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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File Number 0-21819
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MC INFORMATICS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 94-3165144
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
18881 Von Karman Avenue, Suite 100, Irvine, California 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
949-261-7100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(TITLE OF CLASS)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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 there is no 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 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. [ ]
The issuer's revenues for its most recent fiscal year was $8,570,347.
As of April 10, 2000, the aggregate market value of MC Informatics' voting stock
held by non-affiliates was approximately $5,131,784. As of April 10, 2000, there
were 15,589,291 shares of MC Informatics' common stock outstanding and warrants
to purchase 2,345,000 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of MC Informatics' fiscal year and relating to MC Informatics' 2000 Annual
Meeting of Shareholders are incorporated by reference into Items 9-12 of Part
III of this Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking
statements based on the Company's current expectations about the Company and the
healthcare industry. These forward-looking statements are identifiable by use of
words such as "expect," "anticipate," "estimate," "believe," "intend," "plan"
and other similar expressions. These forward-looking statements involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of the factors
described in the "Risk Factors" section of Management's Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in this document.
The Company undertakes no obligation publicly to update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
BACKGROUND
MC Informatics, Inc. (the "Company") is a provider of
business-to-business applications services, consulting services and information
technology solutions to the healthcare industry. The Company was established in
August 1992 under the name HealthDesk Corporation ("HealthDesk"). In 1998,
HealthDesk underwent a major change in its strategic direction through the
implementation of a plan to discontinue its then-current operations and to sell
substantially all of its assets, including its HealthDesk online operations and
substantially all of its intellectual property rights, inventories, certain
office equipment and packaged software to Patient Infosystems, Inc. ("PATI"). In
August 1998, HealthDesk entered into an Agreement and Plan of Reorganization
with MC Acquisition Corporation, a California corporation and a wholly-owned
subsidiary of HealthDesk, MC Informatics, Inc., a California corporation
("MCII"), and certain shareholders of MCII, pursuant to which, among other
things, MCII merged with and into MC Acquisition Corporation through the
issuance of 5,645,230 shares of HealthDesk common stock in exchange for all of
the outstanding shares of MCII common stock. The HealthDesk shareholders
approved the sale of assets to PATI and the merger with MCII on February 26,
1999 and, contemporaneously with the closing of the two transactions on March 2,
1999, HealthDesk changed its name to MC Informatics, Inc. ("MCIF"). Although
HealthDesk was the legal entity surviving the HealthDesk/MCII merger, the merger
has been accounted for as a reverse acquisition whereby MCII has been identified
as the acquiring corporation for financial reporting purposes because HealthDesk
had no ongoing business or operations at the time of the merger and the
executive officers and members of the Board of Directors of the post-merger
entity were primarily comprised of individuals previously associated with MCII.
As a result of the foregoing, the discussion below relates to the current
business of MC Informatics, Inc. and, solely for the purposes of financial
reporting, the discussion addressing periods prior to March 2, 1999 reflects the
accounts of the pre-merger MCII entity. Unless otherwise indicated, references
herein to MCIF or the Company refer to the merged HealthDesk/MCII entity.
Effective June 1, 1999, the Company acquired substantially all of the
assets of Medical Systems Solutions, Inc., a company providing encrypted,
validated connections via the Internet which enable users outside of a
healthcare organization to access their organization's host system via secured
Internet connections. The assets purchased included inventory of computer
hardware and software programs, computer equipment and existing customer
contracts of Medical Systems Solutions. This acquisition provided the Company
with the opportunity to present its services to hospitals previously contracted
with Medical Systems Solutions, thus allowing the Company to broaden its client
base. The acquisition also enabled the Company to reposition itself in the
healthcare industry by providing it with the resources necessary to expand its
service offerings to include applications services and thus build upon its
established core competencies of information technology ("IT"), operations and
management consulting services.
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In October 1999, the Company acquired all of the outstanding stock of
HSG Acquisitions, Inc., dba Inteck, Inc. Inteck is a seventeen-year-old
healthcare consulting company with experience in strategic IT planning,
information systems analysis, selection and implementation, contract
negotiations, network design and implementation, system integration,
outsourcing, physician support service and computer security. As a result of
this acquisition, the Company significantly broadened its IT consulting
capabilities and developed client relationships with healthcare organizations
for which Inteck was providing consulting services.
THE COMPANY'S BUSINESS
The Company is a professional services firm providing a broad spectrum
of applications services, consulting services, strategic and operations
management services and IT solutions for the healthcare industry. The Company's
focus is to assist healthcare organizations maximize the benefits of their
information systems and enable technology to serve their strategic objectives.
Through its IT consulting services, the Company provides healthcare entities
with direction in developing long-term IT strategy through the selection of
technology and products, system implementation, integration and management, and
contract negotiations. As an applications service provider, or ASP, the Company
additionally offers proprietary Web-based software and non-proprietary software
applications to healthcare providers and payors. In addition, the Company
provides complete operational support for all IT functions, including Internet
services, e-mail, Web hosting, Web publishing and business-to-business and
business-to-consumer connectivity; distance learning programs; network services;
desktop services; secure Internet access to application servers in compliance
with the Health Insurance Portability and Accountability Act ("HIPAA");
electronic medical record support; and related applications services as may be
required by a healthcare organization.
The Company serves a national client base across a broad cross-section
of the healthcare industry. The Company performs services for its clients
principally on a project-by-project basis through the development of a
custom-tailored solution for each client based upon the client's specific needs
and requirements. The Company believes that its in-depth institutional
knowledge, long-term relationships, extensive knowledge of its clients' needs
and its broad range of services provide it with significant advantages over its
competitors in marketing additional services and winning new engagements. The
Company's objective is to become the leading provider of applications services
and IT solutions in the healthcare industry.
INDUSTRY BACKGROUND
Because of the nature of the Company's service offerings, the Company
competes primarily in the healthcare industry. The healthcare professional
services industry is highly fragmented and consists principally of: (i) larger
systems integration firms, including the consulting divisions of national
consulting firms, which offer healthcare as one of their specialty areas; (ii)
healthcare information systems vendors, which focus on services relating to the
software solutions they offer; (iii) healthcare consulting firms, many of which
focus on selected specialty areas, such as strategic planning or vendor-specific
implementation; and (iv) large general management consulting firms that do not
specialize in healthcare consulting and/or offer systems implementation. In
addition, the Company competes with applications service providers and IT
outsourcing companies. The Company believes that a competitive advantage will
increasingly be gained by those firms that: (a) possess the necessary expertise
and resources to offer comprehensive skill sets to clients; (b) have the
strength and consistency of advice along the entire service continuum (from
strategy to selection to implementation to support); and (c) offer the
flexibility and experience to meet the challenges of the rapid developments in
healthcare and IT industries.
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GENERAL
The United States healthcare industry is undergoing rapid change. The
Company believes that the consolidation of healthcare systems and the aging of
the U.S. population will result in continued dramatic change in the healthcare
industry. Healthcare providers today face external and internal pressures to
meet the competitive demands of the marketplace, comply with increasing
government regulations and cope with the advent of managed care. These
challenges, combined with increased demands on capital resources, are forcing
many healthcare providers to seek new ways to structure and manage their
organizations and deliver services. In the past, the financial risk of
healthcare delivery was absorbed principally by third-party payors, and
providers did not focus on cost containment. Today, through managed care
arrangements and provider capitation (under which providers are paid an annual
fixed fee per individual to deliver all healthcare services required by that
individual), the economic risk of healthcare delivery is shifting from payors to
providers. In order to manage this risk, many providers are seeking to enhance
their understanding of treatment costs, variability of costs and cost control
and often must restructure their processes and organizations to enhance
efficiency and accountability. The Company believes that providers must achieve
each of these objectives, while at the same time continuing to demonstrate
increasing quality and consistency in healthcare delivery.
The shifting of risk from payor to provider has also encouraged and
accelerated consolidation among healthcare providers. In order to achieve
economies of scale, operating efficiencies, and enhanced contracting
capabilities, many healthcare organizations such as hospitals, primary care and
multi-specialty physician groups, laboratories, pharmacies, home health services
and nursing homes are integrating horizontally and vertically to create
integrated delivery networks ("IDNs"). The goal of IDNs is to deliver
comprehensive healthcare in a cost-effective manner and accordingly, much of
their success is dependent in part on effectively managing and delivering
information to the caregivers. As industry consolidation and IDN formations
create larger healthcare organizations, and as the demand for information
services is increasingly required to cross multiple points of care, the Company
believes that IDNs will need to place greater focus on information management
and business process solutions to control costs, demonstrate quality, measure
performance, predict outcomes and increase efficiency.
CONSULTING
The changing business environment has produced an evolving range of
strategic and operating options for healthcare entities. Several of these
options are unfamiliar to an industry that had long operated under a
non-aligned, third-party payor environment. In response, many healthcare
participants are formulating and implementing new strategies and tactics,
including redesigning business processes and workflows, acquiring better
technology and adopting or remodeling customer service and marketing programs.
The Company believes that healthcare participants will continue to turn to
outside consultants to assist in this process for the following reasons: (i) the
present and projected shortage of qualified IT professionals; (ii) the pace of
change is eclipsing their own internal resources and capacity to identify,
evaluate and implement the full range of options; (iii) consultants enable them
to develop better solutions in shorter time frames; and (iv) purchasing
consulting expertise can be more cost effective. The Company believes that by
employing outside expertise, healthcare providers can often improve their
ability to compete by more rapidly deploying new processes.
INFORMATION TECHNOLOGY IN THE HEALTHCARE INDUSTRY
The increased demand for tools to collect, analyze and interpret
clinical, operational and financial information rapidly, flexibly and in a
technological framework that supports today's healthcare environment is also
intensifying the reliance of the healthcare industry on IT solutions. The
Company believes that, as a result, healthcare organizations will continue to
increase their spending for IT. Healthcare IT spending is being driven not only
by the heightened need for better management information systems, but also
continued price-performance improvements in hardware and software, the ability
to develop increasingly user-friendly software applications and the emergence of
better application development tools.
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The healthcare IT environment has grown increasingly complex, costly
and burdensome as a result of the challenges of deploying new technology,
maintaining older systems and meeting staffing requirements in a market with
what the Company believes to be an insufficient pool of qualified IT
professionals with knowledge of and experience with healthcare processes. At the
same time, external economic factors have forced many healthcare organizations
to focus on core competencies and trim work forces. The Company believes that
healthcare participants will increasingly turn to outside consultants, external
management of internal information systems and outsourcing--especially as
provided by ASPs--as a means of coping with the financial and technical demands
of information systems management. According to the Meta Group, an IT analyst
and market research firm, expenditures for healthcare IT outsourcing will
increase fifteen-fold over the next two to three years, from less than $200
million per year in 1999 to more than $3 billion by 2002-2003. Specific reasons
for this shift include:
o a continuing reduction in support personnel by software vendors
through a shift of responsibility for system implementation and
support to the customer;
o an increasing demand by patients for on-line access to medical
literature, immediate access to their medical history and on-line
access to their healthcare provider;
o the implementation of new standards on confidentiality and
security of information resulting from the HIPAA that will
overshadow recent year 2000 changes; and
o a heightening desire by providers for predictable IT costs, use of
Internet/intranet capabilities for all members of their healthcare
community, IT expertise and resources that are not available
internally and that are difficult to retain, and vendors who
deliver on promises.
HEALTHCARE APPLICATIONS SERVICE PROVIDERS
Because healthcare organizations are often unable to obtain or retain
the IT staff necessary to satisfy their needs, providers are increasingly
turning to outsourcing as a means of managing their technical demands. Software
vendors typically own their software and are responsible for providing upgrades,
enhancements and error correction. In the growing healthcare ASP environment,
healthcare ASPs are beginning to license such software from these vendors for
use by their clients and then rent the licensed software to these clients. The
clients are then responsible for using the software for the purpose for which it
is intended. Through this process, healthcare ASPs can utilize their vendor
contacts and offer a wide variety of proprietary and non-proprietary software
applications to fill a client's needs. Healthcare ASPs generally seek to deliver
a broad range of software applications, from basic e-mail and messaging
applications to a complete healthcare information system that incorporates
e-health programs and manages, controls and reports on the multiple aspects of
the organization. Healthcare ASPs typically enter into a multi-year contract
with each client, usually ranging from 36 to 84 months, pursuant to which the
client pays a fixed monthly payment to the ASP based on the services it
receives. This amount can be based on the number of users, number of
transactions, number of screen clicks or amount of usage time.
Although the ASP market is becoming increasingly popular, there is no
one type of ASP model that has established itself as superior, resulting in many
ASP variations. Some examples include Internet service providers (ISPs),
telecommunication providers and independent software vendors. Full-service
healthcare business-to-business ASPs generally strive to offer all IT services
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necessary to enable a client to use any software package it desires and to share
information with an organization or individual it designates. The objective of
many healthcare ASPs is thus to offer a seamless integration of a full range of
software applications and related services including software selection,
software and system implementation, integration, testing, secure network
infrastructure, reliable mission-critical data center facilities, e-health
system design, implementation and support, and a highly skilled staff of IT
experts who can provide all of the above services.
MCIF'S SOLUTION
The Company uses its in-depth knowledge of healthcare delivery systems
and nationally deployed group of experienced consultants to help its clients
plan and execute business strategies. The Company offers its clients a continuum
of solutions, ranging from strategic planning and operations management
consulting, to interim management and contract negotiations, to information
system planning, implementation and integration, to operational support for all
IT functions through a broad spectrum of applications services. For each client
and engagement, the Company structures a project team that understands the
complexities of the healthcare environment for that particular client and can
concurrently address the management and technical ramifications of change and
improvement. In structuring an engagement, the Company does not impose any
preordained program on its clients. Rather, utilizing the professional judgment
derived from collective years of experience, the Company's consultants work in
concert with each client to develop custom-tailored solutions. This unified team
approach helps to ensure high-quality, consistent and geographically seamless
client service.
The Company's services integrate many diverse facets and constituencies
of the healthcare industry. Through its strategic consulting, the Company brings
together the healthcare and business relationships required to establish and
maintain efficient and collaborative healthcare delivery networks. Through its
operations management consulting, the Company links the needs and optimizes the
contributions of clinical, information and management personnel. The Company's
staff has in-depth knowledge of and experience in clinical and physician use
systems. Through its value-added IT consulting and applications services, the
Company forges a link between healthcare information systems vendors and the
Company's clients by helping each group maximize the potential of existing
technology. The Company also provides a bridge between existing and emerging
technologies by supplying vendors with needed knowledge to develop innovations
focused on the changing needs of the marketplace and by assisting healthcare
industry participants to assess the relative merits and risks of selecting and
implementing new technologies, thereby enabling such participants to take
advantage of the opportunities presented by emerging technologies. Through this
process, the Company assists healthcare organizations in organizing,
implementing and managing a comprehensive IT strategy that fits their specific
needs.
