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, 2002
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 $647,514.
The aggregate market value of the common stock held by non-affiliates computed
based on the closing price of such stock on June 28, 2002, was approximately
$4,692,739.
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
2
PART I
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 under the name Sims Communications, Inc. The Company's primary business was
providing telecommunications services. In 1996 the Company introduced four
initiatives 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 fiscal year-end June 30, 2002,
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.
The Company's primary operations and its core business is as follows:
MEDICAL TRANSACTION PROCESSING
------------------------------
MEDCARD SYSTEM
The Company provides innovative technology-based solutions for the
healthcare industry that enable users to efficiently collect, utilize, analyze
and disseminate data from payers, health care providers and patients. The
MedCard System currently operates through a point-of-sale terminal, and an
on-line enabled personal computer. The point-of-sale terminals are purchased
from Hypercom Corporation (Hypercom). The MedCard System also operates a PC
software version and an on-line solution to accommodate large volume processing.
The Company is in the process of assessing the feasibility of offering a service
bundled package that would include the capability of processing unlimited claims
and eligibility verification for a monthly base rate.
As of June 30, 2002 the MedCard system was able to retrieve on-line
eligibility and authorization information from approximately 125 medical
insurance companies and electronically process and submit billings for its
healthcare providers to over 1,650 companies. These insurance providers include
CIGNA, Prudential, Oxford Health Plan, United Health Plans, Blue Cross,
Medicaid, Aetna, Blue Cross/Blue Shield, and Prudential.
3
COMPETITION
Competing health insurance claims processing and/or benefit verification
systems include WebMD, NDCHealth, Per-se Technologies. 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.
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.
4
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 to 21
days. Health care providers will benefit from a 100% paperless claim processing
system.
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 percent 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.
5
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 and an
increase in healthcare reimbursements to healthcare providers.
During January 2002, the Company has entered into a service agreement with
MedUnite. This strategic 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.
PROCESSING TERMINAL LEASING AGREEMENTS
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 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 months. At June 30, 2002, the remaining deferred equipment
gain of $733,892 is shown as "Deferred Gain on sale-leaseback" in the Company's
Balance Sheet. For the year ended June 30, 2002, the total interest expense
incurred by the Company under these leases was $22,208.
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
strategic 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.
6
ADDITIONAL INFORMATION
The Company has been delinquent in its filings to the Securities and
Exchange Commission attributed to changes in management and discontinued
operations trading is now performed on the over-the-counter bulletin board and
quoted in the Electronic Quotation Service from Pink Sheets.
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, 2002, the Company maintains its executive
offices in Scottsdale, Arizona. The Company leases 1,317 square feet of office
space for approximately $28,000 annually. The Company entered into a three-year
lease in May 2002 for the Scottsdale facility. The Company also maintains a
monthly lease in Irvine, California, for executive office space for
approximately $550 monthly. 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 annually.
As of fiscal year end June 30, 2002, the Company had 41 employees of which
approximately 19 are full-time equivalent employees as of June 30, 2002.
ITEM 3. LEGAL PROCEEDINGS
Subsequent to June 30, 2001, several former employees have filed complaints
against the Company alleging breach of employment agreements. The total known
claims being sought by the former employees at June 30, 2001 was approximately
$175,000. The Company accrued $104,000 associated with these claims as of June
30, 2001. 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, and the
Company is optimistic it can settle this claim. As of June 30, 2002, there was
$164,000 accrued relating to this matter.
Several landlords are seeking damages from the Company arising from the
Company defaulting on lease agreements. Certain landlords have obtained legal
judgments against the Company. The total amount of such claims is $634,000 at
June 30, 2001. 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, 2002. 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.
7
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 common shares of the Company's common stock are 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, 2002, there was approximately $700,000 estimated and accrued
for claims related to the litigation matters described above.
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, 2002.
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 Electronic Quotation Service from Pink Sheets and can be accessed on the
Internet at www.Pinksheets.com under the symbol "EMED."
------------------
At June 30, 2002, there were 24,974,070 shares of common stock of MedCom
outstanding and there were approximately 452 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.
8
FISCAL 2002 HIGH BID LOW BID
----------- -------- -------
Quarter Ended June 28, 2002 $ 0.25 $ 0.25
Quarter Ended March 28, 2002 0.18 0.14
Quarter Ended December 31, 2001 0.05 0.02
Quarter Ended September 28, 2001 0.11 0.10
FISCAL 2001 HIGH BID LOW BID
----------- -------- -------
Quarter Ended June 29, 2001 $ 0.85 $ 0.72
Quarter Ended March 30, 2001 0.31 0.18
Quarter Ended December 29, 2000 0.65 0.50
Quarter Ended September 29, 2000 2.15 1.68
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.
SALES OF UNREGISTERED SECURITIES
During the fiscal year ended June 30, 2001, the Company granted 1,804,650
options to 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. During the fiscal year
ended June 30, 2002 the Company has not granted options.
Common stock shares of approximately 1,442,182 were issued or sold during
year ended June 30, 2001 and were issued or sold in reliance upon the exemption
provided by Section 4(2) of the Act. The persons who acquired these shares gave
consideration of undetermined amounts for various services performed and were
either accredited or sophisticated investors. The shares of common stock were
acquired for investment purposes only and without a view to distribution. The
persons who acquired these shares were fully informed and advised about matters
concerning the Company, including the Company's business, financial affairs and
other matters. The persons acquired these shares for their own accounts. The
certificates representing the shares of common stock bear legends stating that
the shares may not be offered, sold or transferred other than pursuant to an
effective registration statement under the Securities Act of 1933, or pursuant
to an applicable exemption from registration. The shares are "restricted"
securities as defined in Rule 144 of the Securities and Exchange Commission.
9
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.
Statement of Operations Data:
----------------------------
Years Ended June 30,
---------------------------
2002 2001
------------ -------------
Revenues $ 647,514 $ 547,597
Cost of Sales and Services (193,767) (572,296)
Operating and other
Expenses (3,350,466) (15,145,131)
Loss from Discontinued Operations (244,561) (10,396,049)
------------ -------------
Net Loss $(3,141,280) $(25,565,879)
============ =============
Balance Sheet Data:
-------------------
June 30,
---------------------------
2002 2001
------------ -------------
Current Assets $ 219,431 $ 316,407
Total Assets $ 2,131,806 $ 3,007,552
Current Liabilities $ 3,247,094 $ 3,716,164
Non-Current Liabilities $ 898,685 $ 42,514
Total Liabilities $ 4,145,779 $ 3,758,678
Working Capital (Deficit) $(3,027,663) $ (3,399,757)
Shareholders' Equity (Deficit) $(2,013,973) $ (751,126)
The Company has declared no common stock dividends since its inception.
10
FISCAL 2002 OPERATIONS
------------------------
General. As of June 30, 2002, 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. The Company's erratic operations
during fiscal year 2001 are attributed directly to the Company's changes in
management and the discontinuing of unprofitable business sectors.
Management Changes. In July 2001, Mark Bennett resigned as the President and
member of the Board of Directors. In July 2001, Michael Malet resigned as
Executive Vice President and member of the Board of Directors. In May 2001, Alan
Ruben resigned as Chief Accounting and Financial Officer. In June 2001, David
Robinson resigned as Vice President of Healthcare Information Gateway and member
of the Board of Directors. In June 2001, Vladimir Havlena resigned as Managing
Director - DCB Actuaries and Consultants, s.r.o. In June 2001, David Breslow
resigned as a member of the Board of Directors. In June 2001, Julio Curra
resigned as a member of the Board of Directors. In June 2001, Robert Stevens
resigned as Director of Development and Information Technology. In May 2001,
Julie Signorille resigned as Director of Operations for the Company's MedCard
sector. In July 2001, William P. Williams became the sole Director and sole
Executive Officer of the Company.
