UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: Janaury 7, 1998
MEDIX RESOURCES, INC. (FORMERLY INTERNATIONAL NURSING SERVICES, INC)
(Exact name of registrant as specified in its charter)
Colorado 000-24768 84-1123311
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
360 South Garfield Street, Suite 400, Denver, Colorado 80209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 393-1515
See above for former name
(Former name or former address, if changes since last report)
Item 1. Changes in Control of Registrant. N/A.
Item 2. Acquisition or Disposition of Assets. N/A
Item 3. Bankruptcy or Receivership. N/A.
Item 4. Changes in Registrant's Certifying Accountant. N/A.
Item 5. Other Events. N/A
Item 6. Resignations of Registrant's Directors. N/A.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements
The registrant is filing the required financial statements related to the
Cymedix Corporation acquisition on this amendment to Form 8-K.
(b) Pro Forma Financial Information
The registrant is also filing the required pro forma financial information
related to the Cymedix Corporation acquisition on this amendment to Form 8-K.
(c) Exhibits
Exhibit 2.1 *Agreement and Plan of Merger among Cymedix Corporation,
a California corporation, International Nursing Services,
Inc., a Colorado corporation and Cymedix Lynx Corporation,
a Colorado corporation
Exhibit 2.2 *Amendment No. 1 to Agreement and Plan of Merger among
the same parties.
Exhibit 99.1 Pro Forma Combined Financial Statements
Exhibit 99.2 Financial Statements of Cymedix Corporation
Exhibit 99.3 Consolidated Financial Statements of Medix Resources,
Inc. (Formerly International Nursing Services, Inc.)
* Previously filed with Form 8-K filed on December 24, 1997.
Item 8. Change in Fiscal Year. N/A.
Item 9. Sales of Equity Securities Pursuant to Regulation S. N/A.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERNATIONAL NURSING SERVICES, INC.
Date: March 23, 1998 By: /s/ John P. Yeros
----------------------
John P. Yeros, President and Chief Executive Officer
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
AND
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined statements of operations for the
years ended December 28, 1997 and December 29, 1996 and the unaudited pro
forma combined balance sheet as of December 28, 1997 gives effect to the
business combination of Medix Resources, Inc. (formerly International Nursing
Services, Inc.) and Cymedix Corporation effective January 7, 1998, including
the related pro forma adjustments described in the notes thereto. The
transaction between Medix Resources, Inc. and Cymedix Corporation has been
accounted for as a combination of companies under the purchase method. The
unaudited pro forma statements of operations have been prepared as if the
proposed transaction occurred on January 1, 1996. The unaudited pro forma
balance sheet has been prepared as if the transaction occurred on December 28,
1997. These pro forma statements are not necessarily indicative of the
results of operations or the financial position as they may be in the future
or as they might have been had the transaction become effective on the above
mentioned date.
The pro forma combined statements of operations for the years ended December
28, 1997 and December 29, 1996 includes the results of operations of Medix
Resources, Inc. and Cymedix Corporation.
The unaudited pro forma combined statements of operations and the unaudited
pro forma combined balance sheet should be read in conjunction with the
separate historical financial statements and notes thereto of Medix Resources,
Inc. and Cymedix Corporation
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following adjustments are related to the business combination between
Medix Resources, Inc. (formerly International Nursing Services, Inc.) (Medix)
and Cymedix Corporation.
1. Medix Resources, Inc. (Medix) acquired all of the issued and
outstanding common shares of Cymedix Corporation for $2,345,000. The Series
A preferred stock has all been converted into a portion of the merger
shares issued. To finance the acquisition, Medix issued 6,980,000 shares
of common stock valued at $1,418,000, assumed liabilities of $604,000 and
paid $323,000 in cash.
The allocation of the purchase price for purposes of the pro forma financial
information has been estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 5,000
Property and equipment $ 21,000
Liabilities assumed $ (927,000)
</TABLE>
The preliminary excess purchase price in addition to the net liabilities
assumed of $2,319,000 has been allocated to goodwill.
The weighted average number of shares reflects the 6,980,000 shares of common
stock issued in the merger as if they were outstanding at January 1, 1996.
2. To reflect amortization of the $2,319,000 of acquired intangibles over
15 years.
3. No pro forma income tax effect is recognized as both Medix and Cymedix
have operating loss carryforwards which are currently not likely to
be realized.
4. To eliminate stock dividends on convertible preferred stock which was
converted to common shares in conjunction with the merger.
5. To eliminate intercompany liabilities assumed by Medix and allocated to
the purchase price.
MEDIX RESOURCES, INC.
(FORMERLY INTERNATIONAL NURSING SERVICES, INC). AND CYMEDIX CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 28, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Medix ____________________
Resources, Inc. Cymedix, Inc. Total Debit Credit
--------------- ------------- ----------- ----- ------
<S> <C> <C> <C> <C> <C>
Cash $ 158,000 $ 5,000 $ 163,000 $ - $ -
Accounts
receivable,
net 4,559,000 - 4,559,000 - -
Notes
receivable 491,000 - 491,000 - (5) 298,000
Prepaid
expenses
and other 99,000 - 99,000 - -
--------- --------- --------- --------- --------
Total
current
assets 5,307,000 5,000 5,312,000 - 298,000
Property
and
equipment,
net 302,000 21,000 323,000 - -
Intangibles 4,491,000 - 4,491,000 (1) 2,319,000 -
Other
long-term
assets 40,000 - 40,000 - -
--------- -------- --------- --------- ---------
Total $10,140,000 $ 26,000 $10,166,000 $2,319,000 $ 298,000
========== ======== ========== ========= ========
Liabilities and Stockholders' Equity
Current
portion of
LTD $ 35,000 $ - $ 35,000 $ - $ -
Current
portion
of capital
lease
obligations 25,000 - 25,000 - -
Advances
under
financing
arrangement 3,543,000 - 3,543,000 - -
Accounts
payable 649,000 127,000 776,000 - -
Accrued
liabilities 1,384,000 227,000 1,611,000 - (5) 25,000
Notes
payable - 573,000 573,000 (5) 323,000 -
--------- -------- --------- --------- -------
Total
current
liabilit-
ies 5,636,000 927,000 6,563,000 (5) 323,000 25,000
--------- -------- --------- -------- -------
Stockholders'
equity
Preferred
stock - 555,000 555,000 (1) 555,000 -
Common
stock 13,000 283,000 296,000 (1) 283,000 (1) 7,000
Dividends
payable 39,000 - 39,000 - -
Additional
paid-in
capital 12,191,000 - 12,191,000 - (1) 1,411,000
Accumulated
(deficit)
earnings (7,739,000) (1,739,000) (9,478,000) - (1) 1,739,000
---------- --------- --------- --------- ----------
Total
stockholders'
equity 4,504,000 (901,000) 3,603,000 838,000 3,157,000
---------- --------- --------- --------- ----------
Total $10,140,000 $ 26,000 $10,166,000 $1,161,000 $3,182,000
========== ========== ========== ========= =========
</TABLE>
"Unaudited Combined" column continued below.
<TABLE>
<CAPTION>
Unaudited
Combined
------------
<S> <C>
Cash $ 163,000
Accounts receivable, net $ 4,559,000
Notes recievable 193,000
Prepaid expenses and other 99,000
-----------
Total current assets 5,014,000
Property and equipment, net 323,000
Intangibles 6,810,000
Other long-term assets 40,000
-----------
Total $ 12,187,000
===========
Liabilities and Stockholders'
Equity
Current portion of LTD $ 35,000
Current portion of capital 25,000
lease obligations 3,543,000
Advances under financing
arrangement 776,000
Accounts payable
Accrued liabilities 1,636,000
Notes payable 250,000
-----------
Total current liabilities 6,265,000
Stockholders' equity
Preferred stock -
Common stock 20,000
Dividends payable 39,000
Additional paid-in
capital 13,602,000
Accumulated (deficit)
earnings (7,739,000)
----------
Total stockholders'
equity 5,922,000
----------
Total $12,187,000
==========
</TABLE>
<PAGE>
MEDIX RESOURCES, INC.