MCIF'S STRATEGY
[TO BE PROVIDED]
SERVICES
The Company offers its clients comprehensive applications services,
consulting services, strategic and operations management services and IT
solutions. The Company's principle role is to help its clients define what they
seek to provide for their constituency--that is, patients for providers or
members for health plans--and to develop custom-tailored solutions based on an
assessment of each client's needs. The Company offers services in the following
broadly defined categories:
HEALTHCARE APPLICATIONS SERVICES. The Company offers a wide variety of
proprietary Wed-based software and non-proprietary software applications, and
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possesses a skilled staff of IT consultants with knowledge and experience in
providing integration and operational support for a broad range of
Internet-based IT solutions, including system design, implementation,
integration and support, Internet services, secure Internet access to
application servers in compliance with the HIPAA, electronic medical record
support, and other services as may be required by a healthcare organization.
In conjunction with the creation of strategic relationships with
healthcare organizations, the Company will offer plans different models of its
ASP program, which are designed to tailor the relationship and services provided
to a healthcare organization's specific needs:
o STRATEGIC CLIENT PARTNER: For healthcare organizations desiring
all of the services of a business-to-business healthcare ASP, the
Company will provide a complete, risk-sharing arrangement pursuant
to which the Company will purchase an organization's IT assets
and, in exchange, will provide ASP services on a long-term basis.
o DATA CENTER PARTNER: For those healthcare organizations that do
not have significant IT operations, the Company will provide its
applications services via its Data Center Partner program,
pursuant to which the Company will process and support all of the
IT functions of the healthcare provider from a remote data center.
o OUTSOURCING PARTNER: For healthcare organizations that do not
desire to have their systems located in another data center and
that do not wish to have their resources shared with other
healthcare organizations, the Company will furnish ASP services
and will provide appropriate IT management and technical personnel
as needed to balance the capabilities of the organization's
existing IT staff.
o FACILITY MANAGER PARTNER: For those healthcare organizations that
desire to continue to own their IT assets, the Company will
provide facilities management services, consisting of providing
the management and appropriate technical support staff to ensure
the organization has the necessary technical resources to
accomplish its mission.
o INTERNET SERVICE PARTNER: For those healthcare organizations that
desire support only for their e-health program, the Company will
provide an assessment and will help design and implement a
comprehensive e-health program that will include voice, data and
image, local area and wide area networks and integration of
current software applications as needed by the organization.
INFORMATION TECHNOLOGY CONSULTING. The Company provides high-quality
services in developing long-term IT strategy through information systems
analysis and budgeting, selection of technology and products, system design and
implementation, system integration (including electronic medical records, data
repositories and data warehouses), system management, network and client-server
planning and design, and contract negotiations for all new and replacement
applications with vendors. While the Company's consultants have a wide variety
of skills, the majority have concentrated capabilities in the IT area.
MANAGEMENT CONSULTING. The Company's management consulting services
include focus areas such as strategic planning, analysis of current industry and
competitive conditions, integration services, formation of physician-hospital
alliances, mergers and affiliations, multi-specialty group practice formation,
facility planning, practice valuations and acquisitions, IDN formation,
financial advice and establishment of managed care organizations. The Company
also provides clinical consulting services and ambulatory practice management
consulting services.
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OPERATIONS CONSULTING. The Company provides tactical planning and
operational improvement to help clients eliminate organizational redundancy,
reduce costs and implement changes in the areas of patient care, post-acute
care, administrative services, clinical resource allocation, quality management,
finance, physician support and nursing. The Company's services include
re-engineering and business process improvement and redesign, project
management, applications implementation, executive and staff education through
the Company's on-site or distance learning programs, and operational assistance.
In addition, the Company offers comprehensive management services, including
providing a chief information officer, if desired, and all management personnel
including the director of IT, all supervisory and technical management.
SALES AND MARKETING
The Company's business development efforts are based upon a highly
organized, company-wide, consistent approach. All personnel are trained and
reinforced in the Company's marketing methods and philosophy, and are encouraged
to identify, develop and pursue client service opportunities. Senior management
directs the Company's marketing efforts. Business development is an integral
part of the formal responsibilities at all levels of the Company's management
and the Company sets business development goals on both a departmental and an
individual basis.
The Company's business development efforts focus primarily on
identifying key decision makers in the healthcare industry, determining the
value to be provided to each potential client and then managing the sales
process to completion. At any given time, numerous Company professionals are
active in the development of business from either a new or existing client, and
the client resource database enables all Company personnel to access up-to-date
information on the Company's efforts with respect to a client or prospective
client, identifies other Company contacts with that client and highlights the
particular needs expressed by the client.
In addition, the Company relies upon its reputation in the marketplace,
the personal contacts and networking of the Company's professionals, direct
industry marketing programs, trade shows and the industry presence maintained by
Company professionals to enhance its business development efforts. The Company's
marketing efforts are magnified by its presence within the healthcare industry
by virtue of speaking engagements by Company employees and employee publications
on topics affecting healthcare. The Company's views on a wide range of
healthcare and IT topics are frequently solicited and quoted for articles in
major industry journals and books. The Company's healthcare consultants have
been published extensively on current and emerging topics in healthcare
information and management and have participated in external speaking
engagements and presentations to industry associations and client audiences
across the nation.
COMPETITION
The market for the Company's services is highly fragmented, highly
competitive and is subject to rapid change. The Company believes that it
currently competes principally with applications service providers, systems
integration firms, national consulting firms, including the consulting divisions
of the national accounting firms, information system vendors, service groups of
computer equipment companies, facilities management companies, IT outsourcing
companies, general management consulting firms and regional and specialty
consulting firms. Many of the Company's competitors have significantly greater
financial, technical and marketing resources than the Company, generate greater
revenues and have greater name recognition than the Company. Moreover, those
competitors that sell or license their own software may in the future attempt to
limit or eliminate the use of third-party consultants, such as the Company, to
implement and/or customize such software. In addition, vendors whose systems may
enjoy wide market acceptance and large market share could enter into exclusive
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or restrictive agreements with other consulting firms, which could eliminate or
substantially reduce the Company's implementation work for those systems.
There are relatively low barriers to entry into the Company's markets,
and the Company has faced and expects to continue to face additional competition
from new entrants into its markets. In addition, combinations and consolidations
in the consulting industry will give rise to larger competitors, whose relative
strengths are difficult to predict. The Company also competes with its clients'
internal resources, particularly where these resources represent a fixed cost to
the client. This internal client competition may heighten as consolidation of
healthcare providers creates organizations large enough to support internal
information management capabilities.
The Company believes that the principal competitive factors in its
market include reputation, highly experienced workforce, industry expertise,
full array of offerings, project management expertise, vendor neutrality, price,
quality of service, responsiveness and speed of implementation and delivery.
Despite the variety of current and potential competitors and the rapid
development of the healthcare and IT industries, the Company believes that it
presently competes favorably with respect to these competitive factors. In
addition, although competitors exist in a variety of industry segments, the
Company believes that no individual segment offers the integrated solution that
the Company provides. Nonetheless, there can be no assurance that the Company
will be able to continue to compete effectively on pricing or other requirements
with current and future competitors or that competitive pressures faced by the
Company will not cause the Company's revenue or operating margins to decline or
otherwise materially adversely affect its business, financial condition and
results of operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is in part dependent upon its proprietary
internal information and communications systems, tools, and the methods and
procedures that it has developed specifically to serve its clients. The Company
has no patents; consequently, it relies on a combination of non-disclosure and
other contractual arrangements and copyright, trademark and trade secret laws to
protect its proprietary systems, information, and procedures. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to prevent misappropriation of such rights or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its proprietary rights. The Company believes that its systems and procedures and
other proprietary rights do not infringe upon the proprietary rights of third
parties. There can be no assurance, however, that third parties will not assert
infringement claims against the Company in the future or that any such claims
will not require the Company to enter into materially adverse license
arrangements or result in protracted and costly litigation, regardless of the
merits.
GOVERNMENT REGULATION
INTERNET REGULATION. There are increasing numbers of laws and
regulations relating to the Internet. Congress has recently passed legislation
regulating certain aspects of the Internet, including online content, copyright
infringement, user privacy, taxation, access charges and liability for
third-party activities. Federal, state and foreign governmental authorities are
considering other legislative and regulatory proposals to further regulate the
Internet. Areas of potential regulation include libel, pricing, intellectual
property ownership and infringement, regulation of professional services,
regulation of medical devices and regulation of the sale of other specified
goods and services. The Company cannot predict how courts will interpret
existing and new laws, and therefore the Company is uncertain as to how new laws
or the application of existing laws will affect its business. New legislation or
regulations, or any unanticipated application or interpretation of existing
laws, may decrease the growth in the use of the Internet, which could decrease
the demand for the Company's services, particularly its applications services,
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increase the Company's cost of doing business or otherwise have a material
adverse effect on its business, results of operations and financial condition.
PRIVACY CONCERNS. The confidentiality of patient records and the
circumstances under which records may be released are subject to substantial
regulation by state governments. These state laws and regulations govern both
the disclosure and the use of confidential patient medical record information.
Although compliance with these laws and regulations is currently principally the
responsibility of the hospital, physician or other healthcare provider,
regulations governing patient confidentiality rights are evolving rapidly.
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal level. This legislation may
require holders of this information to implement security measures that may
require significant expenditures by the Company. There can be no assurance that
changes to state or federal laws will not materially restrict the ability of
healthcare providers to submit information from patient records using the
Company's applications.
FEDERAL AND STATE HEALTHCARE LEGISLATION. The Company's software
applications and IT services are designed to function within the current
healthcare financing and reimbursement system. Over the past several years, the
healthcare industry has been subject to increasing levels of government
regulation of, among other things, reimbursement rates and certain capital
expenditures. In addition, Congress has considered proposals to reform the
healthcare system. These proposals, if enacted, may further increase government
involvement in healthcare, lower reimbursement rates and otherwise change the
operating environment for our customers. As in the past, healthcare
organizations may react to these proposals and the uncertainty surrounding such
proposals in ways that could result in a reduction or deferral in the use of the
Company's technologies and services. The Company cannot predict with any
certainty what impact, if any, such proposals or healthcare reforms might have
on its business, financial condition or results of operations.
HIPPA requires the use of standard transaction formats, identifiers,
codes sets and privacy and security requirements. Publication of transaction
standards is currently scheduled for June 2000 and compliance will be required
by August 2002. Other regulations are scheduled to be published in stages after
June 2000. Legislation such as the HIPAA could impact the manner in which the
Company conducts its business and could have a material adverse effect on the
Company's financial condition or results of operations.
The Company must deliver HIPAA-compliant systems and its clients are
responsible for their overall HIPAA compliance. The Company's ability to provide
HIPAA-compliant applications to its clients could relieve clients of significant
application remediation requirements, which potentially represents a competitive
advantage for the Company. Conversely, any failure to become HIPAA-compliant
could negatively impact the Company and involve financial and/or criminal
penalties.
EMPLOYEES
The Company believes that one of its key strengths lies in its ability
to attract, develop, motivate and retain a talented, creative and highly skilled
work force of senior-level professionals who are specialists in one or more
areas of healthcare, IT and/or applications services. The Company's employees
are highly experienced, many of whom have established their credentials as
healthcare executives and senior management of healthcare entities, business
office managers, medical records administrators, nurse administrators, nurses,
laboratory technicians, physician assistants, medical technologists, physicians,
hospital admissions directors, and information management and information
systems technical personnel.
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In addition to its skilled employees, the Company retains the services
of trained independent contractors on an as-needed basis to fulfill the
Company's contractual obligations. Such contractors typically have experience in
a specific software vendor's products, and the Company frequently uses these
contractors to implement such vendor's software. Through the combination of
employees and independent contractors, the Company is able to retain highly
talented and experienced professionals on its work force while maintaining the
flexibility to increase or decrease personnel as demanded by contractual needs.
As of April 10, 2000, the Company had 45 employees, of which 44 were
full-time employees. In addition, as of that date, the Company employed 10
independent contractors.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located in Irvine, California
in a leased facility consisting of approximately 5,900 square feet. The lease
expires in March 2002 and provides for an annual rental of $151,936 through
March 2000, $158,296 through March 2001, and $164,656 through March 2002. The
Company also leases office space in Colorado, Iowa and Massachusetts.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1999, no matters were submitted
for vote to the holders of the Company's common stock.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION. The Company's common stock and warrants been traded
on the OTC Electronic Bulletin Board market under the symbol "MCIF" and "MCIFW",
respectively, since June 9, 1999. Prior to that time, between the completion of
the initial public offering of HeathDesk on January 16, 1997 until June 9, 1999,
the Company's common stock and warrants were traded on the Nasdaq Small Cap
Market. On June 9, 1999, the Company was delisted from the Nasdaq Small Cap
Market. Following a hearing with Nasdaq in March 1999, Nasdaq concluded that the
merger of MCII with and into a wholly-owned subsidiary of HealthDesk constituted
a reverse merger with MCII being the acquiring corporation. As a result, Nasdaq
required the Company to comply with the initial listing requirements to remain
listed on the Nasdaq Small Cap Market. Because the Company did not meet these
initial listing requirements, the Company was delisted.
As of April 10, 2000, there were 15,589,921 shares of common stock and
warrants to purchase an aggregate of 2,345,000 shares of common stock
outstanding.
The following table sets forth the range of the high and low bid prices
of the Company's common stock and warrants for the period from January 1, 1998
through December 31, 1999 as reported by National Discount Brokers. Such
information may reflect interdealer prices, without retail mark-up, mark-down or
commissions, and may not reflect actual transactions.
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<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------------------------ ------------------------------
LOW HIGH LOW HIGH
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FISCAL 1998
- -----------
1st Quarter (January 1 - March 31) $2.63 $3.41 $0.81 $0.88
2nd Quarter (April 1 - June 30) $1.03 $3.13 $0.50 $0.81
3rd Quarter (July 1 - September 30) $0.75 $1.94 $0.56 $0.56
4th Quarter (October 1 - December 31) $1.00 $1.63 $0.56 $0.56
FISCAL 1999
- -----------
1st Quarter (March 2 - March 31)(1) $1.25 $3.00 $0.87 $1.05
2nd Quarter (April 1 - June 30) $2.50 $3.12 $0.87 $1.19
3rd Quarter (July 1 - September 30) $2.50 $3.06 $0.75 $0.87
4th Quarter (October 1 - December 31) $1.50 $2.62 $0.75 $0.87
</TABLE>
- ----------------------------
(1) The commencement date for first quarter of 1999 (March 2, 1999) reflects
prices as of the date on which the merger between HealthDesk and MCII was
effectuated.