Discontinued Operations. For fiscal year ended 2001 the Company ceased
operations in the following areas:
ONE MEDICAL SERVICES
In May 1998 the Company acquired One Medical Services, LLC in consideration
for 142,350 shares of common stock and 187,500 warrants exercisable at $2.00 per
share at any time prior to May 30, 2003. The warrants had an imputed value of
$213,870 using the Black Scholes option-pricing model. The One Medical Service
network provides a financial processing and communications network for the Home
Medical Equipment (HME) industry. In addition to processing information and
verifying insurance medical cards, this network connects HME buyers with a
network of HME vendors. This proprietary network had been designated for the
medical and managed healthcare market.
In July 1999 the Company licensed its rights to the One Medical Service
Network to an unrelated third party (Licensee) for $1,377,000 management decided
this business sector was not profitable. The Licensee agreed to purchase
approximately $200,000 of certain inventory as needed, and paid the related
accounts payable. The Licensee purchased approximately $186,000 of inventory.
The Licensee hired employees involved with this operation. The Company retained
as employees those persons who devoted less than full-time to the One Medical
Services Network. Those people primarily provided technical support,
installations, repairs, and maintenance of the underlying software and billing
support. The Company charges the Licensee for these services on a time and
materials basis. As a result of the license agreement, income related to the One
Medical Network was in the form of license fee, sale of inventory and providing
the various support services. Subsequently, the Licensee has ceased operations,
and the Company has expensed any outstanding unpaid principal and interest for
fiscal year ended June 30, 2001.
11
JUSTMED.COM
The JustMed.com website became fully operating on July 1, 1999. The
website advertised healthcare products and services that were available to the
general public and provided medical information. Persons in need of healthcare
products and services were able to access the website and order products (see
"MedStore" below) or transfer to the more detailed websites maintained by the
companies that provide the products and services. The Company anticipated
generating revenues from this website by charging providers of healthcare
products and services fees for advertising on the website. The Company also
anticipated receiving fees when a user transfers from the Company's website to
the websites maintained by a provider of healthcare products or services. For
fiscal year ended June 30, 2001, the Company is not currently marketing the web
site, and has not generated any revenue from the website. The Company has made
this site inactive. Management has determined the www.JustMed.com website, and
---------------
the MedStore is not complimentary to the Company's present primary core
operations and does not anticipate pursuing future operations.
MEDSTORE
The MedStore was a feature of the website that allowed consumers and
physicians to purchase, from their own computers, a variety of healthcare
products and services supplied by unrelated manufacturers and healthcare service
providers. Items available for purchase included canes, crutches, walkers, bath
chairs, blood pressure units, cold therapies, exercise equipment and hot and
cold packs. The MedStore became operational on July 1, 1999. The Company is
not currently marketing the MedStore, and has not generated any significant
revenue from the MedStore.
Accredited Homecare Pharmacy and Accredited Medical Services were
responsible for filling orders for products or services purchased from the
MedStore. The services can be terminated at the discretion of either party As
of June 2001; the Company has ceased operations of this service so that it can
focus fully on its MedCard sector.
HEALTHCARE MANAGEMENT SOFTWARE DEVELOPMENT
------------------------------------------
DCB ACTUARIES & CONSULTANTS
In April 2000, the Company acquired 100% of the stock of DCB Actuaries &
Consultants, s.r.o. (DCB), a Czech Republic based company. DCB developed and
currently operates a health insurance decision support system with advanced data
structures known as the Health Information Gateway. DCB developed and operated
a Health Information Gateway, which is a web-based infrastructure; featuring
advanced data retrieval capabilities designed to meet the information needs of
the worldwide health care industry on a real-time basis.
The Company also acquired certain intellectual property from DSM, LLC
(DSM), a Florida limited liability company. The intellectual property acquired
was used by DCB in its Health Information Gateway and other products. The
intellectual property enables the software to operate and communicate with other
programs and hardware. It provided the backbone to the Health Information
Gateway. It was originally licensed from DSM, LLC to DCB.
12
In August 2001, the Company ceased operations of DCB Actuaries &
Consultants Health Information Gateway. Management has determined slow economic
growth, and long sales cycles in this area are not in the Company's primary
business operations. However, the Company has signed a licensing agreement,
which will permit the Company to get a royalty fee for the use of the Health
Information Gateway software system. The Company is not anticipating significant
or material revenues from this licensing agreement in the near future.
INTELLIGENT VENDING MACHINES
------------------------------
The Company operated three types of intelligent vending machines; video
vending machines, ATM script machines, and phone card dispensing machines. The
Company previously operated Automated Communication Distribution Centers, but
the Company decided to discontinue this aspect of the business in May 2000. The
three intelligent vending machines are described below:
MOVIE VISION
In January 1998 the Company issued 550,000 shares of its common stock to
the shareholders of Moviebar Company USA and Vectorvision, Incorporated in
consideration for the acquisition of businesses known collectively as "Movie
Vision." Movie Vision rents videocassettes, primarily containing motion
pictures, through automated dispensing units in hotels. Movie Vision had
videocassette dispensing machines in approximately 110 hotels and time-share
facilities in the United States. The machines were located in approximately
twenty states with the largest concentration in Florida and California. The
Company has sold this sector to a former employee for consideration of cash and
cash equivalents in the amount of $50,000, and $50,000 in payables, in August
2001.
The Movie Division segment was disposed in the year ended June 30, 2002.
Due to changes in value of certain assets and liabilities, an additional loss
was recognized in the year ended June 30, 2002. The loss on the ultimate
disposition was greater than originally estimated and recognized in the year
ended June 30, 2001.
SCRIPT TERMINALS
In December 1996 the Company acquired all the issued and outstanding shares
of Link International, Inc. ("Link"). Link had a proprietary script terminal
that dispensed a receipt to the customer so that it may be used to pay for
merchandise and/or services.
In June 1999 the Company sold 520 of Link's script terminals to a former
employee. The Company did not receive any cash payment in connection with
this sale, however the purchaser of the assets agreed to assume $70,000 in
accounts payable and approximately $600,000 in capitalized lease obligations
associated with the acquisition of the script terminals. The purchaser also
agreed to assume the lease obligation for the related office space. The script
terminals were sold because this line of business was not profitable, and
management has determined there was a remote possibility of becoming profitable.
During the fiscal period ended June 30, 2001, the Company has not received
revenues in this venture. The Company is not actively pursuing any
opportunities with respect to the script terminals and does not expect to
generate future revenue and has ceased operations.
13
PHONE CARD DISPENSING
The Company operated phone card dispensing machines that were manufactured
by Link. The machines were full sized stand-alone vending machines, and sold
prepaid phone cards, usually in $10 and $20 denominations. Phone card time for
the prepaid calling cards can be purchased from various vendors. The Company in
the past received all of the phone card time from the Licensee of the One
Medical Service Network.
The units were typically placed at colleges and universities, car washes,
and other retail establishments that have a high level of customer traffic.