(FORMERLY INTERNATIONAL NURSING SERVICES, INC). AND CYMEDIX CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Medix _________________
Resources, Inc. Cymedix, Inc. Total Debit Credit
--------------- ------------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues $24,875,000 $ - $24,875,000 $ - $ -
Direct cost
of
services 19,017,000 - 19,017,000 - -
---------- ------------ ---------- -------- ------
Gross margin 5,858,000 - 5,858,000 - -
Operating
expenses 5,670,000 563,000 6,233,000 (2) 156,000 -
Research and
development - 320,000 320,000 - -
Gain on
sale of
division (422,000) - (422,000) - -
--------- ------------ --------- --------- -----
Income (loss)
from operations 610,000 (883,000) (273,000) 156,000 -
Interest
expense 1,125,000 39,000 1,164,000 - -
--------- ------------ --------- --------- -----
Net loss
before income
taxes (515,000) (922,000) (1,437,000) 156,000 -
Income taxes - - - (3 - (3) -
--------- ----------- ---------- --------- -----
Net loss (515,000) (922,000) (1,437,000) 156,000 -
Preferred
stock
dividends (972,000) (29,000) (626,000) - (4) 29,000
--------- ------------ --------- ------ ------
Net loss
applicable
to common
stockholders $(1,487,000) $ (951,000) $(2,438,000) $156,000 $29,000
========== ========= ========== ======= ======
Pro forma basic
loss per common
share $ (.09) $ (.05) $ (.14) $ (.01) $ -
========== ========= ========== ======= ======
Weighted average
number of
shares 16,848,824 - 16,828,248
========== ========= ==========
</TABLE>
"Unaudited Combined" column continued below
<TABLE>
<CAPTION>
Unaudited
Combined
-----------
<S> <C>
Revenues $24,875,000
Direct cost of services 19,017,000
Gross margin 5,858,000
Operating expenses 6,389,000
Research and development 320,000
Gain on sale of division (422,000)
-----------
Income (loss) from operations 429,000
Interest expense 1,164,000
-----------
Net loss before income taxes 1,593,000
Income taxes -
-----------
Net loss (1,593,000)
Preferred stock dividends (972,000)
----------
Net loss applicable to common
stockholders $(2,565,000)
==========
Pro forma basic loss per
common share $ (.15)
==========
Weighted average number
of shares 16,828,248
==========
</TABLE>
<PAGE>
MEDIX RESOURCES, INC.
(FORMERLY INTERNATIONAL NURSING SERVICES, INC). AND CYMEDIX CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
<TABLE>
<CAPTION>
Pro Forma
Medix Adjustments
Resources ___________________
Services, Inc. Cymedix, Inc. Total Debit Credit
-------------- ------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $14,259,000 $ - $14,259,000 $ - $ -
Direct cost
of services 10,831,000 - 10,831,000 - -
---------- ----------- ---------- -------- -------
Gross margin 3,428,000 - 3,428,000 - -
Operating
expenses 4,083,000 546,000 4,629,000 (2) 156,000 -
Research
and
development - 238,000 238,000 - -
--------- ---------- --------- -------- -------
Income (loss)
from
operations (655,000) (784,000) (1,439,000) 156,000 -
Interest
expense 552,000 33,000 585,000 - -
------- ------- --------- ------- --------
Net loss before
income taxes (1,207,000) (817,000) (2,024,000) 156,000 -
Income taxes - - - (3) - (3) -
---------- -------- --------- ------- -------
Net loss (1,207,000) (817,000) (2,024,000) 156,000 -
Preferred
stock
dividends (1,388,000) - (1,338,000) - -
--------- ------- --------- ------- -------
Net loss
applicable to
common
stockholders $(2,595,000) $(817,000) $(3,412,000) $ 156,000 $ -
========== ======== ========== ======== ======
Pro forma
basic loss
per common
share $ (.23) $ (.07) $ (.30) $ (.01) $ -
========= ======== ========== ======== ======
Weighted
average
number of
shares 11,497,111 11,491,111
========== ==========
</TABLE>
"Combined" column continued below.
<TABLE>
<CAPTION>
Combined
--------
<S> <C>
Revenues $14,259,000
Direct cost of services 10,831,000
----------
Gross margin 3,428,000
Operating expenses 4,785,000
Research and development 238,000
----------
Income (loss) from operations (1,595,000)
Interest expense 585,000
---------
Net loss before income taxes 2,180,000
Income taxes -
---------
Net loss (2,180,000)
Preferred stock dividends (1,388,000)
---------
Net loss applicable to
common stockholders $(3,568,000)
==========
Pro forma basic loss per
common share $ (.31)
==========
Weighted average number
of shares 11,497,111
==========
</TABLE>
CYMEDIX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996CYMEDIX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report F-1
Financial Statements
Balance Sheet F-2
Statements of Operations F-3
Statements of Changes in Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Cymedix Corporation
Denver, Colorado
We have audited the balance sheet of Cymedix Corporation, as of December 31,
1997, and the related statements of operations and changes in stockholders'
equity, and cash flows for the years ended December 31, 1997 and 1996 and for
the period from inception to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our 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 Cymedix
Corporation as of December 31, 1997, and the results of their operations and
their cash flows for the years December 31, 1997 and 1996 and for the period
from inception to December 31, 1997 in conformity with generally accepted
accounting principles.
The Company is in the development stage and has not yet begun its planned
principal operations. The Company's ability to continue to develop and market
its proprietary technology is dependent upon its ability to obtain future
funding. Management's plans regarding those matters are described in Note 2.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 13, 1998
Denver, Colorado
CYMEDIX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash $ 4,737
--------
4,737
--------
Property and equipment, net (Note 3) 20,829
--------
Total $ 25,566
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 126,726
Accrued expenses 108,834
Accrued payroll taxes 117,839
Notes payable (Note 4) 572,500
---------
Total current liabilities 925,899
---------
Commitments (Notes 5, 6, 7 and 8)
Stockholders' deficit (Note 6)
Common stock, no par value, 5,000,000
shares authorized 845,785 issued and
outstanding 283,342
Preferred Series A, cumulative
convertible, 50 shares issued and
outstanding, liquidation preference
$297,600 270,400
Preferred Series B, cumulative
convertible 138,705 shares issued and
outstanding, liquidation preference
$314,583 284,623
Deficit accumulated during the
development stage (1,738,698)
---------
Total stockholders' deficit (900,333)
---------
Total $ 25,566
==========
</TABLE>
See notes to financial statements.
<PAGE>
CYMEDIX CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
from For the Year Ended
Inception to December 31,
December 31, -----------------------------
1997 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Costs and expenses
General and administrative $ 1,100,167 $ 557,320 $ 542,847
Research and development 557,880 319,575 238,305
Interest 72,010 39,010 33,000
Depreciation 8,641 5,802 2,839
---------- -------- ---------
Net loss (1,738,698) (921,707) (816,991)
Preferred stock dividends 28,580 28,580 -
--------- -------- --------
Net loss applicable to
common shareholders $(1,767,278) $(950,287) $(816,991)
========== ======== ========
Basic loss per share (4.12) (1.60) (3.09)
========== ======== ========
Weighted average common
shares outstanding 428,643 593,286 264,000
========== ======== =========
</TABLE>
See notes to financial statements.
CYMEDIX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Series A Preferred Stock
----------------- ------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance - January 1, 1996
(date of inception) - $ - - $ -
Issuances of common stock 389,000 151,000 - -
Issuances of preferred stock - - 50 284,000
Net loss - - - -
--------- --------- -------- --------
Balance, December 31, 1996 389,000 151,000 50 284,000
Issuance of common stock
for cash and services 456,785 132,342 - -
Issuances of preferred stock - - - -
Preferred dividends - - - (13,600)
Net loss - - - -
-------- ------- -------- ---------
Balance, December 31, 1997 845,785 $ 283,342 50 $270,400
======= ========= ======== ========
Continued below.
</TABLE>
<TABLE>
<CAPTION>
Series B
Preferred Stock
------------------ Accumulated
Shares Amount Deficit Total
------ ------ ----------- ----------
<S> <C> <C> <C> <C>
Balance - January 1, 1996
(date of inception) - $ - $ - $ -
Issuances of common stock - - - 151,000
Issuances of preferred stock 92,594 200,003 - 484,003
Net loss - - (816,991) (816,991)
---------- ---------- ----------- ---------
Balance, December 31, 1996 92,594 200,003 (816,991) (181,988)
Issuances of common stock for
cash and services - - - 132,342
Issuances of preferred stock 46,111 99,600 - 99,600
Preferred dividends - (14,980) - (28,580)
Net loss - - (921,707) (921,707)
--------- --------- --------- --------
Balance, December 31, 1997 138,705 $284,623 $(1,738,698) $(900,333)
=========== ========= ========== =========
</TABLE>
CYMEDIX CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
from Inception For the Year Ended
to December 31,
December 31, -------------------
1997 1997 1996
-------------- ------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,738,698) $(921,707) $(816,991)
---------- -------- --------
Adjustments to reconcile net loss
to net cash used in operating
activities -
Depreciation 8,641 5,802 2,839
Stock issued for services 169,550 18,550 151,000
Change in assets and liabilities -
Accounts payable and accrued
expenses 340,411 287,969 52,442
---------- --------- --------
518,602 312,321 206,281
---------- --------- ---------
Net cash (used) in
operating activities (1,220,096) (609,386) (610,710)
---------- -------- --------
Cash flows from investing activities
Purchase of property and equipment (29,470) (1,080) (28,390)
--------- --------- --------
Net cash (used in) (29,470) (1,080) (28,390)
investing activities --------- --------- --------
Cash flows from financing activities
Proceeds from notes payable 930,000 408,000 522,000
Issuance of preferred stock 299,603 99,600 200,003
Issuance of common stock 24,700 24,700 -
-------- -------- --------
Net cash provided by
financing activities 1,254,303 532,300 722,003
---------- --------- --------
Net (decrease) increase in cash 4,737 (78,166) 82,903
Cash, beginning of year - 82,903 -
---------- -------- -----------
Cash, end of year $ 4,737 $ 4,737 $ 82,903
========== ========= =========
</TABLE>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $0 for December 31, 1997 and
1996.