SECURITY HOLDERS. As of April 10, 2000, there were approximately 107
holders of record of the Company's common stock and 6 holders of record of the
warrants to purchase the Company's common stock. Within the holders of record of
the Company's common stock are depositories such as Cede & Co. that hold shares
of stock for brokerage firms which, in turn, hold shares of stock for beneficial
owners.
DIVIDENDS. The Company has never paid any cash dividends to holders of
the Company's common stock, and the Company's Board of Directors does not intend
to declare or pay any dividends on shares of its common stock in the foreseeable
future. The Board of Directors currently intends to retain available earnings,
if any, generated by the Company's operations for the development and growth of
its business. Pursuant to state laws, the Company may be restricted from paying
dividends to its shareholders as a result of its accumulated deficit as of
December 31, 1999. In addition, the terms of the Company's bank financing
agreement restrict the Company's ability to pay dividends on the Company's
capital stock.
RECENT SALES OF UNREGISTERED SECURITIES.
In May 1999, the Company issued warrants to purchase 50,000 shares of
common stock to a bank in connection with an agreement for a revolving line of
credit. The warrants are exercisable at $2.87 per share and expire on May 27,
2004.
In June 1999, in connection with the acquisition of substantially all
of the assets of Medical Systems Solutions, Inc., the Company issued 111,216
shares of common stock at a price of $2.75 per share.
In October 1999, in connection with the acquisition of Inteck, Inc.,
the Company issued 245,000 shares of common stock to three individuals at a
price of $2.50 per share. On January 5, 2000, the Company issued an additional
120,000 shares of common stock to the same individuals as part of the same
acquisition.
In November and December 1999, the Company sold an aggregate of
1,012,500 shares of Series C 6% Convertible Preferred Stock at a price of $2.00
per share to third parties in a private equity offering.
The issuances of the Company's securities in the transactions
referenced above were effected in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), as transactions not involving a public offering. Exemption from the
registration provisions of the Securities Act is claimed on the basis that such
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transactions did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would provide.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and Notes thereto included elsewhere in
this document. The merger of HealthDesk and MCII on March 2, 1999 has been
accounted for as a reverse acquisition whereby MCII has been identified as the
acquiring corporation for financial reporting purposes. Accordingly, the
discussion in this Management's Discussion and Analysis of Financial Condition
and Results of Operations relates to the accounts of MCII prior to the merger
and the accounts of the merged HealthDesk/MCII entity for all periods following
March 2, 1999.
Except for the historical information contained herein, the following
discussion contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this document
should be read as being applicable to all related forward-looking statements
wherever they appear herein. The Company's actual results may differ materially
from the results discussed in the forward-looking statements as a result of
certain factors including, but not limited to, those discussed under the heading
"Risk Factors" and elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Twelve Months Ended December 31
--------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 100.0% 100.0%
Direct expenses . . . . . . . . . . . . . . . . . . . . . . . .. . . . 81.9 68.1
---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 18.1 31.9
General and administrative expenses . . . . . . . . . . . . . .. . . . 55.3 35.2
---------- ----------
Loss from operations. . . . . . . . . . . . . . . . . . . . . .. . . . (37.2) (3.3)
Interest expense. . . . . . . . . . . . . . . . . . . . . . . .. . . . 1.0 0.8
Non-cash financing costs. . . . . . . . . . . . . . . . . . . .. . . . 1.5 -
Other income. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . (0.1) -
---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . (39.6)% (4.2)%
========== ==========
</TABLE>
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1999 TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
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<PAGE>
REVENUES. The Company's revenues for the year ended December 31, 1999
were $8.6 million as compared to $3.7 million for the year ended December 31,
1998, an increase of $4.9 million or 131%. This increase was primarily a result
of a growth in the Company's IT consulting business during the first three
quarters of 1999 and, to a lesser extent, as a result of an expansion of the
Company's result of a growth in the client base resulting from the acquisition
of Medical Systems Solutions and Inteck.
GROSS PROFIT. Gross profit increased by 31% to $1.6 million for 1999
from $1.2 million for 1998. Gross margin decreased from 32% for 1998 to 18% for
1999. The decrease in gross margin was primarily due to the expansion of the
Company's operations into the Hawaii market, the establishment of two new
departments, Physician Care and Clinical Care, which incurred significant
startup costs consisting principally of salary and travel expenses, and the
reduction in the Company's overall business in the fourth quarter of 1999. This
reduction in business during the fourth quarter of 1999 resulted in several
consultants not being billable for a period of time or being laid off.
GENERAL AND ADMINISTRATIVE EXPENSES. For 1999, general and
administrative expenses increased by 262% to $4.7 million from $1.3 million for
1998. This $3.4 million increase was primarily due to the merger with
HealthDesk, the acquisition of Medical System Solutions and Inteck and an
increase in personnel. The increase was also attributable in part to the
relocation of the Company's corporate headquarters in April 1999 and the
execution of agreements to lease new facilities in Colorado, Iowa and
Massachusetts. The Company's rental expense amounted to $201,000 for 1999 as
compared to $16,000 for 1998.
INTEREST EXPENSE. For 1999, interest expense increased to $85,000 from
$31,000 for 1998. This 174% increase was primarily due to borrowings under the
Company's revolving line of credit entered into in May 1999.
NON-CASH FINANCING COSTS. For 1999, the $131,000 increase in non-cash
financing costs was primarily due to the incremental yield on common stock
issued at a discount to market in connection with a private placement of common
stock by HealthDesk immediately prior to the merger with MCII involving certain
individuals that were employed by the Company subsequent to the merger.
INCOME TAXES. Income taxes were nominal in both respective periods as
the Company is in a loss carryforward position for federal income tax purposes.
At December 31, 1999, the components of the Company's deferred tax assets and
liabilities were comprised primarily of the future tax benefit of the Company's
net operating loss carryforwards of approximately $5.6 million.
The utilization of the net operating loss carryforwards could be
limited due to restrictions imposed under federal and state laws upon a change
in ownership. The amount of the limitation, if any, has not been determined at
this time. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. As a
result of the Company's continued losses and uncertainties surrounding the
realization of the net operating loss carryforwards, management has determined
that the realization of deferred tax assets is not more likely than not.
Accordingly, a valuation allowance equal to the net deferred tax asset amount
has been recorded as of December 31, 1999.
NET LOSS. Net loss for 1999 was $3.4 million as compared to $158,000
for 1998. The loss in 1999 was primarily attributable to the establishment of
two new profit centers that incurred significant start-up expenses without
realizing significant revenues, the severe decrease in revenue during the fourth
quarter of 1999 which the Company believes to be a direct result of year 2000
fears. This decline in business during the fourth quarter of 1999 resulted in an
unusual number of Company consultants not being billable and/or being laid off
which further resulted in the Company incurring significant costs associated
with the severance of these consultants. In addition, during 1999 the Company
relocated its corporate offices and opened or acquired three other offices. The
Company also incurred substantial increases in general and administrative
expenses as a result of the merger with HealthDesk.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, the Company financed its
operations and capital expenditures primarily through proceeds from the
Company's revolving line of credit and proceeds from a private placement of the
Company's of Series C Convertible Preferred Stock during November and December
1999.
As of December 31, 1999, the Company had a working capital deficiency
of $396,000, an accumulated deficit of $4.1 million and $637,000 in cash.
Cash used in the Company's operating activities increased from $685,000
during 1998 to $3.6 million in 1999 primarily as a result of the cash portion of
the net loss of $3.4 million during 1999, increases in accounts receivable and
decreases in accrued liabilities, all of which were partially offset by cash
provided by increases in accounts payable and certain non-cash expenses.
Cash provided in the Company's investing activities totaled $1.1
million for 1999 as compared to cash used in investing activities of $19,000
during 1998. During 1999, the Company received proceeds of $871,000 upon the
reverse merger with HealthDesk and collected $1.1 million from notes receivable
from related parties, which amounts were offset by payments to acquire Medical
System Solutions and Inteck in the aggregate amount of $412,000 (net of cash
acquired) and $432,000 in capital expenditures, primarily related to the
relocation of the Company's corporate facility.
14
<PAGE>
Cash provided in the Company's financing activities totaled $3.1
million for 1999. That amount was provided primarily through $1.2 million of net
borrowings under the Company's bank financing agreement, through the issuance of
$2.0 million of the Company's Series C Preferred Stock, through the collection
of a pre-merger subscription receivable aggregating $725,000, and through the
issuance of notes in the aggregate principal amount of $500,000 to certain
related parties, partially offset by the Company's repayment of $1.3 million on
notes payable to related parties. Cash provided in the Company's financing
activities totaled $721,000 for 1998 relating primarily to proceeds from notes
payable to related parties.
In May 1999, the Company entered into an agreement with a financial
institution for a revolving line of credit of up to $1,700,000, which includes a
$200,000 sub-facility for an equipment term loan and a $150,000 sub-facility for
the issuance of letters of credit. The line of credit bears interest at the
bank's prime rate plus 1.5%. In connection with this line of credit, the Company
issued warrants to purchase 50,000 shares of its common stock, exercisable at
$2.87 per share. This line of credit is collateralized by substantially all of
the assets of the Company. At December 31, 1999, the Company had $1,025,000
outstanding under the revolving line of credit and $142,000 outstanding under
the equipment term loan. As of December 31, 1999, the Company had no amounts
available under the line of credit.
The bank financing agreement contains certain restrictive financial
covenants. At December 31, 1999, the Company was not in compliance with certain
of these covenants and was in default of certain other provisions of the bank
financing agreement. On April 11, 2000, the Company entered into an agreement
with the bank which amended the bank financing agreement. The bank waived all
violations of the financial covenants included in the financing agreement from
inception up to and including March 31, 2000, and, as of April 1, 2000,
eliminated all previous financial covenants and added one new financial
covenant. As consideration for the amendment to the bank financing agreement, as
of April 10, 2000 the Company had repaid the overadvances on its borrowings
under the revolving line of credit in the aggregate amount of approximately
$379,000. Additionally, all borrowings with the bank are now personally
guaranteed by an individual who is a member of the Board of Directors and a
significant stockholder of the Company.
In October 1999, the Company borrowed an aggregate of $500,000 from
certain officers and directors of the Company pursuant to promissory notes
bearing interest at a rate of 10%. As of December 31, 1999, the notes payable
had been repaid in full.
The accompanying consolidated financial statements contained elsewhere
in this report have been prepared assuming that the Company will continue as a
going concern. The Company has suffered recurring losses from operations and
negative cash flows from operations. In addition, as described above, the
Company had a working capital deficiency at December 31, 1999. These factors,
among others, raise substantial doubt about the Company's ability to continue as
a going concern. As a result, the Company's report from its independent auditors
for 1999 contains an explanatory paragraph that describes the uncertainty as to
the Company's ability to continue as a going concern (see Note 2 to the
Consolidated Financial Statements included elsewhere in this report). The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company believes that it will have to obtain additional funds to
meet its projected cash requirements and fund its operations for the next twelve
months. During late 1999 and early 2000, the Company took certain actions in an
effort to become profitable and improve cash flow from operations in the future.
Management implemented a cost reduction program and developed and continues to
implement plans to reduce existing cost structures, improve operating
efficiencies and strengthen the Company's operating infrastructure. The Company
is also implementing a corporate finance program designed to improve its working
capital structure by considering certain financing alternatives. Such
alternatives include a proposed private placement of certain debt and/or equity
securities during the second or third quarter of 2000. In addition, the Company
has amended its existing bank financing agreement. Although the Company has been
successful in obtaining working capital to fund operations to date, there can be
no assurances that the Company will be able to generate additional capital in
the future or secure additional financing with reasonable terms, if at all. In
addition, there can be no assurance, or that the Company's funding requirements
or cash used in operating activities will not increase significantly as a result
of unforeseen circumstances. The inability to obtain such financing could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
In the event the Company exceeds its projected cash requirements, there
can be no assurance that the Company would be able to obtain public or private
third-party sources of financing or that favorable terms for such financing
would be available. In addition, given the trading history of the Company's
common stock and warrants to purchase common stock, there can be no assurance
that the Company will be able to raise additional cash through public or private
offerings of its common stock. If additional funds are raised by issuing equity
or convertible debt securities, options or warrants, further dilution to our
existing shareholders may result.
YEAR 2000 ISSUES
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
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<PAGE>
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in major
system failure or miscalculations. A failure to identify and correct any
mission-critical internal or third-party year 2000 processing problem could have
a material adverse operational or financial consequence to the Company. The
Company believes that its most reasonably likely worst-case scenario would
relate to problems with the systems of third parties rather than with its
internal systems. The Company is limited in its ability to address the year 2000
issue as it relates to third parties and must rely solely on the assurances of
these third parties as to their year 2000 preparedness.
Thus far, the Company has not experienced any significant problems
related to year 2000 issues associated with the computer systems, software,
other property and equipment used by the Company. However, the Company cannot
guarantee that the year 2000 problem will not adversely affect its business,
operating results or financial condition at some point in the future.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on
its net sales or profitability in recent years.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." In SAB 101, the SEC staff expresses its view regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The adoption of SAB
101 is not expected to have a material impact on the Company.
RISK FACTORS
In addition to the other information contained elsewhere in this Form
10-KSB, the following factors should be considered carefully in evaluation the
business and prospects of the Company:
LACK OF SUFFICIENT REVENUES; SIGNIFICANT AND CONTINUING LOSSES. The
Company has not achieved annual profitability and management cannot be certain
that the Company will realize sufficient revenues to achieve profitability. As
of December 31, 1999, the Company had an accumulated deficit of $4.1 million.
There can be no assurance that the Company will be able to generate meaningful
revenues or achieve profitable operations.
The Company received a report from its independent certified public
accountants for the Company's fiscal year ended December 31, 1999 containing an
explanatory paragraph that describes the uncertainty related to the substantial
doubt about the Company's ability to continue as a going concern due to, among
other factors, the Company's recurring losses from operations, negative cash
flows from operations, and its working capital deficiency at December 31, 1999.