There were currently six dispensing machines in operation, all in southern
California. The Company had another 65 machines in storage. The Company is not
pursuing any opportunities with respect to Phone Card Dispensing and has ceased
operations in this sector.
YEAR ENDED JUNE 30, 2002
------------------------
RESULTS OF OPERATIONS
FISCAL YEAR END JUNE 30, 2002, COMPARED TO FISCAL YEAR END JUNE 30, 2001.
Revenues for Fiscal 2002 increased to $647,514 from $547,597 during Fiscal
2001. 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 gains on the sale of the terminals. Those
gains are generally recognized over a period of 48 months.
Selling expenses for Fiscal 2002 decreased to $141,162 from $571,460 during
Fiscal 2001. The decrease was primarily the result of decreased marketing
efforts. Selling expenses includes primarily commissions to sales personnel and
outside Independent Sales Organizations ("ISO's") Research and development costs
also declined, and is attributed to decreases in expenditures to support or
promote unprofitable or declining business.
General and administrative expenses for Fiscal 2002 decreased to $2,325,184
from $4,726,570 during Fiscal 2001. The decrease was largely due to the
Company's streamlining efforts and a reduction in management salaries and
directors fees. Management expects these expenditures to be in conformance with
budgeted amounts along with applying effective cost curtailment practices.
Professional and consulting expenses for Fiscal 2002 were $108,364 these
expenses primarily are the result of the recognition of stock 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.
14
Interest expense for Fiscal 2002 decreased to $30,654 from $111,430 for
Fiscal 2001. The decrease in interest expense was the direct result of a
settlement of debt and discontinued business sectors.
The loss for Fiscal 2002 was ($244,561) from discontinued operations
reflects the abandonment of business sectors during the year ended June 30,
2002. The Movie Division segment was disposed in the year ended June 30, 2002.
Due to changes in value of certain assets and liabilities, an additional loss
was recognized in the year ended June 30, 2002. The loss on the ultimate
disposition was greater than originally estimated and recognized in the year
ended June 30, 2001. The Company in Fiscal 2001 incurred losses of
approximately ($5,084,883) relative to net assets associated with the
discontinued business segments abandoned or sold.
As of June 30, 2002, MedCom had a federal net operating loss carry forward
of $51,996,000 expiring 2011 to 2020. MedCom had a state net operating loss
carry forward of $46,996,083 expiring from 2003 to 2005.
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 by operating activities for Fiscal 2002 was ($1,818,182)
compared to ($5,582,734) for Fiscal 2001. 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 used for investing activities was ($303,362) for Fiscal 2002, compared
to ($938,029) for Fiscal 2001. Streamlining operations and capital budget
curtailment practices promoted a reduction in equipment purchases for the
Company.
Cash provided from financing activities was $2,148,972 in Fiscal 2002,
compared to cash flows provided for financing activities of $4,477,160 for
Fiscal 2001. Financing activities primarily consisted of proceeds from the sale
of the Company's common stock, and proceeds from the sale-leaseback transactions
during the fiscal period.
The Company has relied upon a significant shareholder to fund its operating
cash flow deficiencies since June 30, 2001. An entity that is controlled by the
Company's new 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. This may
substantially increase the Company's outstanding shares of common stock.
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 sometime in the near fiscal periods. The
Company may require capital to finance the purchases of the electronic
terminals. The amount of such requirement will be dependent upon the rate of
growth experienced. The Company has been successful in obtaining lease
financing for most of this equipment. The nature of the business is such that
large accounts receivable balances will not be carried.
15
The Company anticipates using the sale-leaseback transactions to continue
funding its equipment terminals. However, management believes that the Company
may require additional equity capital to settle older obligations and to fully
implement its business plan and achieve sustained growth.
The Company is delinquent on capital and operating lease obligations as
well as obligations to employees, officers, vendors and other creditors as of
June 30, 2002. 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
16
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, 2002 F-3
Consolidated Statements of Operations for the years ended
June 30, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2002 and 2001 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, 2002 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,
2002, and the results of its operations and cash flows for each of the two years
in the period ended June 30, 2002, 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 has incurred material
operating losses, has experienced severe cash flow deficiencies and has limited
working capital reserves. The Company has divested of several business segments
and expects to face many operating challenges in the near 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
February 3, 2003
F-2
MEDCOM USA, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2002
-------------
ASSETS
CURRENT ASSETS
Cash $ 27,428
Accounts receivable, net of allowance of $19,912 41,303
Due from affiliate 82,000
Inventories 64,748
Prepaid expenses and other current assets 3,952
-------------
Total current assets 219,431
PROPERTY AND EQUIPMENT, net 1,458,295
GOODWILL, net of accumulated amortization of $322,575 436,423
OTHER ASSETS 17,657
-------------
TOTAL ASSETS $ 2,131,806
=============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,118,579
Accrued expenses and other liabilities 949,243
Deferred revenue 733,892
Dividend payable 23,750
Notes payable - current portion 109,437
Capital lease obligations - current portion 312,193
-------------
Total current liabilities 3,247,094
CAPITAL LEASE OBLIGATIONS - long-term portion 898,685
-------------
Total liabilities 4,145,779
-------------
STOCKHOLDERS' EQUITY:
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,
36,879,866 issued and outstanding 3,688
Paid in capital 63,103,597
Accumulated deficit (65,121,291)
-------------
Total stockholders' equity (2,013,973)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,131,806
=============
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, 2002 AND JUNE 30, 2001
--------------------------------------------------
2001 2000
------------ -------------
REVENUES:
Terminal sales $ 164,807 $ 259,372
Service 443,762 288,225
Equipment lease 38,945 -
------------ -------------
647,514 547,597
COST OF SALES AND SERVICE 193,767 572,296
------------ -------------
GROSS PROFIT 453,747 (24,699)
OPERATING EXPENSES:
General and administrative expenses 2,325,184 4,726,570
Sales and marketing expenses 141,162 571,460
Royalties 229,826 139,715
Professional and consulting fees 108,364 8,004,107
Depreciation and amortization 454,476 721,839
------------ -------------
Total operating expenses 3,259,012 14,163,691
------------ -------------
OPERATING LOSS (2,805,265) (14,188,390)
------------ -------------
OTHER (INCOME) AND EXPENSES
Legal settlement and contingency expenses 60,800 854,646
Foreign currency translation - 33,708
Interest expense 30,654 111,430
Interest income - (18,344)
------------ -------------
Total other expense 91,454 981,440
------------ -------------
LOSS BEFORE DISCONTINUED OPERATIONS AND INCOME TAXES (2,896,719) (15,169,830)
INCOME TAX (BENEFIT) PROVISION - -
------------ -------------
LOSS FROM CONTINUING OPERATIONS (2,896,719) (15,169,830)
LOSS FROM DISCONTINUED OPERATIONS
Loss from operations of discontinued segments, no income tax effect - (5,311,166)
Loss from abandonment of discontinued segments, no income tax effect (244,561) (5,084,883)
------------ -------------
Total (244,561) (10,396,049)
------------ -------------
NET LOSS $(3,141,280) $(25,565,879)
============ =============
NET LOSS PER SHARE:
Basic:
Continuing operations $ (0.11) $ (1.97)
Discontinued operations (0.01) (1.35)
------------ -------------
Total Basic $ (0.12) $ (3.32)
============ =============
Diluted:
Continuing operations $ (0.11) $ (1.97)
Discontinued operations (0.01) (1.35)
------------ -------------
Total Diluted $ (0.12) $ (3.32)
============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 27,439,138 7,692,708
============ =============
Diluted 27,439,138 7,692,708
============ =============
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, 2002 AND 2001
------------------------------------------
\ ----------- 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, 2000 6,364,193 $ 637 4,250 $ 4 - $ - 2,850 $ 29 $47,451,521
Common stock issued to settle claims 8,460 1 38,749
Common stock issued to consultants
for services rendered 2,662,268 266 7,924,448
Common stock issued for cash 3,737,235 374 3,035,678
Exercise of warrants for cash 1,009,985 101 1,690,851
Exercise of employee options for cash 14,667 1 51,232
Fair value of stock warrants granted
for services rendered 920,993
Preferred stock dividends 61,965 6 113,994
Translation adjustment
Net loss
---------- ------- ------ ------- ------ ------- ------ ------- -----------
BALANCE
JUNE 30, 2001 13,858,773 $ 1,386 4,250 $ 4 - $ - 2,850 $ 29 $61,227,466
========== ======= ====== ======= ====== ======= ====== ======= ===========
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENT TOTAL
------------- ------------ -------------
BALANCE JULY 1, 2000 $(36,300,132) $ (1,863) $ 11,150,196
Common stock issued to settle claims 38,750
Common stock issued to consultants
for services rendered 7,924,714
Common stock issued for cash 3,036,052
Exercise of warrants for cash 1,690,952
Exercise of employee options for cash 51,233
Fair value of stock warrants granted
for services rendered 920,993
Preferred stock dividends (114,000) 0
Translation adjustment 1,863 1,863
Net loss (25,565,879) (25,565,879)
------------- ------------ -------------
BALANCE
JUNE 30, 2001 $(61,980,011) $ - $ (751,126)
============= ============ =============
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, 2001 AND 2000 (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, 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 (Continued)
MEDCOM USA, INC.