Non-cash investing and financing activities:
During 1996, the Company issued 50 shares of Series A preferred stock for
$284,000 related to the conversion of notes payable and accrued
interest of $272,000 and $12,000, respectively.
During 1997, the Company issued 64.285 shares of common stock for $89,092
related to the conversion of notes payable and accrued interest of $85,500
and $3,592, respectively.
CYMEDIX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- - ----------------------------------------------------------------
Organization
- - ------------
Cymedix Corporation (the Company) was incorporated in California under the
name MedSoft Online, Inc. in November 1995. The Company commenced operations
in January 1996 and subsequently changed its name to Cymedix Corporation.
The Company was formed for the purpose of developing and marketing turnkey
software packages for the secure exchange of medical data on the Internet.
The Company's first product, LYNX-MC, is a connectivity software application
for the transmission of medical data over the Internet between participants in
the managed care marketplace, including the primary physician, clinical
laboratory, radiology center, referral physician and the managed care
organization. As the Company has not yet generated revenue from its planned
principal operations, it is considered to be in the development stage.
Property and Equipment
- - ------------------------
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the five year estimated useful lives of the
related assets.
Income Taxes
- - -------------
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and
are measured by applying enacted tax rates and laws to taxable years in which
such differences are expected to reverse.
Due to operating loss of $921,707 and $816,991 for the years ended December
31, 1997 and 1996, no current income tax expense or payable has been recorded.
This results in operating loss carryforwards of $1,738,698 which can be
utilized to offset future taxable income and will expire in 2012 if unused. A
valuation allowance has been provided for this deferred tax asset. The
Company's net operating loss carryforwards will be limited in the future as a
result of the transaction described in Note 8.
Financial Instruments
- - ----------------------
The carrying value of the Company's cash, accounts payable and accrued
expenses approximate their fair values due the short-term nature of these
financial instruments.
<PAGE>
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- - -----------------------------------------------------------------------------
Revenue Recognition
- - --------------------
The Company anticipates generating future revenue through licensing
arrangements with sponsoring organizations from: the shipment of LYNX server
hardware to the sponsor, monthly software licensing fees payable at the
beginning of each month during the license term, guaranteed minimum annual
transaction fees payable at the beginning of each contract year and fees for
any transactional activity above specified monthly minimums. As of December
31, 1997 and 1996, the Company has not generated any licensing revenues.
Basic Loss Per Share
- - -----------------------
The Company computes basic and diluted loss per share in accordance with SFAS
No. 128. Basic loss per share is based upon the weighted average number of
shares outstanding. All dilutive potential common shares have an antidilutive
effect on diluted net loss per share and therefore have been excluded in
determining net loss per share. The Company's basic and diluted loss per
share are equivalent and accordingly only basic loss per share has been
presented.
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.
NOTE 2 - CONTINUED EXISTENCE
- - --------------------------------
The Company is in the development stage and has not yet begun its planned
principal operations. The Company's ability to continue to develop and market
its proprietary technology is dependent upon its ability to obtain future
funding.
Management is currently taking steps to obtain additional funding necessary to
support activities until such time revenues from operations become sufficient
to sustain operations. Subsequent to year end, the Company merged with a
subsidiary of Medix Resources, Inc. (formerly International Nursing Services,
Inc.) who has provided bridge financing (Notes 4 and 8).
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
- - ------------------------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Furniture and equipment $ 9,891
Computer and software 19,579
--------
29,470
Less accumulated deprecation (8,641)
--------
$ 20,829
=======
</TABLE>
Depreciation expense was $5,802 and $2,839 for the years ended December 31,
1997 and 1996, respectively.
NOTE 4 - NOTES PAYABLE
- - --------------------------
<TABLE>
<CAPTION>
<S> <C>
Note payable - Global Med Technologies, Inc.
(Global), interest accrued at bank prime plus
2% (10.5% at December 31, 1997). The
maturity date is December 31, 1997 at which
time principal and interest are due in full;
however, there is an option to extend the
maturity to June 30, 1998 if the Company has
not been successful in raising an additional
$1.5 million in equity capital prior the scheduled
maturity debt. The loan is collateralized by a
security interest in all of the Company's assets and
is convertible, at the option of Holder, into
51,230 shares of common stock upon any repayment
default by the Company. $250,000
Note payable - International Nursing Services,
Inc., principal and accrued interest at 11% due
on December 31, 1998. The outstanding principal
balance of this note shall be convertible, in
whole or in part, at the option of the Holder,
into the Company's common stock at a conversion
price of $1.00 per share. The note is
collateralized by a security interest in all
of the Company's assets subordinate to the
Global security interest. 322,500
--------
$572,500
=======
<PAGE>
NOTE 5 - PAYROLL TAX LIABILITY
- - -----------------------------------
At December 31, 1997, the Company was delinquent in remitting payroll tax
payments. The Company has accrued $118,000 for estimated taxes and related
penalties and interest. If the Company were to be audited actual amounts due
could differ materially from those estimates made by management.
NOTE 6 - EQUITY
- - ------------------
In 1996, the Company issued 389,000 shares of common stock to founders for
services valued at $151,000.
During 1997, the Company converted loans and related accrued interest with a
value of $89,092 into 64,285 shares of common stock. The Company also issued
185,500 shares of common stock through the cashless exercise of stock options
issued by the Company to employees and third parties for services valued at
$18,550.
The Company has authorized 500,000 shares of preferred stock available for
issuance.
Series A Preferred Stock Issuance
- - -------------------------------------
During the period from July through December 1996, loans totaling $272,000
(the "NextCen Loans") were advanced to the Company in several installments by
NextCen Properties, LLC (NextCen). In December 1996, Cymedix and its
principal stockholders entered into an agreement with NextCen providing for
conversion of the NextCen Loans into 50 shares of Series A Preferred Stock.
Although the NextCen Loans carried an 8% annual interest rate and were
collateralized by a security interest in all of the Company's assets, subject
to the security interest previously granted to Global, interest was paid on
the NextCen Loans prior to conversion, and the security interest was
terminated upon conversion. Upon adoption of a plan of dissolution by NextCen
in December 1996, the shares of Series A Preferred Stock were distributed by
NextCen pro rata to its members. Each share of Series A Preferred Stock has a
liquidation preference of $5,440, is convertible at the option of the holder
into 2,600 shares of Common Stock and entitles the holder to 2,600 votes on
all matters submitted to the stockholders of the Company. Dividends on the
Series A Preferred Stock accrued at an annual rate of $272 per share, payable
quarterly in arrears. The Company does not anticipate paying scheduled
dividends on the Series A Preferred Stock in the foreseeable future. Accrued
and unpaid dividends onto the Series A Preferred Stock will be added to its
liquidation preference. No interest is payable on any scheduled Series A
Preferred Stock dividends that are in arrears.
<PAGE>
NOTE 6 - EQUITY (CONTINUED)
- - -------------------------------
Series B Preferred Stock
- - ---------------------------
In December 1996, the Company issued a total of 92,594 shares of its Series B
Preferred Stock at $2.16 per share in a private placement for a total of
$200,003. An additional 46,111 shares of Series B Preferred Stock were issued
in February 1997 at the same price for a total of $99,600. Each shares of
Series B Preferred Stock has a liquidation preference of $2.16, is convertible
at the option of the holder into one share of Common Stock, subject to
mandatory conversion at the same conversion rate if the Company becomes a
reporting company under the Securities Exchange Act of 1934, and entitles the
holder to one vote on all matters submitted to the stockholders of the
Company. Dividends on the Series A Preferred Stock accrue at an annual rate
of $.108 per share, payable quarterly in arrears. The Company does not
anticipate paying scheduled dividends on the Series B Preferred Stock in the
foreseeable future. Accrued and unpaid dividends onto the Series B Preferred
Stock will be added to its liquidation preference. No interest is payable on
any scheduled Series B Preferred Stock dividends that are in arrears. The
Series B Preferred Stock ranks junior to the Series A Preferred Stock on
liquidation and dividend rights.
Stock Options
- - --------------
The Company's Board of Directors established a 1996 and 1997 nonqualified
stock option plan (the Plans) which provided for the issuance of up to 150,000
and 250,000 shares, respectively, of the Company's common stock. The options
issued under the plans are exercisable for a period of 10 years from the date
of grant. The Company also issued 67,500 stock options outside of the plans.
