 100,773
-------
683,097
=======
12. STOCKHOLDERS' EQUITY
During the year ended June 30, 2002, the Company issued 9,638,462 shares of
shares of its commons stock for $1,242,600. Of that amount, 9,192,462
shares of the Company's common stock were sold to an entity controlled by
the Company's president and chairman for $1,022,600. No shares were issued
for cash in the year ended June 30, 2003.
The Company had anti-dilution agreements with certain investors. These
agreements required that the Company issue additional shares to theses
investors should the stock price decline below specified levels or if the
Company issued common stock in excess of specified amounts within a
specified time frame. During the year ended June 30, 2002, the Company
issued an additional 6,546,130 shares of its common stock to fulfill
obligations under these agreements. Because these shares were contingently
issuable at the time when the original shares were sold, no value has been
ascribed to these shares in recording their issuance.
The Company has issued shares of its common stock as consideration to
consultants for services rendered. The value of those shares was determined
based on the trading value of the stock at the dates on which the
agreements were made for the services. During the year ended June 30, 2002,
the Company granted 1,050,000 shares of common stock to consultants valued
at $116,605. Additionally during the year ended June 30, 2002, the Company
granted 5,786,500 shares of its common stock to officers and employees
valued at $519,229. The value of these shares was expensed during that
year. During the year ended June 30,2003, the Company issued 400,000
warrants at a strike price of $0.50 as consideration to consultants for
services to be rendered. The value of these warrants was determined using
the Black-Scholes option pricing model and expensed when the warrants were
granted.
During the year ended June 30, 2003, the Company issued 100,000 shares of
its common stock as conversion of a settlement balance of $24,000.
Preferred Stock
The Company is authorized to issue up to 300,000 shares of $.001 par value
Preferred Stock. The Board of Directors has the authority to divide the
Preferred Stock into series and, within the certain limitations, to set the
relevant terms of such series created.
F-16
In April 1995, the Company established the Series A Preferred Stock and
authorized the issuance of up to 50,000 shares. Each share of series A
Preferred Stock is entitled to a dividend at the rate of $1.60 per share
when, as and if declared by the Board of Directors. Dividends not declared
are not cumulative. Additionally, each share of Series A Preferred Stock is
convertible into .20 shares of the Company's Common Stock at any time after
July 1, 1999. A total of 850 shares of common stock may be issued upon the
conversion of the shares of Series A preferred stock outstanding as of June
30, 2000. Upon any liquidation or dissolution of the Company, each
outstanding share of Series A Preferred Stock is entitled to distribution
of $20 per share prior to any distribution to the holders of the Company's
common stock. As of June 30, 2000, the Company has 4,250 shares of Series A
Preferred Stock issued and outstanding.
In April 2000, the Company established the Series D Preferred stock and
authorized the issuance of up to 2,900 shares. The Company issued 494
shares related to a business acquisition of and 2,356 shares for the
acquisition of related intellectual property.
Each share of Series D preferred stock is entitled to a dividend at the
rate of $0.04 per share and has a stated value of $1,000 per share.
Dividends on all Series D preferred stock begin to accrue and accumulate
from the date of issuance. Additionally, each share of Series D preferred
stock is convertible into 40.49 shares of common stock for a total of
576,923 shares at the option of the stockholders. Upon liquidation or
dissolution of the Company, each outstanding share of Series D preferred
stock is entitled to a distribution of the stated amount per share prior to
any distribution to the shareholders of the Company's common stock. The
Company can convert the Series D preferred stock into shares of common
stock using the same conversion ratio at any time after April 15, 2001 so
long as the bid price of the Company's common stock exceeds $4.94 per share
and the shares of common stock issuable upon the conversion of the Series D
preferred stock are either covered by an effective registration statement
or are eligible for sale pursuant to rule 144 of the Securities and
Exchange Commission. Each share of Series D preferred stock is entitled to
vote in all matters submitted to the Company's shareholders on an "as
converted" basis.
During the year ended June 30, 2001, the Company paid accrued dividends of
$114,000 on the Series D preferred stock by the issuance of 61,965 shares
of the Company's common stock. The Company did not declare its dividend on
the preferred stock during the year ended June 30, 2003 and 2002. At June
30, 2003, there was an accumulated undeclared and unpaid dividend on the
Series D preferred stock of $228,000. Total accrued, but unpaid dividends
related to the Series D preferred stock was $23,750 at June 30, 2003.
13. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has entered into numerous employment agreements with officers
and key employees. Generally, the employment agreements are for three-year
periods and include, as potential additional compensation, incentive
bonuses computed based upon Company's operations and other benefits,
including such items as an automobile allowance, health and life
F-17
insurance, vacation and sick pay benefits. In June 2000, the Company
entered into employment agreements with several officers. These agreements
were renegotiated in the year ended June 30, 2002. Total aggregate annual
compensation under these agreements is $208,000. These individuals may be
entitled to receive incentive bonuses and other benefits including health
insurance, disability coverage, vacation and sick pay. These individuals
received options to purchase a total of 25,000 shares of the Company's
common stock at $3.00 per share with vesting on an annual basis over two
years. The agreements terminated on June 19, 2003.
Royalty Agreement
In connection with the original licensing and subsequent acquisition of
MedCard, the Company entered into a royalty agreement with the original
Licensor. The royalty provisions of the license agreement remained in
effect after the purchase. This agreement was amended in the year ended
June 30, 2002. The Company will pay the Licensor 20% of the first
$1,000,000 of qualified monthly revenues, less direct costs, generated by
the licensed software and 10% of net monthly revenue in excess of
$1,000,000.
Consulting Agreements
The Company has entered into various consulting agreements with outside
consultants. These agreements entitle the consultant to issuances of common
stock and options as well as cash compensation in exchange for consulting
services relating to such things as raising additional debt and equity
capital, software development, sales development, investor and public
relations and general strategic business consulting. Most of these
agreements were prepaid through the issuance of common stock or warrants.
However, certain of these agreements included additional compensation on
the basis of performance. The Company has cancelled all of these agreements
and wrote-off all of the associated prepaid expense balances at June 30,
2001. The Company does not believe that it has any further obligation under
these agreements. However, there have been certain claims made. During the
year ended June 30, 2003, the Company settled such claim resulting in the
utilization of a $98,000 accrual made as of June 30, 2002. This agreement
included the return of 186,000 shares of the Company's common stock held by
the consultant. These shares were returned but have not been retired as of
June 30, 2003. Therefore, the shares are issued but not outstanding at that
date.
During February 2003, the Company has entered into a service agreement with
a consultant . whereby the consultant will act as financial advisor and
investment banking representative on the Company's behalf. Upon the
execution of the contract the Company granted the consultant warrants to
purchase up to four hundred thousand shares of the Company's common stock
at an exercise price of $.50 per common share . The warrants expire five
years from date of issuance
Litigation
Subsequent to June 30, 2001, several former employees filed complaints
against the Company alleging unpaid payroll and breach of employment
agreements. The total known claims being sought by the former employees at
June 30, 2001 was approximately $175,000. The
F-18
Company believes that it has settled all former employee claims in amounts
aggregating to an amount approximating the accrued amount of $104,000. A
former officer has a claim remaining with the Company. The Company is
attempting to settle this claim. At June 30, 2003, there was $164,000
accrued relating to this matter.
Several landlords are seeking damages from the Company due to the Company
defaulting on several lease agreements. Certain landlords have obtained
legal judgments against the Company. The total amount of such claims was
$634,000. The Company and its legal counsel believe that ultimate
settlement will result in a much lower payout. The Company has accrued
$208,000 associated with these claims at June 30, 2003. This amount was
estimated on the basis of advice from legal counsel whom has settled
several similar suits. However, the ultimate result of any settlement could
vary significantly from this estimate.
The Company had obligated shares of the Company's common stock and warrants
exercisable into common stock under numerous consulting and fund raising
agreements. Some such agreements obligated shares in cases of the
occurrence of substantial dilution or price drop in the trading value of
the Company's common stock. Management believes that it has fulfilled all
such obligations. However, the Company has received claims related to these
matters. One such claim alleges 1,066,666 shares of the Company's common
stock is owed. Management believes that this claim has no merit. Management
believes that there is a possibility that additional claims may arise.
The Company may be subject other unasserted claims associated with the
abandonment of its operations. The Company is also involved in various
claims and legal actions arising in the ordinary course of business. In the
opinion of management, except as discussed above, the ultimate disposition
of these matters will not have a material adverse effect on the Company's
financial position, results of operations, or liquidity.
At June 30, 2003, there was approximately $553,000 estimated and accrued
for claims related to the litigation matters described above.
14. NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. Preferred stock
dividends are subtracted from the net income to determine the amount
available to common shareholders. Preferred stock convertible to 115,396
common shares and options and warrants exercisable into 3,877,281 shares of
common stock were not considered in the calculation for diluted earnings
per share for the year ended June 30, 2003 because the effect of their
inclusion would be anti-dilutive. Preferred stock convertible to 115,396
common shares and options and warrants exercisable into 3,863,975 shares of
common stock were not considered in the calculation for diluted earnings
per share for the year ended June 30, 2002 because the effect of their
inclusion would be anti-dilutive. The following presents the computation of
basic and diluted loss per share from continuing operations:
F-19
2003 2002
---- ----
Per Per
(Loss) Shares share (Loss) Shares share
------------ ---------- ----------- ------------ ---------- -------
Net (Loss) $(3,724,137) $(3,141,280)
Preferred stock dividends (114,000) (114,000)
Discontinued operations - 244,561
------------ ------------
Loss from continuing operations (3,838,137) (3,010,719)
BASIC EARNINGS PER SHARE
Loss available to common
stockholders $(3,838,137) 36,954,659 $ (0.10) $(3,010,719) 27,439,138 $(0.11)
Effect of dilutive securities N/A N/A
DILUTED EARNINGS PER SHARE $(3,838,137) 36,954,659 $ (0.10) $(3,010,719) 27,439,138 $(0.11)
15. RELATED PARTY TRANSACTIONS
The Company's president and chairman is a significant shareholder of the
Company. This individual controls another entity that is also a significant
shareholder of the Company. During the year ended June 30, 2002, the
Company moved its administrative offices into space occupied by this
related entity that is a significant shareholder of the Company. The
Company shares office space and management and administrative personnel
with this related entity. The Company paid rent to the related entity of
approximately $14,158 for the year ended June 30, 2002. Certain of the
Company's personnel perform functions for the related entity but there was
no allocation of personnel related expenses to the related entity in the
years ended June 30, 2003 and 2002.
The Company frequently receives advances and advances funds to an entity
controlled by the Company's president and which is a significant
shareholder of the Company. During the year ended June 30, 2003, the
Company received advances from this entity of $860,308. During the year
ended June 30, 2002, the Company advanced funds of $82,000 to this entity.
This balance due to this affiliate at June 30, 2003 was $778,308. The
advances are generally short term in nature and there is no specified
repayment terms or interest rate.
The Company paid management fees of $255,000 to an entity owned by the
Company's president during the year ended June 30, 2003. Additionally,
there is another $195,000 accrued as management fees due to this entity at
June 30, 2003.
During the year ended June 30, 2002, the entity controlled by the Company's
president and chairman acquired 9,192,462 shares of the Company's common
stock for $1,022,600.
16. CONCENTRATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily trade accounts receivable. The
trade accounts receivable are due primarily from
F-20
small business customers in numerous geographical locations throughout the
United States. The Company estimates and provides an allowance for
uncollectible accounts receivable.
The Company has raised cash through sale-leaseback transactions. All of
these transactions have been conducted through a single lessor. During the
year ended June 30, 2003, the Company received $3,183,611 under
sale-leaseback transactions from this entity.
17. STOCK BASED COMPENSATION
The Company issues stock options from time to time to executives, key
employees and members of the Board of Directors. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," and continues
to account for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, no compensation cost has been
recognized for the stock options granted to employees. Had compensation
cost for the Company's stock options been determined based on the fair
value at the grant date for awards in 2003 and 2002, consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:
2003 2002
------------ ------------
Net Loss - continuing operations $(3,724,137) $(2,896,719)
Net Loss - discontinued operations $ - $ (244,561)
------------ ------------
Total net loss - as reported $(3,724,137) $(3,141,280)
Pro-forma effect of stock based compensation $ - $ (44,657)
------------ ------------
Net Loss - pro forma $(3,724,137) $(3,185,937)
============ ============
Loss per share - continuing operations $ (0.10) $ (0.11)
Loss per share - discontinued operations $ - $ (0.01)
------------ ------------
Total loss per share - as reported $ (0.10) $ (0.12)
Pro-forma effect of stock based compensation $ - $ -
------------ ------------
Loss per share - pro forma $ (0.10) $ (0.12)
============ ============
All options granted have been fully vested and therefore there is no pro
forma effect for the year ended June 30, 2003. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing-model.
In February 2003, 400,000 warrants were issued as consideration for
consulting services to be rendered. The fair value of these warrants
($150,600) was expensed in that year. There were no options or warrants
granted in the year ended June 30, 2002.