STATEMENT OF CASH FLOWS FOR THE
YEARS ENDED JUNE 30, 2002 AND 2001
----------------------------------
2002 2001
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(3,141,281) $(25,565,879)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Loss from discontinued operations 5,311,166
Loss on abandonment of net assets of discontinued operations 244,561 5,084,883
Depreciation and amortization 454,476 721,839
Issuance of common stock as compensation for services 635,834 7,924,714
Value of common stock warrants granted as compensation for services - 856,818
Write-off of notes receivable - 789,720
Changes in assets and liabilities (net of discontinued business segments):
Trade accounts receivable (17,067) 749,761
Inventories 125,347 37,006
Royalty advances - 676,353
Prepaid and other current assets 77,601 137,426
Other assets 47,142 55,636
Accounts payable (114,423) 607,326
Accrued liabilities (235,121) 586,340
------------ -------------
Cash used by continuing operations (1,922,931) (2,026,891)
Cash provided (used) by discontinued operations 104,749 (3,555,843)
------------ -------------
Net cash (used in) operating activities (1,818,182) (5,582,734)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (8,058) (914,809)
Purchases of terminals under capital leases (253,304)
Advances to affiliates (82,000) (62,220)
Proceeds from sale of assets in discontinued segments 40,000 -
Repayments under notes receivable 39,000
------------ -------------
Net cash (used in) investing activities (303,362) (938,029)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft (60,574) 60,574
Principal repayments on notes payable - (10,563)
Principal repayments on capital leases (29,330) (351,088)
Proceeds from the exercise of options and warrants - 1,742,185
Proceeds from sale of common stock 1,242,813 3,036,052
Proceeds from capital sale-leaseback transactions 996,063 -
------------ -------------
Net cash provided by financing activities 2,148,972 4,477,160
------------ -------------
INCREASE (DECREASE) IN CASH 27,428 (2,043,603)
CASH, BEGINNING OF YEAR - 2,043,603
------------ -------------
CASH, END OF YEAR $ 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, 2001 AND 2000
-----------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION: 2002 2001
---------- ----------
Interest paid $ 25,615 $ 111,430
========== ==========
Income taxes paid $ -0- $ 14,586
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Leaseholds acquired under a note payable $ -0- $ 95,000
========== ==========
Equipment acquired under capital leases $1,108,378 $1,229,205
========== ==========
Purchase of equipment with warrants $ -0- $ 64,277
========== ==========
Extinguishment of capital lease obligations by
foreclosure on related equipment $1,121,399 $ -0-
========== ==========
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 provide medical insurance eligibility verification, claims
processing, and credit card/ATM charges and payments. The Company's
customers are health care providers, primarily medical doctors' offices
throughout the United States. During the year ended June 30, 2001, the
company divested or abandoned all other business segments. The Company had
also provided software based applications for health care billing
management and "intelligent" vending services, primarily video rentals in
hotels and motels. Those operations have been discontinued as of June 31,
2001.
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;
Sims Franchise Group Inc., Sims Communications International, Inc.,
JustMed.com, Inc., One Medical Service, Inc., and Link International
Technologies, Inc., New View Technologies, Inc. and accounts of DCB
Actuaries and Consultants, s.r.o. ("DCB") for the year ended June 30, 2001.
The results of operations for the year ended June 30, 2002 include only the
remaining active entities of MedCom USA, Inc., and New View Technologies,
Inc., which 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 has incurred material
operating losses, has experienced severe cash flow deficiencies and has
limited working capital reserves. The Company has a working capital deficit
of $3,027,663 at June 30, 2002 and has defaulted on numerous operating and
capital lease agreements and has material past due obligations. The Company
is attempting to negotiate settlements and payment plans with creditors on
much of the older past due obligations.
The Company has divested of several business segments and expects to face
many operating challenges in the near future. A new management team has
instituted cost cutting measures. A major shareholder of the Company has
provided capital to assist in meeting day-to-day operating expenses. 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 while negotiating with creditors. The Company
will then attempt to raise additional capital to grow the MedCard
operations and settle with remaining creditors.
Cash reserves and working capital at June 30, 2002 were essentially
depleted. 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
F-7
Company to retire prior 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.
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 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, 2001 and 2000 was $705,965 and $723,564, 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. Transactions fees are recognized upon completion of the
transaction processing.
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.
F-8
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.
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, 2002 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. Goodwill is amortized on a straight-line basis over 5 years.
Beginning in the fiscal year ended June 30, 2003, the Company will cease
amortization of the goodwill.
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 Financial
-----------------------------------------
Accounting Standards Board (the FASB) issued Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. The
Company will be required to adopt SFAS No. 142 at the beginning of its 2003
fiscal year. The Company is currently reviewing the impact of adoption of
SFAS 142, but, other than the ceasing of goodwill amortization, does not
believe the adoption of such will have a material effect on the financial
position and results of operations of the Company.
F-9
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations. The Company is
currently reviewing the impact of adoption of SFAS 143, but does not
believe the adoption of such will have a material effect on the financial
position and results of operations of the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. The Company will be required to adopt
SFAS No. 144 at the beginning of its 2003 fiscal year. SFAS No. 144
supersedes SFAS 121, but carries over most of its general guidance. The
Company is currently reviewing the impact of adoption of SFAS 144, but does
not believe the adoption of such will have a material effect on the
financial position and results of operations of the Company. However, the
provisions of SFAS will be applied to long-lived assets such as the URL.