Proceeds of $24,700 were received during 1997 on the exercise of stock options
resulting in the issuance of 207,000 shares of common stock.
The following is a summary of options granted by the Company which expire at
various times through 2007.
</TABLE>
<TABLE>
<CAPTION>
Number of Options Exercise Price
---------------------------
Plan Non-Plan Per Share
---------- ------------ ----------------------
<S> <C> <C> <C>
Outstanding at
December 31, 1996 150,000 - $ .10
Options granted 230,000 67,500 $ .10 - $2.65
Options exercised (380,000) (12,500) $ .10 - $ .50
Options canceled - (35,000) $ 1.00 - $2.16
------- ------- --------------
Outstanding at
December 31, 1997 - 20,000 $ 2.65
======== ======= ===============
</TABLE>
The weighted average exercise price of options outstanding at December 31,
1997 is $2.65.
<PAGE>
NOTE 6 - EQUITY (CONTINUED)
- - -------------------------------
Stock Options (continued)
- - ---------------------------
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Corporation's two stock
option plans been determined based on the fair value at the grant date for
awards consistent with the provisions of SFAS No. 123, the Corporation's net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net loss - as reported (921,707) (816,991)
Net loss - pro forma (934,290) (823,336)
Loss per share - as reported (1.60) (3.09)
Loss per share - pro forma (1.62) (3.12)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividends yield of 0%; expected volatility of
10%; discount rate of 5.5%; and expected lives of 10 years.
NOTE 7 - OPERATING LEASES
- - -----------------------------
The Company leases office facilities and equipment under non-cancelable
operating leases which have varying terms and expire in 2001. Rent expense
for the years ended December 31, 1997 and 1996 was $34,286 and $30,096,
respectively.
Future minimum lease payments under these non-cancelable leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year Ended December 31,
----------------------------------
1998 $ 53,153
1999 55,085
2000 52,344
2001 1,130
-------
$ 161,712
=======
<PAGE>
NOTE 8 - SUBSEQUENT EVENT
- - -----------------------------
On November 17, 1997, the Company entered into an agreement and plan of merger
with Medix Resources, Inc. (formerly International Nursing Services, Inc.)
(Medix). On January 7, 1998, the merger was consummated and the Company
became a subsidiary of Medix. In exchange, Medix issued 6,980,000 shares of
its common stock to the shareholders of the Company and granted options
covering 1,200,000 shares of common stock to employees of the Company.
The Medix stock given as consideration for the acquisition had a market value
of approximately $1,418,000. The liabilities assumed by Medix were
approximately 927,000 which include approximately $323,000 of previous cash
advances, for a total purchase price of approximately $2,345,000. Effective
with the merger, the Company's Series B preferred stock becomes immediately
convertible into shares of Medix. Medix has also reserved a portion of the
merger shares for voluntary conversion of the Company's remaining convertible
Series A preferred stock which have all been converted to merger shares. As
part of the merger certain officers of the Company entered into employment
agreements with the new subsidiary Cymedix Lynx.
</TABLE>
MEDIX RESOURCES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 28, 1997MEDIX RESOURCES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report F-1
Financial Statements
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders'
Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Financial Statements F-8
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Medix Resources, Inc. (formerly International
Nursing Services, Inc.)
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Medix
Resources, Inc. (formerly International Nursing Services, Inc.) and
Subsidiaries, as of December 28, 1997, and the related consolidated statements
of operations and changes in stockholders' equity, and cash flows for the
years ended December 28, 1997 and December 29, 1996. These consolidated
financial statements are the responsibility of the management of Medix
Resources, Inc. and Subsidiaries. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by 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 consolidated financial position
of Medix Resources, Inc. and Subsidiaries, as of December 28, 1997, and the
results of their operations and their cash flows for the years ended December
28, 1997 and December 29, 1996 in conformity with generally accepted
accounting principles.
<PAGE>
To the Board of Directors and Stockholders
Medix Resources, Inc. (formerly International
Nursing Services, Inc.)
Page Two
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As further discussed in
Note 1 to the consolidated financial statements, the Company has incurred
operating losses for the past several years and has a deficit in working
capital which raises substantial doubt about its ability to continue as a
going concern. Current management's plans in regards to this matter are also
discussed in Note 1. The consolidated financial statements do not include any
adjustments that might result from this uncertainty.
As disclosed in Note 1 to the consolidated financial statements, the Company
changed its method of computing earnings per share.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
March 18, 1998
Denver, Colorado
MEDIX RESOURCES, INC. AND SUBSIDIARIES
BALANCE SHEETS
DECEMBER 28, 1997
ASSETS
Current assets
Cash $ 158,000
Accounts receivable, net of allowance of $384,000 $ 4,559,000
Notes receivable 491,000
Prepaid expenses and other 99,000
--------
Total current assets 5,307,000
Property and equipment, net 302,000
Other assets
Intangible assets, net 4,491,000
Other 40,000
--------
Total $ 10,140,000
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 35,000
Current portion of capital lease obligation 25,000
Line-of-credit 3,543,000
Accounts payable 649,000
Accrued expenses 1,384,000
-----------
Total current liabilities 5,636,000
-----------
Commitments and contingency
Stockholders' equity
Preferred stock, 10% cumulative convertible, $1 par value 488 shares
authorized, 155 issued, 26.25 outstanding, liquidation preference $301,481
-
1997 convertible preferred stock, $1 par value 300 shares authorized 167.15
shares issued, 100.5 outstanding, liquidation preference $805,000
-
Common stock, $.001 par value, 25,000,000 shares authorized, 12,843,567
issued and outstanding
13,000
Dividends payable with common stock 39,000
Additional paid-in capital 12,191,000
Accumulated deficit (7,739,000)
------------
Total stockholders' equity 4,504,000
-----------
Total $ 10,140,000
===============
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 28, For the Year Ended December 29,
1997 1996
---------- ----------------
Revenues $ 24,875,000 $ 14,259,000
Direct costs of services 19,017,000 10,831,000
------------ ------------
Gross margin 5,858,000 3,428,000
Selling, general, and administrative expenses 5,670,000
4,083,000
Gain on sale of divisions (Note 4) 422,000 -
--------- ---
Income (loss) from operations 610,000 (655,000)
Interest expense 1,125,000 552,000
----------- ---------
Net loss $ (515,000) $ (1,207,000)
============= ===============
Basic loss per common share (Note 11) $ (.15) $ (.57)
======== =======
Weighted average common shares outstanding 9,848,824 4,517,111
========== ==========
INTERNATIONAL NURSING SERVICES, INC. AND SUBSIDIARIES
See accompanying notes to these consolidated financial statements.