NEGATIVE CASH FLOW; NEED FOR ADDITIONAL FINANCING. The Company obtained
a $1.7 million revolving line of credit from a bank in May 1999. In October
1999, the remaining amount available under the line of credit was utilized for
the acquisition of Inteck. In November and December 1999, the Company engaged in
a private equity offering of shares of Series C 6% Convertible Preferred Stock,
resulting in net cash proceeds of $2.0 million. The Company's capital
requirements are expected to continue to be significant and the Company believes
that it will have to obtain additional funds to meet its projected cash
requirements for the next twelve months. There can be no assurance that the
Company will be able to secure additional financing with reasonable terms, if at
all, or that the Company's funding requirements will not increase significantly
as a result of unforeseen circumstances or that the Company's cash used in
16
<PAGE>
operating activities will not increase. In the event the Company exceeds its
projected cash requirements, there can be no assurance that the Company would be
able to obtain public or private third-party sources of financing or, that
favorable terms for such financing would be available. In addition, given the
trading history of the Company's common stock and warrants to purchase common
stock, there can be no assurance that the Company will be able to raise
additional cash through public or private offerings of its common stock. Any of
these developments could materially adversely affect the Company's business,
financial condition and results of operations.
ABILITY TO IMPLEMENT ASP STRATEGY. The Company only recently expanded
its business to include an ASP component. There can be no assurance that the
Company will be able to assess accurately the investment required to negotiate
and perform in a profitable manner any of its ASP contracts. If the Company is
successful in implementing its ASP strategy, the Company anticipates that
competitors may increase their focus on this market, which could adversely
affect the Company's ability to obtain new contracts as well as the
profitability of any such contracts. In addition, any failure by the Company to
perform adequately under its ASP agreements may adversely effect its ability to
obtain future engagements from these or other clients. The Company's failure to
obtain future engagements could have a material adverse affect on the Company's
business, financial condition and results of operations.
RETENTION AND RECRUITMENT OF PROFESSIONAL STAFF. The Company's business
involves the delivery of professional services and is labor-intensive. The
Company's success depends in large part upon its ability to attract, develop,
motivate and retain highly skilled consultants. There is significant competition
for employees with the skills required to perform the services offered by the
Company from other consulting firms, healthcare providers and other healthcare
industry participants, health information systems vendors, clients, systems
integrators and many other enterprises. There can be no assurance that the
Company will be able to attract and retain a sufficient number of highly skilled
employees in the future or that it will continue to be successful in training,
retaining and motivating employees. The loss of a significant number of
consultants and/or the Company's inability to hire a sufficient number of
qualified consultants would adversely affect the Company's ability to secure,
service and complete client engagements and could have a material adverse effect
on the Company's business, operating results and financial condition.
CLIENT CONCENTRATION. The Company derives a significant portion of its
revenues from a relatively limited number of clients. Clients will typically
engage the Company on an assignment-by-assignment basis, and a client will be
able generally to terminate an assignment at any time without penalty. In
addition, the level of the Company's services required by any individual client
can diminish over the life of its relationship with the Company, and there can
be no assurance that the Company will be successful in establishing
relationships with new clients as this occurs. The loss of any significant
client could have a material adverse effect on the Company's business, financial
condition and results of operations.
STRUCTURE OF CLIENT ENGAGEMENTS. Due to the structure of client
engagements, the Company typically provides services to its clients on a
project-by-project basis. As a result, the amount of personnel required to meet
the Company's contractual obligations at a given time varies depending on client
demands and the contractual arrangements then in place. This volatility can
result in indefinite periods in which certain or all Company consultants may not
be billable. In 1999, the Company was forced to lay off several of its
consultants. There can be no assurance that the Company will require the
services of such individuals in the future, or, if the Company does require
their services, that such consultants will return to work for the Company or
will refrain from working for competitors. This uncertainty may negatively
impact relationships between the Company and its employees which, in turn, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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<PAGE>
PROJECT RISKS; LIMITED OUTSOURCING EXPERIENCE. Many of the Company's
engagements involve projects that are critical to the operations of its clients'
business and that provide benefits which may be difficult to quantify. The
Company's failure to meet a client's expectations in the performance of its
services could damage the Company's reputation and adversely affect its ability
to attract new business. In addition, the Company could incur substantial costs
and expend significant resources correcting errors in its work, and could
possibly become liable for damages caused by such errors. The Company has
assisted and expects to continue to assist clients in selecting and implementing
software applications for the clients' use in their business. While the Company
is not aware of any existing or potential claims, the Company could become
involved in disputes which could negatively impact client relationships and
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations, whether or not the Company bears
any responsibility, legal or otherwise.
COMPETITION. The market for the Company's services is highly
fragmented, highly competitive and subject to rapid change. The Company believes
that it will compete principally with applications service providers, systems
integration firms, national consulting firms, including the consulting divisions
of large accounting firms, information system vendors, service groups of
computer equipment companies, facilities management companies, IT outsourcing
companies, general management consulting firms, and regional and specialty
consulting firms. Many of the Company's competitors have significantly greater
financial, technical and marketing resources than the Company, generate greater
revenues and have greater name recognition than the Company. Moreover, those
competitors who sell or license their own software may in the future attempt to
limit or eliminate the use of third-party consultants, such as the Company, to
implement and/or customize such software. In addition, vendors whose systems may
enjoy wide market acceptance and large market share could enter into exclusive
or restrictive agreements with other consulting firms, which could eliminate or
substantially reduce the Company's implementation work for those systems. There
are relatively low barriers to entry into the Company's markets, and the Company
faces and expects to face additional competition from new entrants into the
healthcare consulting industry. In addition, combinations and consolidations in
the consulting industry will give rise to large competitors whose relative
strengths are impossible to predict. The Company also competes with its client's
internal resources, particularly where these resources represent a fixed cost to
the client. This internal client competition may heighten as consolidation of
healthcare providers creates organizations large enough to support more
sophisticated internal information management capabilities. There can be no
assurance that the Company will be able to compete effectively with current and
future competitors or that competitive pressures, including wage pressures as
the consultant labor market tightens, will not cause the Company's revenue or
operating margins to decline, or otherwise materially adversely affect its
business, financial condition and results of operations.
DEPENDENCE ON VENDOR RELATIONSHIPS. The Company depends, and will
continue to depend, upon its licensing and business relationships with
third-party vendors. The Company's success relies in part upon its ability to
maintain its existing vendor relationships and to form new relationships with
vendors in order to enhance the Company's services and to remain competitive in
providing applications services to its clients. Despite the vendor licensing
contacts in currently in place, there can be no assurance that the Company will
be able to maintain relationships with its vendors or establish relationships
with new vendors. In addition, client satisfaction of the Company's applications
services is dependent upon the use and reliability of the software, products and
services of the Company's application vendors. There can be no assurance that
the software, products or services of the Company's vendors will achieve market
acceptance or commercial success, or that the Company's existing or future
vendor relationships will result in sustained business partnerships or
successful Company product and service offerings.
ACQUISITION STRATEGY. In 1999, the Company implemented its strategy of
expansion through the acquisitions of Medical Systems Solutions and Inteck. The
Company expects to continue to acquire companies as a part of its growth
strategy and in connection with the Company's increase in business-to-business
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<PAGE>
service offerings. The Company competes with other companies to acquire
businesses and expects this competition to continue to increase, making it more
difficult in the future to acquire suitable companies on favorable terms, if at
all. In addition, although the Company may acquire additional companies in the
future, it may be unable successfully to integrate such companies in an
effective and timely manner. If the Company is unable to integrate acquired
businesses, it may incur significant costs, delays or other operational,
technical or financial problems. The inability successfully to integrate
acquired businesses may also divert management's attention from existing
business and impair relationships with exiting clients and employees. To finance
future acquisitions, the Company may issue equity securities that could result
in dilution of the Company's common stock held by shareholders. The Company may
also incur debt and additional expenses as a result of future acquisitions which
could have a material adverse effect on the Company's business, financial
condition and operating results.
DELISTING OF SECURITIES FROM NASDAQ SYSTEM; DISCLOSURE RELATING TO
LOW-PRICED STOCKS. On June 9, 1999, the Company was delisted from the Nasdaq
Small Cap Market. Following a hearing with Nasdaq in March 1999, Nasdaq
concluded that the merger of MC Informatics, Inc. with and into a wholly-owned
subsidiary of HealthDesk Corporation constituted a reverse merger with MC
Informatics, Inc. being the acquiring corporation. As a result, Nasdaq required
the Company to comply with the initial listing requirements to remain listed on
the Nasdaq Small Cap Market. Because the Company did not meet these initial
listing requirements, the Company was delisted. The trading of the Company's
securities is now conducted on the OTC Electronic Bulletin Board.
Due to the delisting, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the Company's
securities. In addition, the trading of securities is subject to certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the common stock, which could
severely limit the market liquidity of the common stock and the ability of
shareholders to sell their common stock in the secondary market. There can be no
assurance that the Company's common stock will be listed on Nasdaq in the
foreseeable future.
CONTROL BY MANAGEMENT. As of April 10, 2000, the officers and directors
of the Company beneficially owned, in the aggregate, approximately 80% of the
outstanding shares of common stock (assuming no exercise of outstanding warrants
to purchase common stock). Accordingly, such persons, acting together, are in a
position to control the election of all of the Company's directors and will thus
control the management, policies and business operations of the Company. Such
persons are also in a position to control the outcome of any matter submitted to
a vote of the Company's shareholders.
OUTSTANDING OPTIONS. As of April 10, 2000, the Company had outstanding
options to purchase an aggregate of 2,596,362 shares of common stock at exercise
prices ranging from $1.00 to $5.00. The exercise price of certain options
represent a discount to market. Exercise of any of these options may have a
dilutive effect on the Company's shareholders. Furthermore, the terms upon which
the Company may be able to obtain additional equity financing may be adversely
affected, since the holders of the options can be expected to exercise them, if
at all, at a time when the Company would, in all likelihood, be able to obtain
any needed capital on terms more favorable to the Company than those provided in
the options.
19
<PAGE>
NO DIVIDENDS. To date, the Company has not paid any cash dividends and
does not expect to declare or pay dividends on its common stock in the
foreseeable future.
AUTHORIZED PREFERRED STOCK. The Company has authorized 3,000,000 shares
of Preferred Stock, of which 2,500,000 shares are designated as Series C 6%
Convertible Preferred Stock. The Series C Convertible Preferred Stock has a
liquidation preference of $2.00 per share and each share is convertible into one
share of common stock. The holders of Series C Convertible Preferred Stock are
entitled to receive cumulative dividends at a rate of 6%, payable annually. The
rights of the holders of the Company's common stock will be subject to and may
be adversely affected by the rights of holders of the Series C Convertible
Preferred Stock and any other preferred stock that may be issued in the future.
The ability to issue preferred stock without shareholder approval could have the
effect of making it more difficult for a third party to acquire a majority of
the voting stock of the Company, thereby delaying, deferring or preventing a
change in control of the Company.
VOLATILITY OF STOCK AND WARRANTS PRICES. The trading price of the
Company's common stock and warrants to purchase common stock have experienced
substantial fluctuations and is subject to significant volatility due to factors
impacting the overall market which are unrelated to the Company's performance.
The historical results of operations and financial position of the Company are
not necessarily indicative of future financial performance. If revenues or
earnings fail to meet securities analysts' expectations, there could be an
immediate and significant adverse impact on the trading price of the Company's
common stock.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company are filed with this report
beginning on page F-1 following the signature pages.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 12, 1998, PricewaterhouseCoopers LLP resigned as accountants
of HealthDesk. In connection with the audit of the two fiscal years ended
December 31, 1996 and December 31, 1997, respectively, and through the date of
resignation, there were no disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused it to make reference to the matter
in connection with its report. The report of PricewaterhouseCoopers LLP on the
financial statements of HealthDesk for the years ended December 31, 1996 and
December 31, 1997 did not contain an adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, scope or accounting
principles.
On February 18, 1999, the Company appointed BDO Seidman, LLP as its
independent certified public accountants. Prior to the appointment of BDO, the
Company did not consult with BDO regarding either the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements.
20
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information appearing under the caption "Election of Directors,"
including the subcaption "Compliance with Beneficial Ownership Reporting Rules,"
contained in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended December 31, 1999 (the "definitive Proxy
Statement") is incorporated by reference into this item.
ITEM 10. EXECUTIVE COMPENSATION.
The information appearing under the caption "Election of Directors,"
including the subcaption "Executive Compensation," contained in the Company's
definitive Proxy Statement is incorporated by reference into this item.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Election of Directors,"
including the subcaption "Principal Shareholders," contained in the Company's
definitive Proxy Statement is incorporated by reference into this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Certain Relationships and
Related Transactions" contained in the Company's definitive Proxy Statement is
incorporated by reference into this item.
21
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation of the Registrant (4)
3.2 Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of 6% Series C Convertible Preferred Stock of the
Registrant
32 Bylaws of the Registrant, as amended (1)
10.1 1994 Founder's Stock Option Plan, as amended (1)
10.2 1999 Stock Option Plan *
10.3 Asset Purchase Agreement dated as of September 29, 1998, by and between
HealthDesk Corporation, Patient Infosystems Acquisition Corp. and
Patient Infosystems, Inc. (2)
10.4 Amendment to Asset Purchase Agreement dated as of December 1, 1998 by
and between HealthDesk Corporation, Patient Infosystems Acquisition
Corp. and Patient Infosystems, Inc. (3)
10.5 Second Amendment to Asset Purchase Agreement dated as of February 1,
1999 by and between HealthDesk Corporation, Patient Infosystems
Acquisition Corp. and Patient Infosystems, Inc. (3)
10.6 Agreement and Plan of Reorganization dated August 18, 1998, by and
between HealthDesk Corporation, MC Acquisition Corporation, MC
Informatics, Inc. ("MCII") and certain shareholders of MCII (2)
10.7 Amendment to Agreement and Plan of Reorganization dated February 24,
1999 by and between HealthDesk Corporation, MC Acquisition Corporation,
MCII and certain shareholders of MCII *
10.8 Amendment to Agreement and Plan of Reorganization dated February 25,
1999 by and between HealthDesk Corporation, MC Acquisition Corporation,
MCII and certain shareholders of MCII (3)
10.9 Asset Purchase Agreement dated June 29, 1999 by and between the
Registrant, Medical Systems Solutions, Inc., Arthur H. Young and John
B. Carey (5)
10.10 Stock Purchase Agreement dated October 1, 1999 by and between the
Registrant and Donald M. Jacobs (6)
10.11 Office Building Lease dated February 11, 1999 by and between Spieker
Properties, L.P. and the Registrant *
10.12 Loan and Security Agreement dated May 27, 1999 by and among the
Registrant, MC Acquisition Corporation and Silicon Valley Bank *
10.13 Second Loan Moditication Agreement dated February 29, 2000 by and
between the Registrant, MC Acquisition Corporation, HSG Acquisitions,
Inc. and Silicon Valley Bank *
10.14 Third Loan Modification Agreement dated April 11, 2000 by and between
the Registrant, MC Acquisition Corporation, HSG Acquisitions, Inc. and
Silicon Valley Bank *
10.15 Revolving Promissory Note dated May 27, 1999 executed by the Registrant
and MC Acquisition Corporation in favor of Silicon Valley Bank *
10.16 Amended and Restated Revolving Promissory Note dated February 4, 2000
executed by the Registrant, MC Acquisition Corporation and HSG
Acquisitions, Inc. in favor of Silicon Valley Bank *
10.17 First Amendment to Amended and Restated Revolving Promissory Note dated
April 11, 2000 executed by the Registrant, MC Acquisition Corporation
and HSG Acquisitions, Inc. in favor of Silicon Valley Bank *
22
<PAGE>
10.18 Equipment Term Note dated May 27, 1999 executed by the Registrant and
MC Acquisition Corporation in favor of Silicon Valley Bank *
10.19 Amended and Restated Equipment Term Note dated February 4, 2000
executed by the Registrant, MC Acquisition Corporation and HSG
Acquisitions, Inc. in favor of Silicon Valley Bank *
10.20 First Amendment to Amended and Restated Equipment Term Note dated April
11, 2000 executed by the Registrant, MC Acquisition Corporation and HSG
Acquisitions, Inc. in favor of Silicon Valley Bank *
10.21 Intellectual Property Security Agreement dated May 27, 1999 by and
between the Registrant, MC Acquisition Corporation and Silicon Valley
Bank *
10.22 Intellectual Property Security Agreement dated February 29, 2000 by and
between HSG Acquisitions, Inc. and Silicon Valley Bank *
10.23 Warrant to Purchase Stock dated May 27, 1999 issued by the Registrant
in favor of Silicon Valley Bank *
10.24 Unconditional Guaranty (Individual) dated March 24, 2000 executed by
John Pappajohn *
10.25 Registration Rights Agreement dated May 27, 1399 by and between the
Registrant and Silicon Valley Bank *
10.26 Registration Rights Agreement dated February 26, 1999 by and between
HealthDesk Corporation and certain shareholders (4)
10.27 Employment Agreement dated February 1999 by and between the Registrant
and Garfield F. Thompson *
10.28 Employment Agreement dated February 1999 by and between the Registrant
and Bi11 W. Childs *
16.1 Letter on Change in Certifying Accountant from PricewaterhouseCoopers
LLP (7)
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
- ------------------
* To be filed be amendment.