3. ACCOUNTS RECEIVABLE
The Company's accounts receivable at June 30, 2002 consisted of:
Medcard trade accounts receivable $ 57,465
Other 3,750
Total 61,215
--------------
Less: Allowance for doubtful accounts ( 19,912)
$ 41,303
==============
The Company estimates uncollectible account balances and provides an
allowance for such estimates. The allowance for doubtful accounts at June
30, 2002, 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 as follows:
F-10
Carrying
Value at
Impairment June 30,
Description Segment Loss 2001
----------------- ---------- ----------- ---------
Goodwill Medical $ 443,829 $ - 0 -
Contracts Medical 8,334 - 0 -
Healthcare
Technology Software 2,493,346 - 0 -
Healthcare
Equipment Software 287,123 - 0 -
Equipment Vending 77,773 16,847
Healthcare
Leaseholds Software 192,748 - 0 -
DCB equipment and Healthcare
goodwill Software 1,189,387 - 0 -
----------- ---------
Total $ 4,692,540 $ 16,847
=========== =========
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.
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.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2002:
MedCard terminals $1,114,378
Software 924,058
Office and computer equipment 201,262
Furnishings and fixtures 128,933
Leasehold improvements 4,439
-----------
Total 2,373,070
Less accumulated depreciation (914,775)
-----------
Property and equipment, net $1,458,295
===========
The MedCard terminals are capitalized under sale leaseback transactions
(NOTE 7). The terminals are amortized on a straight line basis over four
years. Software represents the cost of software acquired that operates the
Company's MedCard System. The capitalized cost of the software is amortized
on a straight line basis over five years. There were no additional costs
capitalized as software development during the years ended June 30, 2002
and 2001.
F-11
6. NOTES PAYABLE
Notes payable at June 30, 2002 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
default. $ 25,000
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, 2002. 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 .
7. 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 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
F-12
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 years, the typical length
of the customer contract and the lease agreement. 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, 2002:
Years ended June 30:
Other
Terminals Equipment Total
----------- ----------- -----------
2003 $ 375,324 $ 137,977 $ 513,301
2004 375,324 53,892 429,216
2005 375,324 375,324
2006 218,939 218,939
2007 -
----------- ----------- -----------
Total minimum lease payments 1,344,911 191,869 1,536,780
Lees: amount representing interest (306,918) (18,984) (325,902)
----------- ----------- -----------
Present value of minimum
lease payments $1,037,993 $ 172,885 $1,210,878
=========== =========== ===========
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.
Total cost of equipment under capital lease and related accumulated
depreciation was $1,108,378 and $63,261 respectively at June 30, 2002.
8. 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:
F-13
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.
9. 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
2002 2001
------------ ------------
Current tax (benefit) provision $(1,584,102) $(7,998,908)
Deferred tax (benefit) provision 1,584,102 7,998,908
------------ ------------
Total income tax provision $ - 0 - $ - 0 -
============ ============
Net deferred tax assets of $22,758,997 less a valuation allowance of
$22,714,638, 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,
2002 is comprised of:
Allowance for losses on accounts receivable $ 8,005
Differences in liabilities 293,652
Impairment of intangible assets 1,958,860
Net operating loss carryforwards 20,498,480
-------------
Deferred income tax asset $ 20,758,997
Less: valuation allowance (22,714,638)
-------------
Total deferred income tax asset 44,359
Deferred income tax liability related to
book/tax differences in bases of property and equipment (44,359)
-------------
Net deferred income tax asset $ - 0 -
=============
Federal net operating loss carryforwards of $51, 996,000 expire from 2011
to 2021. State net operating loss carryforwards of $46,996,083 expire from
2003 to 2005. 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 $1,231,242 in the year ended
June 30, 2002.
The differences between the statutory and effective tax rates is as follows
for the years ended June 30,:
2002 2001
----------------------------------------
Federal statutory rates $(1,068,035) (34)% $(8,692,399) (34)%
State income taxes (188,477) (6)% (1,661,782) (6)%
Valuation allowance for
operating loss carryforwards 1,231,242 39% 10,364,396 40%
Other 25,270 1% (10,215) -%
----------------------------------------
Effective rate $ ( - 0 -) -0-% $ ( - 0 -) 0%
========================================
10. OPERATING LEASES
The Company a leases its office space under long-term operating leases
expiring through 2008. Rent expense under these leases was $185,323 and
$334,913 for the years ended June
F-15
30, 2002 and 2001, respectively. Subsequent to June 30, 2001, the Company
defaulted on several of these operating leases and is attempting to
negotiate settlements with landlords.
Future minimum annual lease payments and sublease rentals under operating
lease agreements for years ended June 30:
2003 221,932
2004 160,781
2005 152,834
2006 126,150
2007 130,566
Thereafter 100,773
-------
$893,036
========
11. 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.
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.
During the year ended June 30, 2001, the Company declared a one-for-five
reverse stock split. All shareholders of record as of May 9, 2001 returned
five shares of the Company's common in exchange for one share. All per
share amounts and number of shares for the two years ended June 30, 2001,
have been restated to reflect the stock spilt retroactively to July 1,
1999.
During the year ended June 30, 2001, the Company issued 2,767,235 shares of
its common stock for cash in several private transactions. The aggregate
cash proceeds received by the Company was $3,036,052 net of cash fund
raising fees of $152,453. The transactions were priced from $0.01 to $2.00
per share.
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. During
F-16
the year ended June 30, 2001, the Company issued 2,662,268 shares to
consultants valued at $7,924,448. The value of these shares was expensed
during each respective year.
During the year ended June 30, 2001, the Company issued 1,024,652 shares of
its common stock in connection with the exercise of stock options and
warrants. The Company received cash of $1,742,083 in connection with these
transactions.
During the year ended June 30, 2001, the Company issued 8,460 shares of its
common stock as conversion of a settlement balance of $38,750.
During the year ended June 30, 2001, the Company granted options to
consultants as consideration for services rendered. The Company also
granted warrants to settle past due lease payments. During the year ended
June 30, 2001, the Company granted warrants and options exercisable into
2,172,996 shares of common stock. The fair value of these options and
warrants was determined to be $920,983. That amount is expensed in the
accompanying statement of operations for the year ended June 30, 2001. The
fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model using the assumptions
outlined in Note 15.
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 he Company's common stock. The Company did not declare its dividend on
the preferred stock during the year ended June 30, 2002. At June 30, 2002,
there was an undeclared and unpaid dividend on the Series D preferred stock
of $114,000. Total accrued, but unpaid dividends related to the Series D
preferred stock was $23,750 at June 30, 2002.
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.
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.
F-17
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.
12. 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 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 terminate 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 qualified monthly
revenues, less direct costs, generated by the licensed software. The
original agreement required the Company to advance $550,000 of royalty fees
payable to the Licensor and then retain as a credit 40% of the future
monthly royalty payments until the advance is offset in full. During the
year ended June 30, 2001, in anticipation of the new agreement, the Company
wrote-off the remaining prepaid royalty and prepaid expense balance of
$643,659.
Consulting Agreements
F-18
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. Subsequent
to June 30, 2002, the Company settled such claim resulting in an additional
$98,000 accrual being made as of June 30, 2002. This agreement includes the
return of 186,000 shares of the Company's common stock held by the
consultant.
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 Company has accrued $104,000
associated with these claims at June 30, 2001. 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, 2002, there was $164,000 accrued relating to this matter.
Several landlords are seeking damages from the Company due to 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 is $634,000 at June 30, 2001. 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, 2002. 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.