F-5
MEDIX RESOURCES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDING DECEMBER 28, 1997 AND DECEMBER 29, 1996
Common Stock Preferred Stock
-------------------------- -------------------------------------
Preferred Stock 1997 Dividend
--------------------
Payable with Common
Number of Number of Paid-in
Accumulated
Shares Amount Shares Amount
------------- --------------- ------------- ------------
Shares Amount Capital Stock Deficit
- - ------ ------------ ------------- ------------ --------------
Total
- - ------------
Balance - December 31, 1995 2,894,773 $ 3,000 469,452
$ - $ - $ - $ 6,349,000 $ 441,000 $(6,017,000)
$ 776,000
Automatic conversion of preferred stock 1,173,631 1,000
(469,452) - - - 440,000 (441,000) -
- - -
Acquisition of assets (Ellis) 256,250 1,000 - -
- - - - 1,058,000 - - 1,059,000
Guaranteed value of common stock issued in Ellis acquisition - -
- - - - - - (560,000) - -
(560,000)
Conversion of notes payable to common stock 41,903 - -
- - - - - 151,000 - - 151,000
1996 preferred stock issuance before imputed discount (Note 11) -
- - - 244 - - - 2,440,000 - -
2,440,000
Imputed dividend on 1996 preferred stock (Note 11) - - -
- - - - - - - - -
Common stock options issued in connection with finder on preferred stock
-
Acquisitions of assets (STAT) 220,133 - - -
- - - - 467,000 - - 467,000
Conversion of preferred stock and accrued dividends of $26,000 923,111
1,000 (89) - - - 25,000 (26,000)
- - - -
Common stock options issued for services - - - -
- - - - 48,000 - - 48,000
Exercise of warrants 178,491 - - - -
- - - 255,000 - - 255,000
Offering costs related to 1996 stock issued - - -
- - - - - (507,000) - - (507,000)
Net loss - - - - - - -
- - - (1,207,000) (1,207,000)
Dividends - - - - - - (92,000)
-- -- -- -- -- -- --------
92,000 - -
- - ----- --- ---
Balance December 29, 1996 5,688,292 6,000 155 -
- - - - 10,199,000 66,000 (7,224,000) 3,047,000
1997 preferred stock issuance, before imputed discount (Note 11)
- 167.15 - 1,672,000 - -
1,672,000
Imputed dividend on 1997 preferred stock (Note 11) - - -
- - - - - - -
Exercise of 1996 unit options - - 20.00 - -
- - - 200,000 - - 200,000
Offering costs on 1997 preferred stock - - - -
- - - - (152,000) - - (152,000)
Imputed value of issuance of warrants in connection with debt issued -
- - - - - - - 134,000 - -
134,000
Imputed dividend on 1997 preferred stock as a result of warrant repricings
(Note 11)
- - -
Conversion of preferred stock and accrued dividends of $71,000
7,042,256 7,000 (149.25) - (66.65) -
64,000 (71,000) - -
Common stock issued for satisfaction of debt 100,000 - -
- - - - - 100,000 - - 100,000
Common stock issued for services 13,019 - - -
- - - - 18,000 - - 18,000
Net loss - - - - - - -
- - - (515,000) (515,000)
Dividends declared - - - - - -
--- -- -- -- -- --
(44,000) 44,000 - -
-- -------- --- ---
Balance at December 28, 1997 12,843,567 $ 13,000 26.25
=========== ========= ======
$ - 100.50 $ - $ 12,191,000 $ 39,000 $
====== ======== ==== ============= ========= =
(7,739,000) $ 4,504,000
==== == ==============
MEDIX RESOURCES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 28, For the Year Ended December 29,
1997 1996
------------- --------------------
Cash flows from operating activities
Net loss $ (515,000) $ (1,207,000)
------------- ---------------
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities -
Depreciation and amortization 606,000 371,000
Common stock issued for services 18,000 48,000
Impairment of goodwill 349,000 -
Basis in assets of divisions sold 770,000 -
Imputed interest expense on convertible debt 134,000 -
Change in assets and liabilities -
Accounts receivable, net (57,000) (1,960,000)
Prepaid expenses and other (108,000) (33,000)
Checks written in excess of bank balance (65,000) (179,000)
Accounts payable and accrued expenses (279,000) 591,000
--------- --------
1,368,000 (1,162,000)
---------- ------------
Net cash provided by (used in) operating activities 853,000
--------
(2,369,000)
- - ----------
Cash flows from investing activities
Business acquisitions (2,000,000) (1,623,000)
Purchase of property and equipment (21,000) (112,000)
Proceeds from the sale of fixed assets 57,000 -
Issuance of notes receivable (491,000) -
---------- ---
Net cash (used in) investing activities (2,455,000)
------------
(1,735,000)
---
Cash flows from financing activities
Proceeds from issuance of debt and notes payable 1,000,000 -
Advances under financing agreement 23,589,000 11,618,000
Payments under financing agreement (23,364,000) (9,478,000)
Principal payments on debt and notes payable (1,185,000)
(588,000)
Issuance of preferred and common stock, net of offering costs
1,720,000 2,593,000
Dividends paid - (60,000)
--- ---------
Net cash provided by financing activities 1,760,000
-----------
4,085,000
--
Net increase (decrease) in cash 158,000 (19,000)
Cash, beginning of period - 19,000
--- --------
Cash, end of period $ 158,000 $ -
============ ======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $972,000 and $655,000 for
December 28, 1997 and December 29, 1996, respectively.
Non-cash investing and financing activities:
Dividends declared payable in common stock were $39,000 and $66,000 for
December 28, 1997 and December 29, 1996, respectively.
The Company issued 100,000 shares of common stock valued at $100,000 in
1997 for the satisfaction of debt.
The Company issued 13,019 shares of common stock valued at $18,000 for
services provided by non-employees.
Acquisition of equipment under capital leases was $56,000 in 1996.
Continued on next page.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued from previous page.
During 1996, $400,000 of receivables and $10,000 of fixed assets were
acquired in business combination through the issuance of 476,383 shares of
common stock with an equivalent value of $1,526,000. The excess of purchase
price over the identifiable assets of $1,116,000 has been allocated to
goodwill.
During 1996, all shares of the 12% preferred stock outstanding at
December 31, 1995 were automatically converted into 1,173,631 shares of common
stock.
In conjunction with the automatic conversion of the 12% preferred stock
accrued dividends outstanding of $441,000 were recaptured.
In 1996, 89 shares of the 10% convertible preferred stock issued plus
$26,000 of accrued dividends were converted into 923,111 share of common
stock.
During 1996, $151,000 in notes payable were converted into 41,903 shares
of common stock to cover the guaranteed value of certain shares issued in a
business acquisition during the year.
During 1996, the Company recorded a liability of approximately $500,000
to cover the guaranteed value of certain shares issued in a business
acquisition during the year.
Options with an imputed value of $125,000 were issued as a finders fee
for preferred stock placements in 1996.
MEDIX RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-23
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- - ----------------------------------------------------------------
Organization
- - ------------
Medix Resources, Inc. (formerly International Nursing Services, Inc.) and
subsidiaries (the Company) provide temporary nurses (registered and/or
licensed), therapists, nurse assistants, and other caregivers to nursing
homes, other long-term health-care facilities, hospitals, and private
residences.
The Company changed its name to Medix Resources, Inc. subsequent to December
28, 1997 to more accurately reflect the types of services it will be providing
in the future (Note 2).
Principles of Consolidation
- - -----------------------------
The accompanying consolidated financial statements include the accounts of
Medix Resources, Inc. and its wholly-owned subsidiaries,
National Care Resources - Colorado, Inc. National Care Resources - New York,
Inc., National Care Resources - Texas, Inc., JJ Care Resources, Inc. and
TherAmerica, Inc. All intercompany transactions have been eliminated.
Use of Estimates
- - ------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
- - -------------------------------
The Company maintains cash in depository accounts which, at times, may exceed
FDIC insurance limits. At December 28, 1997 balances in excess of FDIC limits
were approximately $244,000.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. The Company grants
credit to health-care facilities primarily in California, Colorado, New York,
and Texas; however, travel nurses are made available throughout the United
States. The Company periodically performs credit analysis and monitors the
financial condition of its clients in order to minimize credit risk.
Financial Instruments
- - ----------------------
The carrying value of the Company's accounts and notes receivable, accounts
payable and accrued expenses approximate their fair values due to the
short-term nature of the financial instruments.
Due to current interest rates available to the Company for debt being similar
to rates on the Company's remaining maturities, the fair value of existing
debt approximates its carrying value.
<PAGE>
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- - -----------------------------------------------------------------------------
Revenue Recognition
- - --------------------
Revenue is recognized when services are rendered at the net realizable amounts
expected to be received from payers, patients and others. Amounts reimbursed
by certain payers of healthcare services are subject to examination and
adjustment. These adjustments are accrued throughout the year and adjusted in
future periods as the final settlements are determined. At December 28, 1997,
the Company has recorded a liability of $232,000 for the amount due for the
difference between actual costs and costs to be reimbursed. This liability
was recorded as a reduction in revenue.
Income Taxes
- - -------------
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences result primarily
from the cash to accrual transition adjustment due to a required change from
the cash to accrual basis and depreciation and amortization.
Property and Equipment
- - ------------------------
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets
which range from five to seven years.
Intangible Assets
- - ------------------
Intangible assets are stated at cost, and consist of goodwill, non-compete
agreements and acquisition costs. Goodwill and non-compete agreements are
amortized using the straight-line method over fifteen and three years,
respectively.
Acquisition costs represents costs incurred in connection with the Company's
proposed acquisitions. Acquisition costs will be included in the purchase
price of the acquisitions if successful, or expensed in operations if the
acquisitions are unsuccessful.
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not be recovered. The Company looks primarily to the undiscounted future cash
flows of its acquisition in its assessment of whether or not goodwill and
other intangibles have been impaired. At December 28, 1997, the Company
determined an impairment of goodwill was appropriate as a result of the
transaction described in Note 4.
<PAGE>
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- - -----------------------------------------------------------------------------
Reclassifications
- - -----------------
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
Advertising Costs
- - ------------------
The Company expenses advertising costs as incurred. Advertising expenses for
the years ended December 28, 1997 and December 29, 1996 were $181,000 and
$42,000, respectively.
Basic Loss Per Share
- - -----------------------
During the year ended December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (FAS
128). FAS 128 established new definitions for calculating and disclosing
basic and diluted earnings per share. Basic loss per share is based upon the
weighted average number of shares outstanding. All dilutive potential common
shares have an antidilutive effect on diluted net loss per share and therefore
have been excluded in determining net loss per share. The Company's basic and
diluted loss per share are equivalent and accordingly only basic loss per
share has been presented.
Continued Existence
- - --------------------
The Company has suffered recurring losses for the past several years and
incurred a net loss for the year ended December 28, 1997 of $515,000. In
addition, the Company had a working capital deficit of $329,000. These
factors, among others, raise substantial doubt about the ability of the
Company to continue as a going concern.