(1) Filed as an exhibit to the Registrant's Form SB-2 (Registration No.
333-14519) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Form 8-K filed October 6, 1998
and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 8-K filed March 16, 1999
and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Form lO-KSB filed April 15,
1999 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Form 8-K filed July 14, 1999
and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Form 8-K filed October 15, 1999
and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Form 8-K/A filed August 26,
1998 and incorporated herein by reference.
23
<PAGE>
EXHIBIT INDEX
(a) Exhibits:
3.2 Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of 6% Series C Convertible Preferred Stock of the
Registrant
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized thereunto duly authorized on this 14th day of April,
2000.
MC INFORMATICS, INC.
By: /s/ Jeffrey L. Pollard
-----------------------
Jeffrey L. Pollard
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints and Bill Childs and Jeffrey L.
Pollard and each of them, jointly and severally, his attorneys-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Form 10-KSB, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-KSB has been signed below by the following persons on the date
indicated on behalf of the Registrant and in the capacities and on the dates
indicated:
NAME TITLE DATE
- ---- ---- ----
/s/ Bill Childs Chief Executive Officer, Chairman April 14, 2000
- ----------------------- of the Board and Director
Bill Childs (principal executive officer)
/s/ David Koeller President, Chief Operating Officer April 14, 2000
- -----------------------
David Koeller
/s/ Jeffrey L. Pollard Chief Financial Officer April 14, 2000
- ----------------------- (principal financial and
Jeffrey L. Pollard accounting officer)
/s/ John Pappajohn Director April 14, 2000
- -----------------------
John Pappajohn
/s/ Joseph R. Dunham Director April 14, 2000
- -----------------------
Joseph R. Dunham
/s/ David Joiner Director April 14, 2000
- -----------------------
David Joiner
/s/ Bruce Ryan Director April 14, 2000
- -----------------------
Bruce Ryan
/s/ Michael Richards Director April 14, 2000
- -----------------------
Michael Richards
25
<PAGE>
MC Informatics, Inc.
Index to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
MC Informatics, Inc.
We have audited the accompanying consolidated balance sheet of MC
Informatics, Inc. as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows
for the years ended December 31, 1999 and 1998. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MC
Informatics, Inc. at December 31, 1999, and the results of its
operations and its cash flows for the years ended December 31, 1999 and
1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations and negative cash
flows from operations. In addition, the Company has a working capital
deficiency at December 31, 1999. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Orange County, California
March 8, 2000, except as to the fourth
paragraph of Note 7, which is as
of April 11, 2000, and Note 14,
which is as of April 10, 2000
F-2
<PAGE>
<TABLE>
MC INFORMATICS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<CAPTION>
ASSETS (NOTES 4, 7 AND 14)
<S> <C>
Current assets:
Cash $ 636,504
Accounts receivable, net of allowance for doubtful
accounts of $298,570 1,833,602
Prepaid expenses and other current assets 342,460
-------------
Total current assets 2,812,566
Property and equipment, net (Note 5) 415,032
Goodwill, net of accumulated amortization of $137,289 (Note 4) 2,168,372
Other assets 55,342
-------------
$ 5,451,312
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit (Note 7) $ 1,202,211
Current obligation related to business acquisition (Note 4) 900,539
Accounts payable 658,004
Accrued liabilities 329,160
Deferred revenue 119,148
-------------
Total current liabilities 3,209,062
Obligation related to business acquisition (Note 4) 300,000
-------------
Total liabilities 3,509,062
-------------
Commitments and contingencies (Notes 2 and 13)
Subsequent events (Notes 7 and 14)
Stockholders' equity (Notes 3, 4 and 9):
Preferred Stock, no par value. Authorized 3,000,000 shares:
Series C 6% Convertible Preferred Stock, $.01 par value. Issued
and outstanding 1,012,500 shares (aggregate liquidation
preference of $2,025,000) 2,432,257
Common stock, no par value. Authorized 40,000,000 shares;
issued and outstanding 15,469,291 shares 3,906,890
Unearned compensation (274,450)
Accumulated deficit (4,122,447)
-------------
Total stockholders' equity 1,942,250
-------------
$ 5,451,312
=============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
MC INFORMATICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues $ 8,570,347 $ 3,716,585
Direct expenses 7,017,174 2,529,959
---------------- ----------------
Gross profit 1,553,173 1,186,626
General and administrative expenses 4,740,553 1,309,601
---------------- ----------------
Loss from operations (3,187,380) (122,975)
Interest expense (Note 6) 84,750 30,985
Non-cash financing costs (Note 3) 131,250 -
Other income (9,960) -
---------------- ----------------
Loss before income taxes (3,393,420) (153,960)
Provision for income taxes (Note 10) 1,600 3,800
---------------- ----------------
Net loss $ (3,395,020) $ (157,760)
================ ================
Basic and diluted loss per share (Note 11) $ (.28) $ (.03)
================ ================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
MC INFORMATICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
Members' Preferred Stock Common Stock
Equity ----------------------- -------------------------
(Deficit) Unearned Accumulated
Amount Shares Amount Shares Amount Compensation Deficit Total
----------- ----------- ------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 $ (92,389) -- $ -- -- $ -- $ -- $ -- $ (92,389)
Net income, January 1
through
June 22, 1998 72,189(1) -- -- -- -- -- -- 72,189
Conversion of LLC to
S-corporation 20,200 -- -- 5,645,230 70,000 -- (90,200) --
Net loss, June 23
through
December 31, 1998 -- -- -- -- -- -- (229,949)(1) (229,949)
----------- ----------- ------------ ------------ ------------ ------------ ----------- ------------
Balance,
December 31, 1998 -- -- -- 5,645,230 70,000 -- (320,149) (250,149)
Stock issued in
connection with
reverse acquisition
(Note 3) -- -- -- 9,467,845 2,531,748 -- -- 2,531,748
Stock issued in
connection with
acquisitions (Note
4) -- -- -- 356,216 918,344 -- -- 918,344
Warrants issued in
connection with
bank financing
(Note 7) -- -- -- -- 38,967 -- -- 38,967
Employee stock options
issued as
compensation
(Note 9) -- -- -- -- 329,340 (329,340) -- --
Amortization of
unearned
compensation
(Note 9) -- -- -- -- -- 54,890 -- 54,890
Compensation for
non-employee stock
options (Note 9) -- -- -- -- 18,491 -- -- 18,491
Series C Preferred
Stock issued in
private equity
offering (Note 9) -- 1,012,500 2,024,979 -- -- -- -- 2,024,979
Preferred stock deemed
dividend (Note 9) -- -- 407,278 -- -- -- (407,278) --
Net loss -- -- -- -- -- -- (3,395,020) (3,395,020)
----------- ----------- ------------ ------------ ------------ ------------ ----------- ------------
Balance,
December 31, 1999 $ -- 1,012,500 $ 2,432,257 15,469,291 $ 3,906,890 $ (274,450) $(4,122,447) $ 1,942,250
=========== =========== ============ ============ ============ ============ ============ ============
</TABLE>
(1) The total net loss for the year ended December 31, 1998 was $157,760.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
MC INFORMATICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,395,020) $ (157,760)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 198,333 9,499
Provision for doubtful accounts 304,278 38,597
Warrants issued in connection with bank financing 38,967 -
Non-cash financing costs 131,250 -
Amortization of unearned compensation for employee options 54,890 -
Compensation for non-employee stock options 18,491 -
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable (833,737) (888,879)
Prepaid expenses and other current assets (38,684) (57,261)
Other assets 9,792 (13,368)
Accounts payable 289,621 148,913
Accrued liabilities (333,507) 112,764
Deferred revenue (83,557) 122,824
------------------ ------------------
Net cash used in operating activities (3,638,883) (684,671)
------------------ ------------------
Cash flows from investing activities:
Purchases of property and equipment (431,880) (18,918)
Cash received upon reverse acquisition 871,268 -
Collection of notes receivable from related parties 1,111,819 -
Advances to related party 7,285 -
Payments for business acquisitions, net of cash acquired (411,706) -
------------------ ------------------
Net cash provided by (used in) investing activities 1,146,786 (18,918)
------------------ ------------------
Cash flows from financing activities:
Proceeds from revolving line of credit 1,367,211 -
Repayments on revolving line of credit (200,000) -
Proceeds from notes payable to related parties 500,000 848,819
Repayments of notes payable to related parties (1,288,819) (100,000)
Proceeds from notes payable - 50,000
Repayment of notes payable (17,500) (77,500)
Collection of pre-merger subscription receivable 725,000 -
Proceeds from Series C Preferred Stock offering 2,024,979 -
------------------ ------------------
Net cash provided by financing activities 3,110,871 721,319
------------------ ------------------
</TABLE>
F-6
<PAGE>
<TABLE>
MC INFORMATICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Net increase in cash 618,774 17,730
Cash, beginning of year 17,730 -
------------------ -------------------
Cash, end of year $ 636,504 $ 17,730
================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 87,994 $ 15,893
================== ===================
Income taxes $ 1,600 $ 1,920
================== ===================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
MC Informatics, Inc. (the "Company") was incorporated in California on
June 22, 1998. The Company is the successor to a California limited
liability company that was formed on April 14, 1997. The Company
operates in one segment and is a provider of consulting services and
information technology solutions to the healthcare industry.
Effective June 22, 1998, the members of the limited liability company
converted their membership interests to shares of the Company's common
stock.
BASIS OF PRESENTATION
As discussed more fully in Note 3, HealthDesk Corporation ("HealthDesk")
merged with MC Informatics, Inc. ("MCIF") on March 2, 1999. The merger
was accounted for as a purchase of HealthDesk by MCIF in a "reverse
acquisition", since HealthDesk had no ongoing business or operations at
the time of the merger and the executive officers and members of the
board of directors of the post-merger entity were primarily comprised of
individuals previously associated with MCIF. In a reverse acquisition,
the accounting treatment differs from the legal form of the transaction,
as the continuing legal parent company (HealthDesk) is not assumed to be
the acquirer and the financial statements of the combined entity are
those of the accounting acquirer (MCIF), including any comparative prior
year financial statements presented by the combined entity after the
business combination. Consequently, the consolidated financial
statements include the accounts of MCIF, and beginning March 2, 1999,
include the accounts of HealthDesk.
In connection with the reverse acquisition, the Company assumed the
number of authorized no par common shares (40,000,000 shares) and the
number of authorized no par preferred shares (3,000,000 shares) of
HealthDesk. Accordingly, all references to the number of shares and the
per share information in the accompanying consolidated financial
statements have been adjusted to reflect these changes on a retroactive
basis.
REVENUE RECOGNITION
The Company recognizes revenue when services are rendered. Payments
received from customers and invoices presented to customers in advance
of services have been deferred until earned and are recorded as deferred
revenue in the accompanying consolidated financial statements.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives
of the assets (or lease term, if shorter) which range from two to seven
years.
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
GOODWILL
Goodwill represents the excess of the purchase price over net assets
acquired through business combinations accounted for as purchases and is
amortized on a straight-line basis over its estimated useful life of
five to seven years.
DEBT ISSUANCE COSTS
The costs related to the issuance of the bank financing are capitalized
and amortized over the term of the related debt.
F-8
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG LIVED ASSETS
The Company reviews the carrying amount of its long-lived assets and
identifiable intangible assets for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less
costs to sell.
INCOME TAXES
From inception through June 22, 1998, the Company was structured as a
limited liability company ("LLC"). No liability for income taxes was
recorded for Federal or state purposes since the LLC was recognized as a
partnership for income tax purposes. Accordingly, all profits, losses
and credits of the Company through June 22, 1998 were the responsibility
of the LLC members.
Upon the Company's conversion on June 22, 1998 from an LLC to an
S-corporation under the provisions of Section 1362 of the Internal
Revenue Code, the Company elected to be taxed as an S-corporation.
Accordingly, the Company has not provided for any income taxes for the
period from June 22, 1998 through March 2, 1999, except certain state
franchise taxes, since the liability is that of the individual
stockholders.
Effective March 2, 1999, in connection with the merger with HealthDesk,
the Company became a C Corporation for income tax purposes. The Company
uses the liability method of accounting for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recognized based on the
differences between financial statement and income tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the
state minimum tax payable for the period and the change during the
period in net deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is
recognized for its employee stock option plans, unless the exercise
price of options granted is less than fair market value on the date of
grant. The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation".
LOSS PER SHARE
Loss per share is calculated pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings per Share". Basic earnings
(loss) per share includes no dilution and is computed by dividing loss
available to common shareholders by the weighted average number of
shares outstanding during the period. Diluted earnings (loss) per share
reflects the potential dilution of securities that could share in the
earnings of the Company.