F-19
At June 30, 2002, there was approximately $700,000 estimated and accrued
for claims related to the litigation matters described above.
13. 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 3,863,975 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. Preferred stock convertible to 115,396
common shares and options and warrants exercisable into 7,835,766 shares of
common stock were not considered in the calculation for diluted earnings
per share for the year ended June 30, 2001 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:
2002 2001
---------- ---------
(Loss) Shares Per share (Loss) Shares Per share
------------- ---------- ----------- ------------- --------- -----------
Net (Loss) $ (3,141,280) $(25,565,880)
Preferred stock dividends (114,000) (114,000)
Discontinued operations 244,561 11,884,346
------------- -------------
Loss from continuing operations (3,010,719) (13,795,534)
BASIC EARNINGS PER SHARE
Loss available to common
stockholders $ (3,010,719) 27,439,138 $ (0.11) $ (7,274,239) 7,692,708 $ (1.97)
Effect of dilutive securities N/A N/A
DILUTED EARNINGS PER SHARE $(13,795,534) 27,439,138 $ (0.11) $ (7,274,239) 7,692,708 $ (1.97)
14. 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
year ended June 30, 2002.
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. During the year ended June 30, 2002, the Company
advanced funds of $82,000 to this entity. This
F-20
balance remains due and is reflected as a receivable at June 30, 2002 in
the accompanying balance sheet.
During the year ended June 30, 2001, the Company purchased $429,008 of
computer equipment and implementation services from DSM.net, a company
owned by an individual whom at the time was an officer of the Company.
15. CONCENTRATION OF CREDIT RISK
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 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.
16. 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 2002 and 2001, 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:
2002 2001
------------ -------------
Net Loss - continuing operations $(2,896,719) $(15,169,830)
Net Loss - discontinued operations $ (244,561) $(10,396,049)
------------ -------------
Total net loss - as reported $(3,141,280) $(25,565,879)
Pro-forma effect of stock based compensation $ (44,657) $ (81,685)
------------ -------------
Net Loss - pro forma $(3,185,937) $(25,647,564)
============ =============
Loss per share - continuing operations $ (0.11) $ (1.97)
Loss per share - discontinued operations $ (0.01) $ (1.35)
------------ -------------
Total loss per share - as reported $ (0.12) $ (3.32)
Pro-forma effect of stock based compensation $ - 0 - $ - 0 -
------------ -------------
Loss per share - pro forma $ (0.12) $ (3.32)
============ =============
F-21
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for
years ended June 30,:
2001
--------
Dividend yield None
Volatility 147.88%
Risk free interest rate 4.99%
Expected asset life 3 years
There were no options or warrants granted in the year ended December 31,
2002.
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 1,000,000 905,150
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:
F-22
Weighted Weighted
Average Average
Exercise Exercise
2002 Price 2001 Price
------------ --------- ----------- ---------
Options/warrants outstanding at
Beginning of year 7,835,766 $ 6.99 3,000,981 $ 2.08
Granted - 0 - $ 5.32 5,995,905 $ 5.32
Exercised - 0 - (924,651)
Terminated/Expired (3,971,791) (236,469)
Options outstanding at end of year 3,863,975 $ 6.99 7,835,766 $ 6.99
Options exercisable at end of year 3,863,975 $ 9.66 6,512,639 $ 9.66
Options available for grant at end
of year 4,787,142 3,392,542
$ 0.47 to $ 0.01 to
Price per share of options outstanding $ 40.00 $ 42.80
Weighted average remaining contractual lives 2.94 years 3.86
Weighted Average fair value of options
granted during the year N/A $ 0.33
Range of exercise prices of options outstanding at June 30, 2002:
Weighted Weighted
Number Average Number Average
Exercise Price Outstanding Exercise Price Exercisable Exercise Price
------------------ ----------- --------------- ----------- ---------------
0.47-$1.50 1,012,940 $ 0.86 1,012,940 $ 0.86
1.51-$3.00 505,282 $ 2.41 505,282 $ 2.41
3.01-$4.50 271,666 $ 3.95 271,666 $ 3.95
4.51-$6.00 408,913 $ 4.58 408,913 $ 4.58
6.01-$10.00 289,294 $ 8.14 289,294 $ 8.14
10.01-15.00 451,750 $ 2.98 451,750 $ 2.98
15.01 and greater 924,130 $ 25.59 924,130 $ 25.59
17. 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 Company made expensed
F-23
contributions to the plan $38,199 for the year ended June 30, 2001. The
Plan was frozen subsequent to June 30, 2001.
18. 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, 2002, the
Company operates only in the medical transaction processing segment with
substantially all revenue generated in the United States.
The intelligent vending machine segment is comprised of the sales of
prepaid phone cards, the processing of monetary transactions utilizing a
script machine that are used primarily in major fast food chains and the
rental of videocassettes through automated dispensing units in hotels and
time share facilities, primarily located in the states of Florida and
California.
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.
The healthcare management software development segment includes the
licensing of the Health Information Gateway and related developmental
services, as well as the licensing of other software and hardware products
and services. It operates under the name of the DCB division in the United
States and DCB Actuaries and Consultants, s.r.o., in Europe.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company's reportable
segments are strategic business units that offer different products and
services.
Net revenue includes sales and services to external customers within that
segment and related licensing revenue. There are no significant transfers
between segments. Cost of sales and services includes costs associated with
net revenue within the segments. Depreciation and amortization includes
expenses related to depreciation and amortization directly allocated to the
segment. Segment income (loss) does not include general and administrative
expenses, selling and marketing, other operating expenses, other income
(expense) items or income taxes. Identifiable assets are those assets used
in segment operations, which consist primarily of receivables, inventory,
prepaid expenses, machinery, equipment and goodwill. DCB's operations are
based in the Czech Republic. Substantially all assets at June 30, 2001, are
maintained in the United States.
F-24
Healthcare
Intelligent Medical Management
Vending Transaction Software Corporate
Machines Processing Development and Other Consolidated
------------ ------------- ------------- ------------- --------------
JUNE 30, 2001:
Net Revenues $ 713,264 $ 547,597 $ 843,881 $ (1,557,145) $ 547,597
Cost of Sales
and services $ 404,842 $ 479,962 $ 474,873 $ (1,246,278) $ 113,399
Depreciation
and
amortization $ 285,749 $ 327,190 $ 1,650,743 $ (1,865,258) $ 398,424
Selling,
General and
Administrative -- -- -- $ 13,717,308 $ 13,717,308
Income (loss)
from
Operations
Before Income
Taxes $ 22,673 $ (259,555) $ (1,281,735) $(12,162,917) $ (13,681,534)
Identifiable
Assets $ 125,000 $ 1,028,876 $ 1,651,863 $ 218,660 $ 3,024,399
Expenditures
for Long-Lived
Assets $ 1,781 $ 226,426 $ 2,097,708 $ -- $ 2,325,915
The discontinued operations are presented above in the applicable business
segments. The operating results of the discontinued business segments are
aggregated in the Loss from Operations of Discontinued Segments in the
accompanying statement of operations. Amounts in the table above included
in Corporate and Other include reclassifications for discontinued
operations.
The Company's healthcare management software development segment operates
in both Europe and the United States. Of the revenue earned during the year
ended June 30, 2001, $685,991 was generated in Europe. All of the revenues
from the Company's other segments were generated in the United States.