Management's plans in regard to these matters include pursuing a number of
alternatives for additional financing which may include a public and/or
private offering of the Company's securities. The Company is currently
holding discussions with investment bankers and financial institutions related
to an offering of securities and new debt financing. No agreements have been
reached to date. Additionally, subsequent to year end (Note 2), the Company
merged with Cymedix Corporation, which has developed software for the secure
exchange of medical data on the Internet. There can be no assurance that the
Cymedix Corporation merger will produce positive cash flows, or that the
Company will be able to obtain any additional future financing on terms
acceptable to the Company.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
<PAGE>
NOTE 2 - ACQUISITIONS
- - ------------------------
TherAmerica, Inc.
- - ------------------
In January 1997, the Company acquired certain assets of Colorado Therapists On
Call, Inc. ("CTOC") and Professional Healthcare Providers, Inc. ("PHP"),
together doing business under the name Theramerica, Inc. (Theramerica). The
Company paid $2,000,000 cash and assumed approximately $175,000 of liabilities
for the acquisition which was effective January 1, 1997. The Company
accounted for the transaction as a purchase.
The purchase price was allocated to the assets based upon the following
estimated fair values at the acquisition date:
Net tangible assets $ 160,000
Non compete 50,000
Excess of cost over net assets acquired (goodwill) 1,965,000
----------
$ 2,175,000
==============
Cymedix Corporation
- - --------------------
In January 1998, the Company consummated a merger with Cymedix Corporation
(Cymedix). In conjunction with the merger the Company acquired all of the
issued and outstanding common shares of Cymedix for $2,345,000. To finance
the acquisition, the Company issued 6,980,000 shares of common stock valued at
$1,418,000 assumed liabilities of $604,000 and paid $323,000 in cash. The
merger has been accounted for as a purchase. The purchase price has been
allocated as follows:
Cash $ 5,000
Property and equipment 21,000
Excess of cost over net assets acquired (goodwill) 2,319,000
----------
$ 2,345,000
==============
The following table reflects the unaudited historical and pro forma results of
the Company's 1997 and 1998 acquisitions.
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
- - -------------------------------------
(Unaudited)
Medix Combined
Historical(1) Cymedix Adjustments(2) Totals
------------- ------------ ----------------- -----------
YEAR ENDED DECEMBER 28, 1997
Revenues $ 24,875,000 $ - $ - $ 24,875,000
=============== ==== ==== =============
Net (loss) $ (515,000) $ (922,000) $ (156,000) $
(1,593,000)
Preferred stock dividends (972,000) (29,000) 29,000
---------- -------- -------
(972,000)
------
Net (loss) applicable to common shareholders $ (1,487,000) $
============= =
(951,000) $ (127,000) $ (2,565,000)
=== ============= ===============
Basic net (loss) per common share (0.09) (0.05) (.01)
===== ===== =====
(.15)
==
Weighted average shares outstanding 16,828,824
============
16,828,824
=
(Unaudited)
YEAR ENDED DECEMBER 29, 1996
Medix Combined
Historical(1) Theramerica Cymedix Adjustments(3)
-------------- ----------- --------------- ------------------
Totals
- - -----------
Revenues $ 14,259,000 $ 8,378,000 $ - $ - $
============= ============ ==== ==== =
22,637,000
======
Net (loss) $ (1,207,000) $ (62,000) $ (817,000) $
91,000 $ (1,995,000)
Preferred stock dividends (1,388,000) - - -
------------ -- -- --
(1,388,000)
------
Net (loss) applicable to common shareholders
$ (2,595,000) $ (817,000) $ (3,383,000)
=============== =========== =============
Basic net (loss) per common share
(.23) - (.07) .01 (.29)
===== === ====== ===== =====
Weighted average shares outstanding
11,497,111 11,497,111
=========== ============
(1) Includes the results of operations for Theramerica from January 1,
1997, and reflects the issuance of 6,980,000 common shares related to the
acquisition on weighted average shares outstanding.
(2) Adjustments relate to the amortization of goodwill, and dividends on
convertible preferred stock converted into common stock in the merger have
been eliminated.
(3) Adjustments relate to amortization of goodwill and interest expense on
acquisition debt which would have been required had the Company completed the
acquisition at the beginning of the period, and the elimination of certain
corporate expenses which would not have been incurred.
<PAGE>
NOTE 3 - BALANCE SHEET DISCLOSURES
- - ---------------------------------------
Property and equipment consists of the following:
Furniture and fixtures $ 90,000
Computer hardware and software 536,000
---------
626,000
Less accumulated depreciation (324,000)
----------
$ 302,000
============
Depreciation expense was $121,000 and $105,000 for the years ended December
28, 1997 and December 29, 1996, respectively.
Intangible assets consist of the following:
Goodwill $ 5,948,000
Non-compete agreements 150,000
Acquisition costs 11,000
--------
6,109,000
Less accumulated amortization and impairment (1,618,000)
------------
4,491,000
==========
Amortization expense was $485,000 and $266,000 for the years ended December
28, 1997 and December 29, 1996, respectively. As discussed in Note 4, the
Company entered into an agreement to sell two entities at a price which would
have resulted in on a loss of approximately $349,000. Accordingly, the
Company impaired the related carrying value of goodwill on these two entities
by approximately $347,000 in 1997.
Accrued liabilities consist of the following:
Amount due under Ellis acquisition $ 296,000
Amounts due Medicare 232,000
Accrued payroll taxes and penalties 483,000
Other 373,000
---------
$ 1,384,000
==============
At various times during the year the Company was delinquent with payroll tax
deposits. At December 28, 1997, $215,000 was accrued for estimated interest
and penalties.
<PAGE>
- - ------
NOTE 4 - SALE OF OPERATING DIVISIONS
- - ------------------------------------------
In February of 1997 the Company sold its Medicare division for $200,000 in
cash which resulted in a gain of $190,000. The purchasor did not assume any
prior liabilities associated with operations prior to the acquisition. The
Company believes it has adequate reserves for any final adjustment which may
occur.
During the 4th quarter of 1997, the Company entered into an agreement to sell
three entities it acquired in the past four years. Ellis Home Care Services,
Inc. (Ellis), Stat Health Care Services, Inc. (Stat) and Paxxon Services, Inc.
(Paxxon). The sales prices are $500,000, $1,580,000, and $1,468,000 for Ellis,
Stat and Paxxon, respectively. The Company consummated the sale of Paxxon in
the 4th quarter of 1997 for approximately $1,275,000 cash and a $193,000 note
receivable (Note 5). The Ellis and STAT sales are contingent upon regulatory
approval of the buyer which is anticipated to be completed in late 1998. The
Paxxon sale resulted in a gain of $581,000 while Ellis and STAT resulted in a
loss of $349,000. The Company impaired goodwill on the Ellis and STAT
divisions by $349,000 as a result of entering into the sales contracts. These
sales relate only to the business and not to the assets of these entities
which the Company will retain and liquidate.
In February of 1998, the Company sold the balance of the trade receivables of
Paxxon to the purchasor at a discount of $35,000 which has been netted in the
gain on sale of Paxxon.
The sale of these divisions will result in a significant loss in revenues on
an ongoing basis.
NOTE 5 - NOTES RECEIVABLE
- - -----------------------------
December 31,
--------------------------
1997 1996
---------- --------------
As part of consideration for the sale of Paxxon (Note 4), the Company received
a note receivable in the amount of $192,795 that accrues interest at 5.75%.
Two principal and accrued interest payments of $100,000 each are due in May
1998 and November 1998. Payment on the note is collateralized by a pledge of
a subordinate interest in the debtors accounts receivable.
193,000 -
The Company advanced $298,000 to Cymedix which accrued interest at 11% with
principal and accrued interest due December 31, 1998. The note is
collateralized by a subordinated security interest in all of the debtors
assets. The Company advanced an additional $25,000 to Cymedix subsequent to
year end. These were included as part of the purchase price (Note 2).
298,000 -
$ 491,000 $ -
============ ======
<PAGE>
NOTE 6 - LINE-OF-CREDIT
- - --------------------------
The Company has entered into an agreement with a financial institution for a
revolving line-of-credit with a maximum principal balance of $5,000,000 which
is limited by a borrowing base calculation of 80% of qualified accounts
receivable. Interest accrues on the outstanding balance at 2% above bank
prime (10.5% at December 28, 1997). Additionally, the Company is required to
pay the lender a loan management fee on a monthly basis equal to 0.35% of the
average outstanding principal balance of the preceding month. Interest and
fees paid to this financial institution for the year ended December 28, 1997
approximated $650,000. The outstanding principal balance including accrued
interest and fees was $3,543,000 at December 28, 1997. The agreement expires
May 2000 and can be terminated by the lender without notice or by the Company
with a thirty day notice to the lender and payment of defined early payment
penalties. The loan is collateralized by substantially all the Company's
assets.