F-9
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires all entities to disclose
the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is
practicable to estimate fair value. This statement defines fair value of
a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
The carrying amount of accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of their fair value because of the
short maturity of these items. The Company believes the carrying amounts
of its revolving lines of credit approximate fair value because the
interest rates on these instruments approximate market interest rates.
As of December 31, 1999, the fair value of all financial instruments
approximated carrying value.
The fair value of the Company's obligations related to business
acquisitions cannot be determined due to the financial instrument
arising in connection with an acquisition transaction and therefore no
market for such instrument.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and accounts
receivable. The Company places its cash with high quality financial
institutions. At times, cash balances may be in excess of the amounts
insured by the Federal Deposit Insurance Corporation.
Credit is extended for all customers based upon an evaluation of the
customer's financial condition and credit history and generally the
Company does not require collateral. Credit losses are provided for in
the consolidated financial statements and consistently have been within
management's expectations.
The Company had revenues from three customers, which accounted for
approximately 25%, 17% and 16%, respectively, of revenues for the year
ended December 31, 1999. The accounts receivable balance from these
customers was approximately 10%, 36% and 2%, respectively, at December
31, 1999. The Company had revenues from two customers which accounted
for approximately 39% and 18%, respectively, of revenues for the year
ended December 31, 1998.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to be consistent with the 1999 presentation.
F-10
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. During the years
ended December 31, 1999 and 1998, the Company experienced operating
losses of $3,187,380 and $122,975, respectively, and had negative cash
flow from operations of $3,638,883 and $684,671, respectively. In
addition, the Company had a working capital deficiency of $396,496 at
December 31, 1999. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
During late 1999 and early 2000, the Company took certain actions in an
effort to become profitable and improve cash flow from operations in the
future. Management embarked on an aggressive cost reduction program and
developed and continues to implement plans to reduce existing cost
structures, improve operating efficiencies, and strengthen the Company's
operating infrastructure. There can be no assurances that the Company
can achieve its plans to become profitable and improve cash flow from
operations.
The Company is also implementing a corporate finance program designed to
improve its working capital structure by considering certain financing
alternatives. Such alternatives include the private placement of certain
debt and equity securities. In addition, management has amended its
existing bank financing agreement (Note 7). Although management has been
successful in obtaining working capital to fund operations to date,
there can be no assurances that the Company will be able to generate
additional capital in the future.
3. MERGER WITH HEALTHDESK
On March 2, 1999, MC Informatics, Inc. ("MCIF"), was merged with and
into a wholly-owned subsidiary of HealthDesk Corporation ("HealthDesk")
through the issuance of 5,645,230 shares of HealthDesk's common stock in
exchange for all the outstanding common shares of MCIF pursuant to the
terms of an Agreement and Plan of Reorganization, dated August 18, 1998
(the "Agreement"). In connection with the merger, HealthDesk changed its
name to MC Informatics, Inc. In accordance with the Agreement, upon the
closing of the merger in March 1999, all of the outstanding shares of
series B preferred stock of HealthDesk were converted into 2,525,000
shares of common stock.
The transaction has been accounted for as a reverse acquisition whereby
MCIF has been identified as the acquiring corporation for financial
reporting purposes. Accordingly, the accompanying consolidated financial
statements reflect the accounts of MCIF for all periods presented, and
include the accounts of HealthDesk from the date of the stock-for-stock
exchange (March 2, 1999).
The 5,645,230 shares of common stock issued to acquire the common stock
of MCIF are reflected in the accompanying consolidated financial
statements as if the shares were issued and outstanding for all periods
presented. The 9,467,845 shares retained by the original HealthDesk
shareholders (including the 2,525,000 shares of common stock issued upon
conversion of the HealthDesk series B preferred stock) are reflected in
the accompanying consolidated financial statements as consideration
issued by MCIF to acquire the net assets of HealthDesk. The historical
cost of the net assets acquired and, accordingly, the recorded value of
the common stock issued was $2,531,748.
The Company recorded $131,250 in the accompanying 1999 consolidated
statement of operations for non-cash financing costs associated with
common stock sold by HealthDesk, at a discount to market, to certain
individuals that were employed by the Company subsequent to the merger.
As used herein, the term the Company refers to MCIF prior to the merger
of MCIF and HealthDesk Corporation and the combined entity after the
merger.
F-11
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
3. MERGER WITH HEALTHDESK (CONTINUED)
The following represents the unaudited pro forma results of operations
as if the merger had occurred at the beginning of the respective periods
presented below.
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues $ 8,570,347 $ 3,716,585
=============== ===============
Loss from continuing operations $ (3,781,782) $ (1,335,461)
=============== ===============
Basic and diluted loss per share from continuing operations $ (.27) $ (0.14)
=============== ===============
</TABLE>
The pro forma results of operations above do not purport to be
indicative of the results that would have occurred had the merger taken
place at the beginning of the respective periods presented or of results
which may occur in the future.
4. ACQUISITIONS OF BUSINESSES
HSG ACQUISITION, INC.
On October 1, 1999, the Company acquired all of the outstanding stock of
HSG Acquisitions, Inc. (dba Inteck, Inc.) ("Inteck") pursuant to the
terms of a Stock Purchase Agreement for a purchase price of $1,812,500
subject to certain adjustments. The purchase price for the acquisition
included the issuance of 245,000 shares of the Company's common stock
valued at $2.50 per share (market value), an additional issuance of
120,000 shares of common stock valued at $2.50 per share on January 5,
2000, a cash payment of $300,000 and a promissory note for $600,000
bearing interest at the rate of 8.5% per annum commencing October 1,
1999. The terms of the promissory note include an interest only payment
of $13,413 due on January 5, 2000, and nine monthly payments of
principal and interest of $36,650 commencing January 5, 2000, with a
balloon payment of $300,000 due on October 1, 2000. The acquisition has
been accounted for using the purchase method of accounting and the
assets acquired and liabilities assumed were recorded at their estimated
fair values at the date of the acquisition. The cost in excess of net
assets acquired was $1,845,247 which is being amortized on a
straight-line basis over seven years.
In connection with the acquisition, the Company assumed a deferred
compensation liability of $144,983, which is due on demand. In addition,
the purchase price was increased by $155,556 as a result of the
subsequent realization of certain assets. This purchase price adjustment
is payable to the seller on April 23, 2000. Such amounts have been
included in current obligation related to business acquisition in the
accompanying balance sheet. The amounts due to the seller as a result of
the acquisition are collateralized by substantially all of the assets of
Inteck.
Supplementary information related to the acquisition of Inteck is as
follows:
Components of purchase price
F-12
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
4. ACQUISITIONS OF BUSINESSES (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Cash $ 300,000
Promissory note 600,000
Future obligation to issue 120,000 shares of the Company's stock 300,000
Issuance of 245,000 shares of the Company's common stock 612,500
---------------
1,812,500
Purchase price adjustment payable to seller 155,556
Acquisition costs 79,561
---------------
Total purchase price 2,047,617
Net assets acquired 202,370
---------------
Goodwill $ 1,845,247
===============
</TABLE>
The following represents the unaudited pro forma results of operations
as if the acquisition had occurred at the beginning of the respective
periods presented below:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Revenues $ 10,049,394 $ 5,380,964
================== =================
Net loss $ (3,313,307) $ (1,831,014)
================== =================
Basic and diluted loss per share $ (.27) $ (.14)
================== =================
</TABLE>
The pro forma results of operations above do not purport to be
indicative of the results that would have occurred had the acquisition
taken place at the beginning of the respective period presented or of
results which may occur in the future.
MEDICAL SYSTEMS SOLUTIONS
Effective June 1, 1999, the Company acquired substantially all of the
assets of Medical Systems Solutions, Inc. pursuant to the terms of an
Asset Purchase Agreement. The assets purchased include inventory of
computer hardware and software programs, computer equipment and all of
the current customer contracts of Medical Systems Solutions, Inc. The
purchase price for the acquisition included the issuance of 111,216
shares of common stock (with a market value of $305,844) and a cash
payment of $195,263. The acquisition has been accounted for using the
purchase method of accounting and the assets acquired and liabilities
assumed were recorded at their estimated fair values at the date of the
acquisition. The cost in excess of the net assets acquired was $438,414
which is being amortized on a straight-line basis over five years.
The pro forma effect of this asset purchase for 1999 and 1998 would not
be materially different than the amounts reported in the accompanying
statements of operations.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, 1999
------------------
Office equipment $ 308,951
Furniture and fixtures 150,629
Software 21,241
------------------
480,821
Accumulated depreciation and amortization (65,789)
------------------
$ 415,032
==================
6. NOTES RECEIVABLE AND PAYABLE TO RELATED PARTIES
During 1998 and through February 1999, HealthDesk loaned amounts
aggregating $1,111,819 to certain of the directors and officers of MCIF.
These funds were subsequently loaned on substantially the same terms to
MCIF by said directors and officers. The notes were unsecured, bore
interest at 8.5% per annum and were payable on demand. As of December
31, 1999, the notes receivable and notes payable had been collected and
repaid in full.
F-13
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. NOTES RECEIVABLE AND PAYABLE TO RELATED PARTIES (CONTINUED)
In October 1999, certain officers and directors loaned an aggregate
amount of $500,000 to the Company. The notes were unsecured and bore
interest at 10% per annum. As of December 31, 1999, all amounts owed had
been repaid.
Interest incurred on notes payable to related parties was $27,522 and
$30,385 during the years ended December 31, 1999 and 1998, respectively.
7. REVOLVING LINES OF CREDIT
On May 28, 1999, the Company entered into an agreement with a bank for a
revolving line of credit of up to $1,700,000, which includes a $200,000
sub-facility for an equipment term loan and a $150,000 sub-limit for the
issuance of letters of credit. In connection with the bank financing
agreement, the Company issued warrants to purchase 50,000 shares of the
Company's common stock, exercisable at $2.87 per share and expiring on
May 27, 2004. The estimated fair value of these warrants was $38,967 and
such amount has been accounted for as a debt issuance cost in the
accompanying consolidated financial statements. As of December 31, 1999,
the Company had $1,025,000 outstanding under the revolving line of
credit and $142,211 outstanding on the equipment term loan. No amounts
are available under this revolving line of credit at December 31, 1999.
The line of credit is collateralized by substantially all assets of the
Company and bears interest at the bank's prime rate (8.5% at December
31, 1999) plus 1.5%. The revolving line of credit is payable in monthly
installments of interest only, with the unpaid principal balance and
accrued interest due on May 26, 2000. The equipment term loan is payable
in monthly installments of interest only at the bank's prime rate plus
1.5% through May 27, 2000, at which time the outstanding balance was to
be payable in equal monthly principal and interest installments through
May 26, 2003.
The bank financing agreement contains certain restrictive financial
covenants. At December 31, 1999, the Company was not in compliance with
certain of these covenants and was in default of certain other
provisions of the bank financing agreement.
On April 11, 2000, the Company entered into an agreement with the bank
which amended the bank financing agreement. Pursuant to this amendment,
the bank extended the maturity date to the earlier of (i) January 31,
2001, or (ii) the date upon which the Company successfully raises
$3,000,000 or more of debt or equity financing, as defined in the
amended agreement. In addition, the bank waived all violations of the
financial covenants included in the bank financing agreement from
inception up to and including March 31, 2000, and as of April 1, 2000,
eliminated all previous financial covenants and added one new financial
covenant. As consideration for the amendment to the bank financing
agreement, the Company repaid the overadvances on its borrowings under
the revolving line of credit in the aggregate amount of approximately
$379,000. Additionally, all borrowings with the bank are now personally
guaranteed by an individual who is a member of the board of directors
and a significant stockholder. In connection with the amended bank
financing agreement, all amounts due have been presented in revolving
lines of credit in the accompanying consolidated balance sheet.
In connection with the acquisition of Inteck (Note 4), the Company
assumed a revolving line of credit agreement for unsecured borrowings of
up to $35,000. The line of credit bears interest at the bank's prime
rate (8.5% at December 31, 1999) plus 2.5% and is due on demand. As of
December 31, 1999, the Company had $35,000 outstanding under this line
of credit.
8. NOTES PAYABLE
In July 1998, the Company borrowed $50,000 from an individual. The
unsecured note payable accrued interest at 10%. The outstanding balance
at December 31, 1998 was repaid in full in January 1999.
F-14
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 3,000,000 shares of Preferred Stock, of which
2,500,000 shares are designated as Series C Convertible Preferred Stock.
The Series C Convertible Preferred Stock has a liquidation preference of
$2.00 per share and each share is convertible into one share of common
stock. The holders of Series C Convertible Preferred Stock are entitled
to receive cumulative dividends at a rate of 6%, payable annually. At
December 31, 1999, undeclared cumulative dividends totaled $17,420.
PRIVATE EQUITY OFFERING
On November 1, 1999, the Company sold an aggregate of 1,012,500 shares
of Series C 6% Convertible Preferred Stock, at $2.00 per share, in a
private equity offering. The net cash proceeds of this offering were
$2,024,979. The Series C 6% Convertible Preferred Stock, which is
convertible to common stock at a discount to the market, has been
accounted for by treating such discount to the market as a deemed
dividend. The Company computed the amount of the discount based on the
difference between the conversion price and the fair value of the
underlying common stock on the date these preferred shares were issued.
Accordingly, $407,278 has been recorded as a deemed dividend and is
considered in the calculation of loss per share (see Note 11).
STOCK OPTION PLAN
In February 1999, the Company adopted the 1999 Stock Option Plan (the
"1999 Plan") under which eligible employees can receive options to
purchase shares of the Company's common stock at a price generally not
less than 100% of the fair value of the common stock on the date of the
grant. The 1999 Plan allows for the issuance of a maximum of 374,356
shares of the Company's common stock. The options granted under the 1999
Plan are exercisable over a maximum term of ten years from the date of
grant.
In connection with the merger with HealthDesk (Note 3), the Company has
an additional stock option plan (the "1994 Plan") under which eligible
employees, directors and consultants can receive options to purchase
shares of the Company's common stock at a price generally not less than
100% and 85% of the fair value of the common stock on the date of grant
for incentive stock options and non-statutory stock options,
respectively. The 1994 Plan allows for the issuance of a maximum of
3,000,000 shares of the Company's common stock. The options granted
under the 1994 Plan are exercisable over a maximum term of ten years
from the date of grant.
The Company accounts for stock-based compensation for employees under
the "intrinsic value" method. Under this method, no compensation expense
is recorded for these plans and arrangements for current employees whose
grants provide for exercise prices at or above the market price on the
date of grant. Compensation expense for employees is recorded based on
intrinsic value (excess of market price over exercise price on the
measurement date) which is accounted for as unearned compensation and is
reflected as a separate component of stockholders' equity until earned.