For the years ended June 30, 2002 and 2001, there were no material
concentrations of revenue to specific customers. One customer in the
medical transaction processing segment, accounted for $886,756 of revenue
in that segment for the year ended June 30, 2001, all of which was related
to the licensing of the One Medical Services system and corresponding
F-25
sales and services. One customer accounted for $249,739 of revenue in the
healthcare management software development segment for the year ended June
30, 2001. This licensing arrangement was voided at June 30, 2001.
Expenditures for long-lived assets include equipment acquired under capital
leases.
19. SUBSEQUENT EVENTS
In addition to matters discussed in other footnotes, the following events
occurred subsequent to June 30, 2002:
An entity that is controlled by the Company's chairman and chief executive
officer has funded $144,000 to the Company in the form of loans. This
balance is net of the $82,000 receivable from this entity reflected in the
accompanying balance sheet as of June 30, 2002.
* * * * * *
F-26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company reports that on September 17, 2001, it dismissed its principal
certified public accountants for the past 7 years, Ehrhardt Keefe Steiner &
Hottman, P.C.
The accountant's report on the Company's financial statements for fiscal
year 2000 reports did not contain an adverse opinion or disclaimer of opinion.
Nor was the fiscal year ending 2000 report on the Company's financial statements
qualified or modified as to uncertainty, audit scope, or accounting principles.
The Company reports that, over the two past fiscal years and the subsequent
interim period, it had no disagreements with its former accountant on any matter
of accounting principles or practices financial statement disclosure; or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter of the disagreements in connection with its report. No such
scenario existed with the Registrant and its former accountant.
The Company has retained as its certifying public accountants the firm of
Epstein, Weber & Conover, P.L.C. The engagement was effectively dated September
17, 2001.
All decisions to engage and/or terminate the relationships between Medcom
USA and its certifying public accountants are made by the Chief Executive
Officer and President who constitutes the sole member of the Board of Directors.
Medcom USA has no audit committee.
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 9, 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 49 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 July 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.
45
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.
The following table sets forth in summary form the compensation received by
(i) the Chief Executive Officer of the Company and (ii) by each other executive
officers of the Company who received in excess of $100,000 during the fiscal
years ended June 30, 2002 and 2001.
(1) Other Annual Compensation Options
Name and Fiscal Salary Bonus Compensation Stock Awards Granted
Principal Position Year (2) (3) (4) (5)
------------------------- ------- --------- -------- ------------- ------------- -------
Mark Bennett, 2001 $208,765 $25,000 -- -- 310,000
President and Chief
Executive Officer
Michael Malet, 2001 $167,552 -- -- -- 310,000
Vice President and
Chief Operating Officer
Alan Ruben 2001 $177,351 $25,000 -- -- 125,000
Chief Accounting
and Financial Officer
Robert Stevens 2001 $115,004 -- -- -- 32,000
Director of Development
and Information
Technology
(1) These executives represented prior management. There has been no
executive compensation activity for fiscal 2002.
(2) The dollar value of base salary (cash and non-cash) received.
(3) The dollar value of bonus (cash and non-cash) received.
(4) Any other annual compensation not properly categorized as salary or
bonus, including perquisites and other personal benefits, securities
or property. Amounts in the table represent automobile allowances.
(4) Amounts reflect the value of the shares of the Company's common stock
issued as compensation for services. No restricted awards were issued
to any of the above individuals.
46
OPTIONS GRANTED DURING FISCAL YEAR ENDING JUNE 30, 2001
The following tables set forth information concerning the options granted
to executive officers during the fiscal year ended June 30, 2001, to the persons
named below:
Number of Shares
Granted under Type Price Per Expiration
Name Option of Plan Share Date
-------------- ------- ------------- ---------- ----------
Mark Bennett 310,000 Incentive $.47(a)(b) 05/29/06
Michael Malet 310,000 Incentive $.47(a)(b) 05/29/06
Alan Ruben 125,000 Incentive $.47(a)(b) 05/29/06
Robert Stevens 30,000 Incentive $.47(a)(b) 05/29/06
2,000 Non-Qualified 3.00 0 03/01/05
(a). Options must be exercised before the date of expiration.
(b). Options may be exercised no later than 30 days subsequent to which option
holders employment by the Company is terminated under the Plan.
*** Subsequent to June 30, 2002, all above employees were terminated and
corresponding options cancelled.
Options issued to Mark Bennett, Michael Malet, Alan Ruben, and Robert
Stevens granted under the Incentive Stock Option Plan were 30% immediately
vested upon granting and the remaining 70% vesting over a one-year period of
time. Robert Stevens was issued Non-Qualified Stock Options that will fully
vest one-year from the date of granting.
EMPLOYEE PENSION, PROFIT SHARING OR OTHER RETIREMENT PLANS
The Company reactivated its 401(k) Plan (originally established by New View
Technologies) in June 2000. All United States based full-time employees are
eligible to participate on the first day of a calendar quarter after the
employee completes ninety days of employment with the Company. Participants can
contribute the lesser of fifteen percent of their compensation or the federally
mandated maximum amount (currently $10,500). The Company matches the employees'
contributions fifty percent of the first six percent, or a maximum of three
percent of salary. Employees are fully vested in amounts they contribute and
vest twenty percent per year over five years on Company contributions
Except as noted above and as provided in the Company's employment
agreements with its executive officers and other personnel, the Company does not
have a defined benefit, pension plan, profit sharing or other retirement plan,
although the Company may adopt one or more of such plans in the future.
Management is in the process of evaluating such benefit plans to offer Company
employees. The above plan is temporarily inactive as of September 30, 2001,
pending management's evaluation.
COMPENSATION OF DIRECTORS
The Company agreed to pay each member of the Board of Directors in prior
fiscal periods $25,000 per year, payable in semi-annual installments at the
beginning of each six month period.
47
Prior to this time, the Company had no standard arrangement pursuant to which
directors of the Company were compensated for any services provided as a
director or for committee participation or special assignments.
STOCK OPTION AND BONUS PLANS
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans and Stock Bonus Plans. A summary description of each Plan follows. In
some cases these three Plans are collectively referred to as the "Plans".
Management as of June 30, 2002 has not determined whether to continue or modify
the existing Option and Bonus Plans.
INCENTIVE STOCK OPTION PLANS
The Incentive Stock Option Plans authorize the issuance of options to
purchase up to 2,500,000 shares of the Company's Common Stock, less the number
of shares already optioned under this Plan. Only officers and employees of the
Company may be granted options pursuant to the Incentive Stock Option Plans.
In order to qualify for incentive stock option treatment under the Internal
Revenue Code, the following requirements must be complied with:
1. Options granted pursuant to the Plan must be exercised no later
than:
(a) The expiration of thirty (30) days after the date on which an
option holder's employment by the Company is terminated.
(b) The expiration of one year after the date on which an option
holder's employment by the Company is terminated, if such
termination is due to the Employee's disability or death.
2. In the event of an option holder's death while in the employ of the
Company, his legatees or distributes may exercise (prior to the option's
expiration) the option as to any of the shares not previously exercised.
3. The total fair market value of the shares of Common Stock
(determined at the time of the grant of the option) for which any employee may
be granted options which are first exercisable in any calendar year may not
exceed $100,000.
4. Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years from
the date of grant.
5. The purchase price per share of Common Stock purchasable under an
option is determined by the Board of Directors, but cannot be less than the fair
market value of the Common Stock on the date of the grant of the option (or 110%
of the fair market value in the case of a person owning the Company's stock
which represents more than 10% of the total combined voting power of all classes
of stock).