F-21
The Company grants options under several stock option plans. The Company's
Incentive Stock Option Plans, Non-Qualified Stock Option Plans and Stock
Bonus Plans are collectively referred to as the "Plans". The following sets
forth certain information as of June 30, 2002 concerning the stock options
and stock bonuses granted by the Company pursuant to the Plans. Each option
represents the right to purchase one share of the Company's Common Stock.
--------------------------------------------------------------------------------
TOTAL SHARES RESERVED REMAINING OPTIONS
UNDER THE PLAN UNDER THE PLAN
1998 Incentive Stock Option Plan 1,500,000 400,167
2000 Incentive Stock Option Plan 1,000,000 925,150
2000 Non-Qualified Stock
Option Plan 2,000,000 1,820,575
1999 Stock Bonus Plan 900,000 833,250
2000 Stock Bonus Plan 500,000 500,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
During the year ended June 30, 2001, the Company granted 1,804,650 options
to certain key employees. These options vest at 30% immediately and the
remaining 70% over one year. These options were granted at an exercise
price of $0.47 to $3.00 the fair market value of the underlying shares on
the date of grant. The options expire five years from date of grant. The
summary of activity for the Company's stock options and warrants is
presented below:
Weighted Weighted
Average Average
Exercise Exercise
2003 Price 2002 Price
----------- --------- ------------ ---------
Options/warrants outstanding at
Beginning of year 3,863,975 $ 9.49 7,835,766 $ 6.99
Granted 400,000 - 0 -
Exercised - 0 - - 0 -
Terminated/Expired (386,694) (3,971,791)
Options outstanding at end of year 3,877,281 $ 8.41 3,863,975 $ 9.49
Options exercisable at end of year 3,877,281 $ 8.41 3,863,975 $ 9.49
Options available for grant at end
of year 4,479,142 3,459,142
F-22
$ 0.47 to $ 0.47 to
Price per share of options outstanding $ 40.00 $ 40.00
Weighted average remaining
contractual lives 1.84years 2.94 years
Weighted Average fair value of options
granted during the year $ 150,600 N/A
Range of exercise prices of options/warrants outstanding at June 30, 2003:
Weighted Weighted
Number Average Number Average
Exercise Price Outstanding Exercise Price Exercisable Exercise Price
------------------ ----------- --------------- ----------- ---------------
0.47-$1.50 1,397,940 $ 0.76 1,397,940 $ 0.76
1.51-$3.00 473,993 $ 2.38 473,993 $ 2.38
3.01-$4.50 261,667 $ 3.95 261,667 $ 3.95
4.51-$6.00 400,913 $ 5.00 400,913 $ 5.00
6.01-$10.00 107,595 $ 8.24 107,595 $ 8.24
10.01-15.00 365,000 $ 13.63 365,000 $ 13.63
15.01 and greater 870,175 $ 24.71 870,175 $ 24.71
18. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) profit sharing plan for its employees. Each
United States based full-time employee is eligible to participate in that
plan on the first day of the calendar quarter after completing ninety days
of employment with the Company. A participating employee can contribute up
to fifteen percent (15%) of their annual compensation, up to a maximum of
the federally mandated limit. The Company matches 50% of the contributions
on the first six percent (6%) of the employee's contribution up to a
maximum of three percent (3%). Employees are fully vested on their own
contributions and vest in the Company's contributions twenty percent (20%)
per year over five years. The Plan was frozen subsequent to June 30, 2001
and there were no contributions for the years ended June 30, 2003 and 2002.
19. BUSINESS SEGMENTS
The Company previously had three reportable segments: intelligent vending
machines, healthcare management software development and medical
transaction processing. During the year ended June 30, 2001, the Company
determined it would divest or abandon all business segments other than the
medical transaction processing segment. Therefore, going forward, the
Company will have only one reportable segment. At June 30, 2003 the Company
operates
F-23
only in the medical transaction processing segment with substantially all
revenue generated in the United States.
The medical transaction processing segment includes revenue from the
MedCard System, including the sale of terminals, processing fees and
billing service revenue and the licensing, sales and services related to
the Company's One Medical Services Network.
For the years ended June 30, 2003 and 2002, there were no material
concentrations of revenue to specific customers. However, all gains related
to sale-leaseback transactions are associated with one lessor but relate to
numerous customer contracts.
* * * * * *
F-24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTOR AND EXECUTIVE OFFICER
Mr. William P. Williams as of August 2001 accepted the position of Chief
Executive Officer and sole Director of the Company. Information representing Mr.