NOTE 7 - CAPITAL LEASES
- - ---------------------------
The Company leases a portion of their computer equipment under various leases
all that have a 36 month term and contain a
bargain purchase option. The future minimum lease payment as of December 28,
1997 are as follows:
1998 $ 25,000
-----------
Future minimum lease payments 25,000
Less interest (2,000)
--------
Present value of capital leases 23,000
Less current portion (23,000)
---------
Long-term portion $ -
======
Cost of the leased equipment was $77,000 with related accumulated depreciation
of $36,000 at December 28, 1997.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- - -------------------------------------------
Operating Leases
- - -----------------
The Company leases office facilities and equipment under non-cancelable
operating leases. One of the office leases is personally guaranteed by an
officer, director, and stockholder. Rent expense for the years ended December
28, 1997 and December 29, 1996 was $289,000 and $188,000, respectively.
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- - --------------------------------------------------------
Future minimum lease payments under these leases are approximately as follows:
Fiscal Year Ended December Amount
----------------------------- ------------
1998 $ 259,000
1999 206,000
2000 155,000
2001 34,000
--------
$ 654,000
============
Litigation
- - ----------
In 1997, a former patient filed a complaint in Texas against the Company
alleging that an employee/therapist of the Company was negligent. The Company
believes that there was no wrong doing and intends to defend itself vigorously
against the charges. The client/hospital where the employee was working at
the time of the alleged incident paid the plaintiff $100,000 in settlement and
release from further claims. The client/hospital has now demanded that the
Company indemnify them for the $100,000 as the client/hospital alleges this is
stipulated in a contract between the Company and the client/hospital. The
Company does not believe that it has a contractual obligation to indemnify the
client/hospital in this situation and intends to vigorously defend against
this demand. In addition, the Company maintains an insurance policy with a
limit of $1,000,000 which may satisfy some or all of the damages in the event
of an unfavorable outcome. The Company believes that it will not incur any
material losses in excess of accrued amounts or insured limits.
The Company is also subject to certain other litigation with former employees.
Management believes that it will not incur any material losses in excess of
accrued amounts.
Ellis Guarantee
- - ----------------
The Company purchased Ellis Health Services, Inc. by issuing 256,250 shares of
the Company's common stock and guaranteeing that the former owner of Ellis
would realize at least $4.25 per share upon the sale of the first 12,000
shares each month and 4.00 per share thereafter. The Company agreed to issue
additional shares or stock to make up any shortfall and the Chairman and CEO
of the Company pledged 100,000 of his personal shares as collateral. At
December 29, 1996, the former owner of Ellis had a shortfall of approximately
$500,000 from the sales of stock to that date. In January 1997, the former
owner of Ellis exercised his right to take the security pledged by the
Chairman and CEO of the Company. The Board of Directors of the Company
approved the issuance to the Chairman and CEO 100,000 shares of common stock
and options to purchase 250,000 shares of common stock at $1.00 per share to
compensate the Chairman and CEO for the loss of his personal shares. The
$1.00 per share represented the fair market value of the shares at the date of
the grant. In March 1997, the former owner of Ellis presented a demand letter
to the Company requesting immediate payment of the remaining short fall of
approximately $400,000. In August of 1997, the Company entered into an
agreement with the former owner of Ellis agreeing to payments resulting in a
liability of $295,000 at December 28, 1997.
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY
- - ---------------------------------
1996 Private Placement
- - ------------------------
In July and September 1996, the Company completed a private placement of 244
units, each unit consisting of a share of convertible preferred stock, $10,000
per unit, $1 par value ("1996 Preferred Stock"), a warrant to purchase 8,000
shares of the
Company's common stock at $2.50 per share and a unit purchase option to
purchase an additional unit at $10,000 per unit. The convertible preferred
stock carries a 10% dividend and is convertible at the lesser of $1.25 or 75%
of the average sales price for the five trading days prior to conversion. The
private placement raised gross proceeds to the Company of approximately
$2,440,000.
Approximately $1,550,000 of the proceeds raised was used to fund the cash
purchase portion of STAT. A shareholder who participated in the placement of
the private placement was paid a commission of $117,000 in 1996 and issued a
warrant to purchase 100,000 shares of common stock at $2.00 per share. The
warrant price was subsequently reduced to $1.00 per share in January 1997.
During 1996, 88.5 units (with accrued dividends) were converted to 923,111
shares of common stock. In addition, a Unit holder who held 17 units was
allowed to reduce their purchase price on their warrants to $1.00 per share
from $2.50 per share, resulting in gross proceeds to the Company of $136,000
in November 1996. In 1997 a Unit Holder who held 20 Units exercised their
Unit purchase option resulting in gross proceeds to the Company of $200,000.
The Unit holder immediately converted the preferred to common resulting in the
issuance of 257,000 shares of common stock in January 1997.
1997 Private Placement
- - ------------------------
In January and February 1997, the Company completed a private placement of
167.15 Units, each unit consisting of one share of convertible preferred
stock, $10,000 per unit, $1 par value, "1997 Preferred Stock", and a warrant
to purchase
10,000 shares of common stock at $1.00 per share. The convertible preferred
stock carries no dividend if the underlying common stock is included in an
effective registration statement within 90 days of the date of the agreement.
After 90 days, if the underlying shares are not included in an effective
registration statement, the dividend rate becomes 18%. In addition, the
preferred stock contains a redemption feature whereby if the underlying common
stock which the preferred shares are convertible into is not effectively
registered by the second anniversary date of each respective unit, the holder
at their option may redeem the preferred shares for $10,000 back plus all
accrued unpaid dividends. The Company raised gross proceeds of $1,672,000
from this private placement. Commissions of $100,000 were paid to individuals
who assisted in the private placement who are also shareholders of the
Company. The Company received net proceeds of approximately $1,520,000 from
the sale of the 1997 preferred stock. Substantially all of the proceeds were
used to purchase TherAmerica (Note 2).
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
- - ----------------------------------------------
Warrants
- - --------
On January 28, 1997, the Company issued a convertible note for proceeds of
$1,000,000 from a shareholder of the Company. Interest accrued on the note at
12.5% and the note matured on January 27, 1998. The proceeds of the note were
used to fund the acquisition costs related to TherAmerica (Note 2). The
Company also issued a warrant to purchase 200,000 shares of common stock at
$1.1875 per share until July 31, 1999 to the convertible note holder. The
Company recorded an imputed discount on the convertible debenture of $134,000
using the Black-Scholes option pricing model related to the issuance of the
warrant to purchase 200,000 shares of common stock at $1.1875 per share. The
Company amortized the imputed discount over the expected term of the related
debt. On May 28, 1997, the Company paid $500,000 of principal plus accrued
interest to the noteholder, and the exercise price of the warrant was reduced
to $0.27 from $1.19. The reduction of the exercise price resulted in no
material change to the imputed discount due to decrease in market value to the
Company stock. During the forth quarter of 1997 the Company paid the
remaining $500,000 plus accrued interest from proceeds received on the Paxxon
Sale (Note 4).
Stock Options
- - --------------
In May 1988, the Company adopted an incentive stock option plan (ISO), which
provides for the grant of options representing up to 100,000 shares of the
Company's common stock to officers and employees of the Company upon terms and
conditions determined by the Board of Directors. Options granted under the
plan are generally exercisable immediately and expire up to ten years after
the date of grant. Options are granted at a price equal to the market value
at the date of grants, or in the case of a stockholder who owns greater than
10% of the outstanding stock of the Company, the options are granted at 110%
of the fair market value.
In 1994, the Board of Directors established, the Omnibus Stock Plan of 1994
(1994 Plan) and reserved 500,000 shares of the Company's common stock for
grant under terms which could extend through January 2004. All options and
warrants issued under this plan are non-qualified. Grants under the 1994 Plan
may be to employees, non-employee directors, and selected consultants to the
Company, and may take the form of non-qualified or incentive stock options,
not lower than 50% of fair market value. To date, the Company has not issued
any options below fair market value at the date of grant. Incentive stock
options and options to directors may be granted only at fair market value,
except that incentive stock options granted to employees who are also owners
of 10% or more of the Company's outstanding common stock must be at prices no
lower than 110% of fair market value.
In 1996, the Board of Directors established the 1996 Stock Option Plan (the
"1996 Plan") with terms similar to the 1994 Plan. During 1996, the Company
issued 300,000 options to purchase the Company's common stock at $1.88
expiring in 2006. The Board of Directors of the Company reserved 3,000,000
shares of common stock for issuance under the 1996 Plan.