48
NON-QUALIFIED STOCK OPTION PLANS.
The Non-Qualified Stock Option Plans authorize the issuance of options to
purchase up to 5,000,000 shares of the Company's Common Stock, less the number
of shares already optioned under this Plan. The Company's employees, directors,
officers, consultants and advisors are eligible to be granted options pursuant
to the Plan, provided however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction. The option
exercise price is determined by the Board of Directors but cannot be less than
the market price of the Company's Common Stock on the date the option is
granted.
Options granted pursuant to the Plan not previously exercised terminate
upon the expiration of the option, which must occur no later than five (5) years
from the date the option was granted.
In the event of an option holder's death while in the employ of the
Company, his legatees or distributees may exercise the option as to any of the
shares not previously exercised prior to the option's expiration.
STOCK BONUS PLANS.
Up to 2,400,000 shares of Common Stock may be granted under the Stock Bonus
Plans. Such shares may consist, in whole or in part, of authorized but unissued
shares or treasury shares. Under the Stock Bonus Plans, the Company's
employees, directors, officers, consultants and advisors are eligible to receive
a grant of the Company's shares; provided, however, that bona fide services must
be rendered by consultants or advisors and such services must not be in
connection with the offer or sale of securities in a capital-raising
transaction.
OTHER INFORMATION REGARDING THE PLANS.
The Plans were administered by the Company's Board of Directors. The Board
of Directors has the authority to interpret the provisions of the Plans and
supervise the administration of the Plans. In addition, the Board of Directors
is empowered to select those persons to whom shares or options are to be
granted, to determine the number of shares subject to each grant of a stock
bonus or an option and to determine when, and upon what conditions, shares or
options granted under the Plans will vest or otherwise be subject to forfeiture
and cancellation.
At the discretion of the Board of Directors, any option granted pursuant to
the Plans may include installment exercise terms such that the option becomes
fully exercisable in a series of cumulating portions. The Board of Directors
may also accelerate the date upon which any option (or any part of any options)
is first exercisable. Any shares issued pursuant to the Stock Bonus Plan and
any options granted pursuant to the Incentive Stock Option Plan or the
Non-Qualified Stock Option Plan will be forfeited if the "vesting" schedule
established by the Board of Directors at the time of the grant is not met. For
this purpose, vesting means the period during which the employee must remain an
employee of the Company or the period of time a non-employee must provide
services to the Company, unless specifically covered by an act addressed in an
49
employee's employment agreement. At the time an employee ceases working for the
Company (or at the time a non-employee ceases to perform services for the
Company), any shares or options not fully vested will be forfeited and
cancelled. In the discretion of the Board of Directors payment for the shares of
Common Stock underlying options may be paid through the delivery of shares of
the Company's Common Stock having an aggregate fair market value equal to the
option price. A combination of cash and shares of Common Stock may also be
permitted at the discretion of the Board of Directors.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Board of Directors when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner it
deems appropriate, provided that such amendment, termination or suspension
cannot adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
The Plans are not qualified under Section 401(a) of the Internal Revenue
Code, nor are they subject to any provisions of the Employee Retirement Income
Security Act of 1974.
SUMMARY
The following sets forth certain information as of June 30, 2002,
concerning the stock options and stock bonuses granted by the Company pursuant
to its Plans. Each option represents the right to purchase one share of the
Company's Common Stock.
Total Shares Shares Reserved Shares Remaining
Reserved for Outstanding Issued As Options/Shares
Name of Plan Under Plan Options Stock Bonus Under Plan
------------------------------------ ------------ --------------- ----------- --------------
2002 Incentive Stock Option Plan -0- -- -0- -0-
2001 Incentive Stock Option Plan -0- -- -0- -0-
2000 Incentive Stock Option Plan 1,000,000 -- N/A 1,000,000
------------------------------------ ------------ --------------- ----------- --------------
2002 Non-Qualified Stock Option Plan -0- -- -- -0-
2001 Non-Qualified Stock Option Plan -0- -- -- -0-
2000 Non-Qualified Stock Option Plan 2,000,000 -- N/A 2,000,000
------------------------------------ ------------ --------------- ----------- --------------
2002 Stock Bonus Plan -0- -0- -- -0-
2001 Stock Bonus Plan -0- -0- -0- -0-
2000 Stock Bonus Plan 500,000 N/A -0- 500,000
------------------------------------ ------------ --------------- ----------- --------------
50
STOCK BONUSES
--------------
The Company, in accordance with the terms of its Stock Bonus Plans, has
issued shares of Common Stock to certain Company officers, employees, directors
and consultants. The following persons (including former officers and directors)
received shares of the Company's common stock as stock bonuses:
Shares Issued as Stock Bonus
----------------------------
Name 2002 2001 2000
---- ---- ---- -------
Mark Bennett -0- -0- 37,500
Michael Malet -0- -0- 37,500
Alan Ruben -0- -0- 51,679
Robert Stevens -0- -0- 1,000
Other employees and
consultants as a group -0- -0- 282,071
---- ---- -------
-0- -0- 409,750
==== ==== =======
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of June 30, 2002 information with respect to the only persons owning
beneficially 5% or 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 19.2 %
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.
During the year ended June 30, 2001, the Company purchased $429,008 of
equipment and services, from DSM.net, a company owned by David Robinson, a
previous officer of the Company. Also, the Company purchased equipment and
received technical services from DSM.net, an entity owned by David Robinson. The
total of such equipment and services purchased by the Company was $218,936 and
$23,106, respectively during the year ended June 30, 2000. The total amount
owed to DSM.net at June 30, 2001 was $107,095 and is included in accounts
payable on the accompanying consolidated balance sheet.
51
ITEM 13. EXHIBITS AND REPORTS.
EXHIBITS
--------
3.1 Articles of Incorporation (5)
3.2 Amendments to Articles of Incorporation - Fourth Article (5)
3.3 Amendment to Articles of Incorporation - Name Change (5)
4.1 Incentive Stock Option Plan (1)
4.2 Non-Qualified Stock Option Plan (1)
4.3 Stock Bonus Plans (1)
10.1 Agreement related to acquisition of Medcard System (2)
10.5 Licensing Agreement related to One Medical System (1)
10.18 Purchase Agreement - DSM (3)
10.19 Amendment to License Agreement - Dream Technologies, LLC (4)
16.1 Change in Certifying Accountants (5)
___________________________________________________
(1). Incorporated by reference to the same exhibit filed with the Company's
Annual Report on Form 10-KSB/A for the year ending June 30, 1999.
(2). Incorporated by reference to the same exhibit filed with Amendment No. 2 to
the Company's Registration Statement on Form S-3 (Commission File No.
333-71179).
(3). Incorporated by reference to the same exhibit filed with the Company's 8-K
Report dated April 15, 2000.
(4). 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)
(5). 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
-------------------
One report on Form 8-K was filed in the fiscal quarter ended September 30,
2001. A Form 8-K filed on September 20, 2001 reported the dismissal of its
independent accountants referenced herein as Exhibit 16.1, and announced
retaining the independent accountants of Weber & Company, P.C., also known as
Epstein, Weber & Conover, P.L.C.
52
ITEM 14. CONTROLS AND PROCEDURES.
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;
53
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, 2002, 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)
February 14, 2003
54