Williams, is set forth below:
William P. Williams 50 Chairman, President, Chief Executive Officer
The chief executive officer and sole director of the Company will hold
office until additional members or officers are duly elected and qualified. The
background and principal occupations of the sole officer and director of the
Company is as follows:
William P. Williams has been the Chairman, Chief Executive Officer, of
Medcom USA since August 2001. He is also currently Chief Executive Officer and
Chairman of the Board for American Nortel Communications, Inc., a publicly
traded company located in Scottsdale, Arizona, which is in the business of
long-distance telephone service domestically, as well as internationally. From
1983 to 1995, he was President and Chairman of the Board of Shelton Financial,
Inc., a financial factoring firm headquartered in San Antonio, Texas. Mr.
Williams has a Bachelor of Arts, and a Master of Business Administration in
Finance from Baylor University.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 9.A. DIRECTORS AND EXECUTIVE
OFFICERS, PROMOTERS, AND CONTROL PERSONS:
The Company is aware that all filings of Form 4 and 5 required of Section
16(a) of the Exchange Act of Directors, Officers or holders of 10% of the
Company's shares have not been timely and the Company has instituted procedures
to ensure compliance in the future.
ITEM 10. EXECUTIVE COMPENSATION
General. Mr. William P. Williams serves as the Company's sole-director and
chief executive officer. Pursuant to a Management Services Agreement executed
and approved by the Company Mr. Williams was compensated approximately $298,700
for management fees, and other sources or forms of compensation was not paid or
collected for Fiscal year ended 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of June 30, 2003 information with respect to the only persons owning
beneficially 5% or
41
more of the outstanding common stock and the number of and percentage of the
outstanding shares owned is represented below:
Name and Address Shares Owned (1) Common Stock
----------------------------- ---------------- ------------
William P. Williams 4,796,500 13.3 %
7975 North Hayden Road #C-260
Scottsdale, Arizona 85258
(1) Excludes any shares issuable upon the exercise of any warrants or options
or upon the conversion of other convertible securities.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company frequently receives advances and advances funds to an entity
controlled by the Company's president and which is a significant shareholder of
the Company. During the year ended June 30, 2003, the Company received advances
from this entity of $860,308. During the year ended June 30, 2002, the Company
advanced funds of $82,000 to this entity. This balance due to this affiliate at
June 30, 2003 was $778,308. During the year ended June 30, 2002, the entity
controlled by the Company's president and chairman acquired 9,192,462 shares of
the Company's common stock for $1,022,600.
ITEM 13. EXHIBITS AND REPORTS.
EXHIBITS
--------
3.1 Articles of Incorporation (2)
3.2 Amendments to Articles of Incorporation - Fourth Article (2)
3.3 Amendment to Articles of Incorporation - Name Change (2)
10.18 Amendment to License Agreement - Dream Technologies, LLC (1)
___________________________________________________
(1). Incorporated by reference to the same exhibit filed with Amendment No. 5 to
the Company's Registration Statement on Form S-3 (Commission File No. 333-71179)
(2). Incorporated by reference to the same exhibit filed with the Company's
Annual Report on Form 10-KSB for the year ending June 30, 2001.
REPORTS ON FORM 8-K
-------------------
Not applicable.
ITEM 14. CONTROLS AND PROCEDURES.
42
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in this report is recorded, processed,
accumulated, and reported to its management, including the chief executive
officer to allow timely decisions regarding the required disclosures. Within
the 90 days prior to the filing date of this report, MedCom's management, with
the participation of its chief executive officer and corporate accounting,
performed an evaluation of the effectiveness of the design and operation of
these disclosure controls and procedures. This officer and management have
concluded that such disclosure controls and procedures are effective at ensuring
that required information is disclosed in the Company's reports.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation date.
ITEM 15. SIGNATURES.
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, there unto duly authorized.
CERTIFICATIONS
I, Bill Williams, certify that:
1. I have reviewed this annual report on Form 10-KSB of MedCom USA, INC.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's corporate management and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is make known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
43
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's corporate management and I have disclosed, based on our most
recent evaluation, to the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's corporate management and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
MEDCOM USA, INC.
By /s/ W.P. Williams
-----------------
Chairman, President, CEO
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of MedCom USA, INC., (the "Company") on
Form 10-KSB for the period ended June 30, 2003, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Bill Williams, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, That to
the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
MEDCOM USA, INC.
By /s/ W.P. Williams
-----------------
Chairman, President, CEO
(Sole executive officer of the registrant)
September 25, 2003
44