Unearned employee compensation is amortized to expense over the vesting
period and the expense recognized amounted to $54,890 during 1999.
The Company accounts for stock-based compensation for non-employees
using the fair value of the option award on the measurement date.
Compensation for non-employee stock options are recorded in the period
earned. The fair value of non-employee stock options granted in 1999
totaled $50,319, of which $18,491 was earned and recorded during 1999
and the balance forfeited due to the termination of the related
consulting agreement.
F-15
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity is set forth below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Aggregate Exercise
Shares Per Share Price Price
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 and 1998 - $ - $ - $ -
Options granted 2,871,805 1.00-3.06 5,112,419 1.78
Options assumed in merger with HealthDesk 110,000 1.00-5.00 150,000 1.36
Options forfeited/canceled (440,443) 1.00-3.06 (1,010,823) 2.30
----------- ----------- ------------- -----------
Balance, December 31, 1999 2,541,362 $1.00-5.00 $ 4,251,596 $ 1.67
=========== =========== ============= ===========
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Number Weighted Avg. Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Price 31, 1999 Life (Years) Price 31, 1999 Price
------------- --------------- --------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
$1.00-1.62 1,992,362 8.1 $ 1.39 77,083 $ 1.00
2.20-2.94 499,000 9.6 2.61 25,000 2.53
3.06 40,000 9.3 3.06 - -
5.00 10,000 6.0 5.00 8,333 5.00
------------- --------------- --------------- ----------- -------------- ------------
$1.00-5.00 2,541,362 8.4 $ 1.67 110,416 $ 1.64
============= =============== =============== =========== ============== ============
</TABLE>
If the Company had elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the
estimated fair value of all stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The
fair value of each option granted in 1999 has been estimated on the date
of grant using the Black-Scholes option valuation model with the
following weighted average assumptions: no dividend yield; expected
volatility of 33% based on historical results; risk-free interest rate
of 6.5%; and average expected lives of 3 to 5 years.
The weighted average fair value of those options granted during the year
ended December 31, 1999 was $0.69 per share.
The following table sets forth the net loss per share amounts for the
years presented as if the Company had elected the fair value method of
accounting for stock options.
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
NET LOSS
As reported $ (3,395,020) $ (157,760)
=============== ================
Pro forma $ (3,475,216) $ (157,760)
=============== ================
BASIC AND DILUTED LOSS PER SHARE
As reported $ (.28) $ (.03)
=============== ================
Pro forma $ (.29) $ (.03)
=============== ================
</TABLE>
F-16
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its stock options.
Additional incremental compensation expense includes the excess of fair
values of options granted during the year over any compensation amounts
recorded for options whose exercise prices were less than the market
value at date of grant, and for any expense recorded for non-employee
grants. All such incremental compensation is amortized over the related
vesting period, or expensed immediately if fully vested. The above
calculations include the effects of all grants in the years presented.
Because options often vest over several years and additional awards are
made each year, the results shown above may not be representative of the
effects on net income (loss) in future years.
WARRANTS
In connection with the merger with HealthDesk (Note 3), outstanding
redeemable warrants to purchase 2,125,000 shares of common stock were
assumed by the Company which entitle the registered holder thereof to
purchase one share of common stock at a price of $2.50, subject to
adjustment in certain circumstances, at any time through and including
January 16, 2002. These warrants are redeemable by the Company upon
notice of not less than 30 days, at a price of $.10 per warrant,
provided the closing bid quotation of the common stock on all 30 of the
trading days ending on the third day prior to the day on which the
Company gives notice has been at least 150% ($3.75, subject to
adjustment) of the then effective exercise price of the warrants.
In addition, in connection with the merger with HealthDesk (Note 3), the
Company assumed outstanding warrants to purchase up to 170,000 shares of
the Company's common stock at an exercise price of $6.00 per share and
rights to purchase up to 170,000 additional warrants at a purchase price
of $.12 per warrant (each exercisable to purchase one share of common
stock at a price of $8.25 per share). These warrants are exercisable
over a five-year period through January 16, 2002.
A summary of common stock purchase warrants activity is as follows:
<TABLE>
<CAPTION>
Warrant Price
--------------------------------
Number of
Shares Per Share Total
--------------- -------------- -------------
<S> <C> <C> <C>
Balance outstanding, December 31, 1997 and 1998 - $ - $ -
Warrants assumed in merger with HealthDesk 2,295,000 2.50-6.00 6,332,500
Warrants issued (Note 7) 50,000 2.87 143,500
--------------- -------------- -------------
Balance outstanding, December 31, 1999 2,345,000 $ 2.50-6.00 $ 6,476,000
=============== ============== =============
</TABLE>
F-17
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK RESERVED FOR ISSUANCE
At December 31, 1999, the total number of shares of common stock
reserved for issuance upon exercise of outstanding stock options and
warrants, and conversion of convertible preferred stock was 5,898,862
shares.
RESTRICTIONS ON DIVIDENDS
Pursuant to state law, the Company may be restricted from paying
dividends to its stockholders as a result of its accumulated deficit as
of December 31, 1999.
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999 and
1998 is comprised of the minimum current state income tax. Differences
between the statutory and effective tax rates are primarily due to
valuation allowances recorded to offset deferred tax benefits associated
with net operating losses.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and amounts used for income tax purposes.
Components of the Company's deferred tax assets and liabilities are
comprised primarily of the future tax benefits of the Company's net
operating loss carryforwards of approximately $5,600,000 at December 31,
1999. Such deferred tax asset is offset by a valuation allowance equal
to the total net deferred tax asset balance.
As of December 31, 1999, the Company has a federal net operating loss
carryforward of approximately $15,000,000 which expires at various dates
between 2002 and 2019 and a state net operating loss carryforward of
approximately $7,000,000 which expires at various dates between 2000 and
2004.
The utilization of the net operating loss carryforwards could be limited
due to restrictions imposed under federal and state laws upon a change
in ownership. The amount of the limitation, if any, has not been
determined at this time. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. As a result of the Company's continued losses and
uncertainties surrounding the realization of the net operating loss
carryforwards, management has determined that the realization of
deferred tax assets is not more likely than not. Accordingly, a
valuation allowance equal to the net deferred tax asset amount has been
recorded as of December 31, 1999.
11. LOSS PER SHARE
The following table illustrates the computation of basic and diluted
loss per share:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Numerator:
Net loss $ (3,395,020) $ (157,760)
Less: preferred stock deemed dividend (Note 9) 407,278 -
Less: preferred stock dividends (Note 9) 17,420 -
--------------- ---------------
Net loss available to common stockholders $ (3,819,718) $ (157,760)
=============== ===============
Denominator:
Weighted average number of common shares outstanding during the
year 13,657,737 5,645,230
--------------- ---------------
Basic and diluted loss per share $ (.28) $ (.03)
=============== ===============
</TABLE>
F-18
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
11. LOSS PER SHARE (CONTINUED)
The weighted average number of common shares outstanding for 1998
assumes the common shares issued in connection with the conversion from
a limited liability company on June 22, 1998 were outstanding for the
entire year ended December 31, 1998.
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding
common stock options and warrants and the potential conversion of
preferred stock because their effect was antidilutive due to losses
incurred by the Company during the years presented. See summary of
outstanding stock options and warrants and discussion of convertible
preferred stock in Note 9.
12. PROFIT SHARING PLAN
The Company has a profit sharing plan which is qualified under Section
401(k) of the Internal Revenue Code. Any employee who has attained the
age 21 and has completed three months of service is eligible to
participate. Employees may contribute to the plan subject to the limits
of Section 401(k) of the Internal Revenue Code. The Company may
contribute to the profit sharing on behalf of the employees at the
Company's discretion. There were no Company contributions to the plan
during 1999 or 1998.
13. COMMITMENTS
LEASES
The Company leases its corporate office under a lease agreement that
expires in March 2002. Future obligations under existing operating
leases at December 31, 1999 are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2000 $ 236,721
2001 212,066
2002 73,164
---------------
$ 521,951
===============
Total rent expense amounted to $201,000 and $16,000 for the years ended
December 31, 1999 and 1998, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers which
provide for a base salary, incentive compensation and other benefits.
F-19
<PAGE>
MC INFORMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
14. SUBSEQUENT EVENT
During March 2000 and through April 10, 2000, the Company received an
aggregate of $500,000 from certain members of the Company's board of
directors and related parties. It is the intent of the Company and these
parties that such advances will be exchanged for promissory notes, the
terms of which have not yet been finalized.
F-20
CERTIFICATE OF DETERMINATION
OF RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF
6% SERIES C CONVERTIBLE PREFERRED STOCK
FOR
MC INFORMATICS, INC.
(Pursuant to Section 401 of the California General Corporation Law)
Bill Childs and Jeffrey Pollard hereby certify that:
ONE: They are, respectively, the duly elected and acting President and
Secretary of MC Informatics, Inc., a California corporation (the "Company)".
TWO: Pursuant to authority granted by the Articles of Incorporation, as
amended (the "Articles"), of the Company, the following recitals and resolutions
have been duly adopted by the Board of Directors of the Company (the "Board"):
WHEREAS, the Articles of the Company provide for a class of authorized
shares known as Preferred Stock, comprising three million (3,000,000)
shares issuable from time to time in one or more series; seven hundred
fifty (750) shares of Preferred Stock are designated "Series B
Preferred Stock", none of which shares are issued and outstanding;
WHEREAS, the Board is authorized to fix or alter the rights,
privileges, preferences, and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock, including, but not
limited to, dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, the liquidation
preferences of any wholly unissued series of Preferred Stock, and the
number of shares constituting any such series and the designation
thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series,
but not below the number of shares of such series then outstanding; and
WHEREAS, the Board desires, pursuant to its authority as aforesaid, to
designate a series of Preferred Stock and to determine and fix the
rights, preferences, privileges and restrictions relating to said
series of Preferred Stock and the number of shares constituting said
series;
NOW, THEREFORE, BE IT RESOLVED, that, pursuant to the Articles of the
Company, the Board hereby authorizes the issuance of, and fixes the
designation and preferences and relative, participating, optional and
other special rights, and qualifications, limitations and restrictions,
of a series of Preferred Stock consisting of 2,500,000 shares, par
value $0.01 per share, to be designated "6% Series C Convertible
Preferred Stock" (the "Series C Stock").
<PAGE>
RESOLVED, FURTHER, that each share of the Series C Stock shall rank
equally in all aspects and shall be subject to the following terms and
provisions:
1. VOTING. The holders of the Series C Stock shall have such voting
rights as are set forth below except as otherwise required by law from time to
time:
The affirmative approval (by vote or written consent as permitted by
applicable law) of the holders of at least a majority of the outstanding shares
of the Series C Stock, voting separately as a class, will be required for (a)
any amendment, alteration or repeal of the Company's Articles of Incorporation,
as amended from time to time, (including any Certificate of Determination) if
such amendment, alteration or repeal adversely affects the powers, preferences
or rights of the Series C Stock (including, without limitation, by creating any
class or series of equity securities having a preference over the Series C Stock
with respect to dividends, redemption, distribution upon liquidation or in any
other respect), or (b) any amendment to or waiver of the terms of the Series C
Stock or this Certificate.
Except as provided in the preceding paragraph, to the extent that under
applicable law or under the Company' Articles of Incorporation or Bylaws, each
as amended from time to time, the approval of the holders of the Series C Stock,
voting separately as a class, is required to authorize a given action of the
Company, the affirmative approval (by vote or written consent as permitted by
applicable law) of the holders of a majority of the outstanding shares of the
Series C Stock shall constitute the approval of such action by the class. Except
as otherwise provided under applicable law or under the Company's Articles of
Incorporation or Bylaws, each as amended from time to time, the holders of the
Series C Stock shall vote on all matters with holders of the Common Stock,
voting together as one class, and each share of Series C Stock shall be entitled
to that number of votes as shall be equal to the number of shares of the
Company's Stock (the "Common Stock") into which each share of Series C Stock is
convertible on the record date for any meeting of stockholders or on the date of
any written consent of stockholders, as applicable. Holders of the Series C
Stock shall be entitled to notice of all shareholder meetings or written
consents (whether or not they are entitled to vote there at), which notice will
be provided pursuant to the Company's Bylaws, as amended from time to time, and
applicable statutes.
2. DIVIDENDS. The holders of the Series C Stock (including shares
received as dividends) shall be entitled to receive cumulative dividends, equal
to $0.12 per year, out of any assets legally available therefor, prior and in
preference to any declaration of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the holder
there to receive directly or indirectly, additional shares of Common Stock of
the Company) on the Company's Series B Preferred Stock or Common Stock or any
other class or series of equity security of the Company. No dividend shall be
paid on any Common Stock or Series B Preferred Stock (other than a stock
dividend declared and paid on the Common Stock that is payable for shares of
Common Stock (a "Common Stock Dividend") unless all then accrued but unpaid
dividends have been paid with respect to all outstanding shares of Series C
Stock. No dividends shall be paid on any Common Stock or Series B Preferred
Stock (other than a Common Stock Dividend) unless an equal dividend is paid with
respect to all outstanding shares of Series C Stock or on as converted basis.
2
<PAGE>
3. LIQUIDATION, DISSOLUTION OR WINDING UP PREFERENCE.
a. In the event of any liquidation, dissolution or winding up
of the affairs of the Company, voluntarily or involuntarily, the holders of each
share of Series C Stock shall be entitled to be paid pro rata out of the assets
of the Company available for distribution to its stockholders, whether such
assets are capital, surplus, or earnings, before any payment or declaration and
setting apart for payment of any amount shall be made in respect of any shares
of the Company's Common Stock or shares of any other capital stock of the
Company ranking junior to the Series C Stock (collectively, "Junior Stock"), a
preferential amount equal to (i) $2.00 for each share of Series C Stock
outstanding, plus (ii) any and all unpaid dividends as provided for in Section 2
hereof (such preferential amount, as adjusted to reflect any stock split, stock
dividend, combination, recapitalization or reorganization, being hereinafter
referred to as the "Series C Liquidation Preference"). The Series C Stock shall
rank pari passu with the Series B Preferred Stock with respect to liquidation.