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
- - ----------------------------------------------
Stock Options (continued)
- - ---------------------------
Also during 1996, the Company canceled and reissued certain options to certain
officers and directors of the Company. Options to purchase 224,187 shares of
common stock at exercise prices ranging from $1.20 to $2.75 which were issued
to certain officers and directors under the 1994 Plan were canceled. Options
to purchase 239,437 shares of common stock at $1.88 (which represented the
fair market value of the common stock at the time of grant) were issued as
replacement for the canceled options. The additional 15,250 options were
issued to replace the loss in value for those option holders who held options
at exercise prices which were less than $1.88.
The Company also granted 443,748 options to purchase common stock at $1.00 per
share under the "1996 Plan", 133,609 of which were granted to officers and
directors.
The following is a summary of options and warrants granted, all of which
expire at various times through 2007.
Number of Options
-----------------------------
Exercise Price Per Exercise Price Per
Number of
ISO Non-Plan Share Warrants
--------- ---------- --------- ----------
Share
- - -----
Outstanding December 31, 1995
1,121,375 15,500 $0.63-$6.00 1,514,604
$1.75-$5.00
Option/warrants granted 539,437 - $1.88
2,217,000 $1.00-$2.50
Unit options granted (1) - - - 1,952,000
-
Cancellations (317,687) (8,000) $0.63-$6.00
---------- ------- -----------
(358,941) $1.00-$4.00
------ ----------
Outstanding December 29, 1996
1,343,125 7,500 $.63-$6.00 5,324,663
$1.00-$5.00
Options/warrants granted 3,019,155 (2) - $0.25-$1.00
2,279,126 (3) $0.15-$2.50
Unit options canceled - - (1,792,000)
(3) $2.50
Cancellations (1,920,935) (2) - $0.63-$3.25
------------ -- -----------
(1,011,376) $0.27-$2.50
------- -----------
Outstanding December 28, 1997
2,441,345 7,500 $0.25-$6.00 4,800,413
$0.15-$5.00
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
- - ----------------------------------------------
(1) Represents option to purchase an additional unit identical to the Unit
issued in the July/September private placement. Each $10,000 unit consists of
one share of convertible preferred (convertible at the lesser of $1.25 or 75%
of the closing price on the five trading days prior to conversion) and a
warrant to purchase 8,000 shares of common stock at $2.50 per share for three
years.
(2) Includes 1,223,326 options that were canceled and reissued at an
exercise price of $0.25 to $1.00 to officers, directors, and employees of the
Company. The options were originally exerciseable between $0.63 and $3.25.
Net new issues were 1,794,729 and net canceled were 696,509.
(3) Includes 287,626 warrants that were canceled and reissued at an
exercise price of $0.25 to an officer of the Company. The warrants were
originally exerciseable at $1.75. Also includes the cancelation of 204 Unit
Options in exchange for the cancellation and reissue of the related warrant
with an exercise price of $0.63. The warrants were previously exerciseable at
$2.50. Millenco note warrants were issued on January 28, 1997 at $1.19,
Millenco exercised 20 unit options. On August 15, 1997 the canceled and
reissued at $0.63. The warrants were originally exerciseable at $1.25. Net
new issues were 1,871,500 and net canceled were 163,750.
The weighted average exercise price of options and warrants outstanding
at December 28, 1997 is $1.82.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Corporation's two stock
option plans been determined based on the fair value at the grant date for
awards consistent with the provisions of SFAS No. 123, the Corporation's net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
1997 1996
---------- --------------
Net loss - as reported $ (515,000) $ (1,207,000)
Net loss - pro forma (1,963,000) (2,141,000)
Basic loss per share - as reported (.15) (.57)
Basic loss per share - pro forma (.30) (.78)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
0%; expected volatility of 128% and 93%, respectively; discount rate of 5.5%
and 11.5%, respectively; and expected lives of 10 years.
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
- - ----------------------------------------------
Dividends
- - ---------
In 1995, the Board of Directors declared a stock dividend on the preferred
stock to be paid in common stock. Under the terms of the preferred stock, if
the Company does not have $750,000 cash or cash equivalents then the dividend
may be paid by issuing common stock at the rate of $1.80 per share annualized.
The Company accrued dividends at the $1.80 level for 1995 as the Company did
not have $750,000 in cash and cash equivalents. The dividends on the
preferred stock for the year ended December 31, 1995 were $876,000 of which
$435,000 was paid in common stock of the Company. The remaining dividends of
$441,000 were accrued at year end and recorded as a dividend payable in common
stock.
During January 1996, the outstanding 12% preferred stock at December 31, 1995
was automatically converted into common stock. All unpaid dividends on that
preferred stock were void and no longer payable. Since the dividends were
previously reflected in the statement of operations as a component of the net
loss applicable to common stockholders, the recovery of the accrued dividends
has been reflected as a credit in determining the net loss applicable to
common stockholders in 1996 on the statement of operations in the accompanying
financial statements.
The Company has imputed dividends on the 1997 and 1996 preferred stock as a
result of in the money conversion features (Note 11).
Stock Payoff of Note Payable
- - --------------------------------
In February 1996, the Company paid off a note payable consisting of principal
of $25,000 and accrued interest payable of approximately $23,000 with issuance
of 13,700 shares of common stock. The common stock was valued at $3.50 which
represented the fair market value of the common stock at the time of the
payoff.
Settlement of Stock for Services
- - ------------------------------------
In September 1996, the Company settled a dispute with a former investment
banker who claimed that the Company owed the investment banker approximately
$53,000. The Company settled the dispute by issuing 20,133 shares of common
stock.
<PAGE>
- - ------
NOTE 10 - INCOME TAXES
- - --------------------------
The temporary differences between the tax basis of assets and their financial
reporting amounts that give rise to a deferred tax asset are primarily due to
a cash to accrual transition adjustment due to the Company being required to
adopt the accrual basis for income tax filing purposes.
The components of deferred tax assets (liabilities) in the balance sheet,
which are fully limited by a valuation allowance, are as follows:
Accounting method differences $ 244,000
Net operating loss carryforward 2,006,000
-----------
2,250,000
Less valuation allowance 2,250,000
-----------
Net deferred tax asset $ -
======
The Company has incurred net losses for federal tax reporting purposes since
inception of approximately $5,900,000. The tax net operating loss (NOL)
carryforwards expire in years 2003 through 2012. The utilization of
$4,718,000 of the NOL carryforward is limited to $469,000 on an annual basis
due to an effective change in control which occurred as a result of the 1996
private placement. Due to the existence of net operating losses incurred by
the Company which raise substantial doubt about the Company's ability to
continue as a going concern, the Company has concluded it is more likely than
not that it will not realize its deferred tax asset and accordingly has
established a valuation allowance of $2,250,000.
NOTE 11 - LOSS PER COMMON SHARE
- - -------------------------------------
In accordance with the SEC's position on preferred stock with convertible
features that are in the money at the time of issuance, the Company has
imputed a value associated with such conversion features and has recorded the
value as a discount on the preferred stock. The Company amortizes the imputed
discount on the preferred stock over the period from issuance of the preferred
stock to the earliest period at which the preferred stock becomes convertible.
As the Company's 1997 and 1996 preferred stock issuances are immediately
convertible, the Company has amortized the entire imputed discount as a
component of dividends on preferred stock. The Company recorded additional
dividends to preferred stockholders of approximately $553,000 and $1,737,000
for the years ended December 29, 1997 and 1996, respectively, which represents
an imputed increase to the dividend yield and not a contractual obligation on
the part of the Company to pay such imputed dividends.
The Company has also imputed additional dividends on the 1997 preferred stock
of $375,000 as a result of the repricing of the exercise price associated with
the related
warrants issued. The Company repriced the warrant exercise price as an
inducement for holders not to convert their 1997 preferred stock into shares of
common stock.
<PAGE>
NOTE 11 - LOSS PER COMMON SHARE (CONTINUED)
- - --------------------------------------------------
December 31,
-------------------------
1997 1996
--------- --------------
Net loss $ 515,000 $ 1,207,000
Preferred stock dividends based on stated rate 44,000 92,000
Preferred stock dividends based on imputed discount at issuance
553,000
Preferred stock dividends imputed associated with related warrant repricing
375,000
Preferred stock dividends recaptured (Note 9) - (441,000)
-- ---------
Net loss applicable to common stockholders $ 1,487,000 $ 2,595,000
============ ============
Basic loss per common share $ (.15) $ (.57)
========= =========
Weighted average shares outstanding 9,848,824 4,517,111
=========== ==========
NOTE 12 - RETIREMENT SAVINGS PLAN
- - --------------------------------------
Effective March 25, 1997, the Company adopted a defined contribution
retirement savings plan which covers all employees age 21 or older with one
thousand hours of annual service. Matching contributions are made by the
Company at $0.25 for each $1 that the employee contributes up to 8% of
compensation. Company contributions vest as follows:
Years of Service Vested
------------------ --------------
1 10%
2 20%
3 30%
4 40%
5 60%
6 80%
7 100%
Contributions for the year ended December 28, 1997 were $35,000.