Except as otherwise provided herein, upon payment of the Series C Liquidation
Preference upon each share of Series C Stock, the Company shall have no further
obligation to make any other payments or distributions out of the assets of the
Company on any shares of Series C Stock in connection with such liquidation,
dissolution or winding up of the Company. If upon such liquidation, dissolution
or winding up, the assets of the Company are insufficient (after payment of the
liquidation preference of any class of preferred stock ranking senior on
liquidation to the Series C Stock) to provide for the payment in full of the
Series C Liquidation Preference for each share of Series C Stock outstanding,
such assets as are available shall be paid out pro rata (determined in
accordance with the liquidation preferences of the relevant series of preferred
stock) to the outstanding shares of Series C Stock and to any holders of any
series of preferred stock that ranks pari passu with the Series C Stock.
b. REMAINING ASSETS. After the payment or distribution to the
holders of the Series C Stock and Series B Preferred Stock of the full Series C
Liquidation Preference and the liquidation preferences for the Series B
Preferred Stock, the holders of the Series B Preferred Stock and Junior Stock
then outstanding shall be entitled to receive all remaining assets of the
Company to be distributed.
4. CONVERSION RIGHTS.
a. OPTIONAL CONVERSION. Each share of Series C Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, into fully-paid and nonassessable shares of Common
Stock, (as such shares of Common Stock may be constituted on the conversion
date) the number of shares of Series C Stock then held by such holder.
b. MANDATORY CONVERSION. Each share of Series C Stock shall be
converted into fully-paid and nonassessable Common Stock, automatically and
without further action, in the manner provided in this Section 4 upon the
earlier to occur of (i) the date the Company closes a sale of securities at a
price per share of at least $2.00 and gross proceeds to the Company of at least
$5,000,000, or (ii) the first day after the Company's Common Stock has traded at
more than $5.00 per share for 30 consecutive trading days.
3
<PAGE>
c. CONVERSION RATE. The number of shares of Common Stock into
which each share of Series C Stock may be converted pursuant to this Section 4,
as such may be adjusted from time to time in accordance with Section 5 hereof,
is hereinafter referred to as the "Conversion Rate". The number of shares of
Common Stock to be received upon conversion of the Series C Stock will be
determined by dividing the Conversion Amount by the Series C Conversion Price
(as defined in Section 4(d)) subject to adjustment in accordance with Section 5
hereof. The "Conversion Amount" will be $2.00 per share of Series C Stock being
converted.
d. DETERMINATION OF CONVERSION PRICE. The "Series C Conversion
Price" shall be equal to Two Dollars ($2.00).
e. MECHANICS OF CONVERSION. Unless conversion is mandatory in
accordance with Section 4(b) hereof, any or all shares of Series C Stock may be
converted by the holder thereof by giving written notice (the "Conversion
Notice") by facsimile by 5:00 p.m. Eastern Time, together with the holder's
calculation of the Conversion Rate to the Company, that the holder elects to
convert the number of shares specified therein, which notice and election shall
be irrevocable by the holder; and by delivering the certificate or certificates
representing the Series C Stock to be converted, duly endorsed, by either
overnight courier or two-day courier, to the principal office of the Company or
of any transfer agent for the Series C Stock, provided, however, in the event
that such certificate or certificates have been lost, stolen or destroyed, in
lieu of delivering such certificate or certificates the holder may notify the
Company of such loss, theft or destruction and deliver to the Company an
instrument reasonably satisfactory to the Company indemnifying the Company from
any loss incurred by it in connection with such lost, stolen or destroyed
certificate or certificates.
The Company shall, as soon as possible and in any event within three
(3) business days, verify the holder's calculation of the Conversion Rate as
calculated by the holder, or if the Company disagrees with the holder's
calculation of the Conversion Rate, deliver to the holder the Company's
calculation of the Conversion Rate. The Company shall use its best efforts to
issue and deliver as soon as possible, and in any event within five (5) business
days after delivery to the Company of a Conversion Notice, to the holder of
Series C Stock requesting conversion of shares thereunder, or to its designee,
one or more certificates representing that number of shares of Common Stock to
which such holder shall be entitled, together with one or more certificates
representing any shares of Series C Stock represented by the certificate or
certificates delivered by such holder but not submitted for conversion. The
Company shall be deemed to have received the Conversion Notice on the date of
dispatch by the holder to the Company (the "Holder Conversion Date") and the
person or persons entitled to receive the shares of Common Stock issuable upon
the conversion specified therein shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date, provided that the
certificate or certificates representing the shares of Series C Stock to be
converted (or a notice of loss, theft or destruction and an indemnification
instrument in lieu thereof), are received by the Company or any transfer agent
for the Series C Stock within five (5) business days thereafter. If such
certificate or certificates (or such notice and indemnification instrument) are
not received by the Company or any transfer agent for the Series C Stock within
five (5) business days after the Holder Conversion Date, the Conversion Notice
shall, at the election of the Company by written notice to the holder requesting
such conversion, become null and void unless the holder delivers such
certificate or certificates (or such notice and instrument of indemnification)
within three (3) business days after receipt by the holder of such election by
the Company.
4
<PAGE>
5. ADJUSTMENTS; REORGANIZATIONS.
a. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If, at any
time or times after the date shares of Series C Stock are first issued (the
"Original Issuance Date"), the Company effects a subdivision (by any stock
split, stock dividend, recapitalization or otherwise) of the Common Stock into a
greater number of shares or combination (by reverse stock split or otherwise),
of the outstanding Common Stock into a smaller number of shares, the Conversion
Rate in effect immediately before such subdivision shall be proportionately
increased or decreased, as appropriate.
b. ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the
Company at any time or from time to time after the Original Issuance Date makes,
or fixes a record date for the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock or in other securities of the Company, then and in each such event
provision shall be made so that the holders of Series C Stock shall receive that
number of shares of Common Stock or other securities of the Company, as the case
may be, to which such holders would be entitled to receive had such holders
converted each share of Series C Stock then outstanding into Common Stock
immediately prior to the record date for the determination of holders of Common
Stock entitled to receive such dividend or other distribution (without regard to
any restrictions on conversion).
c. ADJUSTMENT FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the
event that the Company, at any time or from time to time after the Original
Issuance Date, makes or fixes a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable other
than in securities of the Company, then and in each such event provision shall
be made so that the holders of Series C Stock shall receive the amount of such
dividend or other distribution, payable in the form in which such dividend or
other distribution is to be paid to holders of Common Stock, to which such
holders would be entitled to receive had such holders converted each share of
Series C Stock then outstanding into Common Stock immediately prior to the
record date for the determination of holders of Common Stock entitled to receive
such dividend or other distribution (and without regard to any restrictions on
conversion).
d. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
In the event that at any time or from time to time after the Original Issuance
Date, the Common Stock issuable upon the conversion of the Series C Stock is
changed into the same or a different number of shares of any class or classes of
stock, whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or reorganization
provided for elsewhere in this Section 5), then and in each such event each
holder of shares of Series C Stock shall have the right thereafter to convert
such stock into the kind of stock receivable upon such recapitalization,
reclassification or other change by holders of shares of Common Stock, all
subject to further adjustment as provided herein. In such event, the formula set
forth herein for conversion shall be equitably adjusted to reflect such change
in number of shares or, if shares of a new class of stock are issued, to reflect
the market price of the class or classes of stock issued in connection with the
above described transaction.
5
<PAGE>
e. REORGANIZATION. If at any time or from time to time after
the Original Issuance Date there is a capital reorganization of the Common Stock
(other than a recapitalization, subdivision, combination, reclassification, or
exchange of shares provided for elsewhere in this Section 5), then as a part of
such reorganization, provision shall be made so that the holders of the Series C
Stock shall thereafter be entitled to receive upon conversion of shares of
Series C Stock the number of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 5 with respect to the rights of the holders of the Series C
Stock after the reorganization to the end that the provisions of this Section 5
(including adjustment of the Conversion Rate then in effect and the number of
shares issuable upon conversion of shares of the Series C Stock) shall be
applicable after that event and be as nearly equivalent as may be practicable,
including, by way of illustration and not limitation, by equitably adjusting the
formula set forth herein for conversion to reflect the market price of the
securities or property issued in connection with the above described
transaction.
f. ACQUISITION. In the event of (i) a sale or other
disposition of all or substantially all of the assets of the Company or (ii) any
merger, consolidation or other corporate reorganization or transaction or series
of related transactions in which in excess of 50% of the Company's voting power
is transferred, the holders of the Series C Stock shall vote with respect to the
approval of such transaction as a separate class. The holders of the Series C
Stock shall be entitled to receive on consummation of any such transaction the
consideration which they would have received had all Series C Stock been
converted to Common Stock immediately prior to the consummation of such
transaction (without regard to any then applicable restrictions on conversion).
6. NO REDEMPTION. The Company shall not have a right of redemption.
7. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
a. RESERVATION REQUIREMENT. The Company has reserved and the
Company shall continue to reserve and keep available at all times, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue shares of its Common Stock upon
conversion of the authorized shares of Series C Stock. The number of shares so
reserved may be reduced by the number of shares actually delivered pursuant to
conversion of shares of Series C Stock; provided that in no event shall the
number of shares so reserved be less than 125% of the maximum number required to
satisfy remaining conversion rights on the unconverted shares of Series C Stock
(and without regard to any restrictions on conversion hereunder) and the number
of shares so reserved shall be increased to reflect stock splits and stock
dividends and distributions.
b. DEFAULT. If the Company does not have a sufficient number
of shares of Common Stock available to satisfy the Company's obligations to a
holder of one or more shares of Series C Stock upon receipt of a Conversion
Notice, or if the Company is otherwise prohibited by applicable law, regulation,
or stock exchange or trading market rule from issuing shares of Common Stock
upon receipt of a Conversion Notice (each, a "Conversion Default"), or if the
Company fails for any other reason (other than due to the failure of any holder
of Series C Stock to timely deliver the stock certificate for the shares of
Series C Stock to be converted or reasonably satisfactory indemnification
instruments) to issue shares of Common Stock upon receipt of any Conversion
Notice for a period of 30 days, the holder of one or more shares of Series C
Stock requesting conversion shall have the right, upon notice to the Company, to
require the Company to redeem such shares of Series C Stock, as soon as possible
and in any event within 30 days of such notice, at a price per share which shall
be the product of the Conversion Rate and the closing trading price of the
Common Stock on the applicable Conversion Date, such redemption amount to be
payable in cash, in readily marketable securities (the marketability and value
of which shall be mutually agreed upon by the Company and the holder or shall be
determined by a nationally recognized investment banking firm), or in a
combination thereof.
6
<PAGE>
8. NO REISSUANCE OF SHARES OF SERIES C STOCK. No share or shares of
Series C Stock acquired by the Company by reason of redemption, purchase,
conversion or otherwise shall be reissued as Series C Stock, and all such shares
shall be retired and shall return to the status of authorized, unissued and
retired and undesignated shares of preferred stock of the Company. Except as
provided in the Subscription Agreements entered into by the Company and the
initial holders of shares of Series C Stock on or about the Original Issuance
Date, no additional shares of Series C Stock shall be authorized or issued
without the consent of at least majority in interest of the holders of shares of
Series C Stock outstanding immediately prior thereto.
9. NO IMPAIRMENT. The Company shall not intentionally take any action
which would impair the rights and privileges of the shares of Series C Stock set
forth herein.
10. NOTICE OF ADJUSTMENT. Upon the occurrence of any of the events
specified in Section 5, then and in each such case, the Company shall give
written notice to each holder of such shares subject to conversion under Section
4 hereof, which notice shall describe in reasonable detail such event and the
resulting adjustment and shall set forth in reasonable detail the method by
which such adjustment was determined.
11. OTHER NOTICES. In case at any time:
a. the Company shall declare any dividend upon its Common
Stock payable in cash, stock or convertible securities or make any
other distribution to the holders of its Common Stock;
b. the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any
class, any convertible securities, or other rights;
c. there shall be any capital reorganization or
reclassification of the capital stock of the Company, or a
consolidation or merger of the Company with or into, or a sale of all
or substantially all its assets to, another entity or entities; or
d. there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give to each holder of
any shares of Series C Stock (i) at least ten (10) days' prior written notice of
the date on which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up and (ii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, at least twenty (20) days' prior
7
<PAGE>
written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (i) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and such notice in accordance
with the foregoing clause (ii) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be. The Company shall simultaneously make public disclosure of all such
information delivered to the holders of Series C Stock.
12. NOTICE REQUIREMENTS. Unless otherwise provided herein, notices and
other deliveries to be made hereunder shall be made by hand or registered or
certified mail, postage and charges prepaid, or by express overnight delivery,
or by telecopy or telex (in which cases, the original notice shall be sent by
means reasonably intended to result in delivery of the original notice to the
recipient thereof on the next business day). Such notices and other deliveries
shall be addressed, in the case of the Company, to the Company at its principal
place of business, and in the case of any holder of one or more shares of Series
C Stock, to such holder at the address of such holder appearing on the books of
the Company or given by such holder to the Company for the purpose of notice,
or, if no such address appears or is so given, at the last known address of such
holder. Notices are deemed delivered upon receipt in accordance with any of the
foregoing methods.
THREE: The authorized number of shares of Preferred Stock of the
Company is three million (3,000,000), seven hundred fifty (750) of which are
designated Series C Preferred Stock and non of which shares of Series B
Preferred Stock are issued and outstanding, Two Million Five Hundred Thousand
(2,500,000) of which are designated Series C Stock and none of which shares of
Series C Stock are issued or outstanding.
8
<PAGE>
The undersigned further declare under penalty of perjury under the laws
of the State of California that the matters set forth in the foregoing
Certificate are true and correct of their own knowledge.
Executed at Irvine, California on the 10 day of November, 1999.
/s/ Bill W. Childs
------------------------------
Bill Childs, President
/s/ Jeffrey Pollard, Secretary
------------------------------
Jeffrey Pollard, Secretary
EXH. 21.1
SUBSIDIARIES OF MC INFORMATICS, INC.
HSG Acquisitions, Inc., dba Inteck, Inc., a Colorado corporation, is
the only subsidiary of MC Informatics.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 636,504
<SECURITIES> 0
<RECEIVABLES> 2,132,172
<ALLOWANCES> 298,570
<INVENTORY> 0
<CURRENT-ASSETS> 2,812,566
<PP&E> 480,821
<DEPRECIATION> 65,789
<TOTAL-ASSETS> 5,451,312
<CURRENT-LIABILITIES> 3,209,062
<BONDS> 0
0
2,432,257
<COMMON> 3,906,890
<OTHER-SE> (4,396,897)
<TOTAL-LIABILITY-AND-EQUITY> 5,451,312
<SALES> 0
<TOTAL-REVENUES> 8,570,347
<CGS> 0
<TOTAL-COSTS> 7,017,174
<OTHER-EXPENSES> 4,740,553
<LOSS-PROVISION> 304,278
<INTEREST-EXPENSE> 84,750
<INCOME-PRETAX> (3,393,420)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (3,395,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,395,020)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
</TABLE>
