U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A2
CURRENT PERIOD
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 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.)
Suite 400, 360 South Garfield Street
Denver, Colorado 80209
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number: (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 amended financial statements for Medix Resources, Inc.
on this amendment to Form 8-K.
(b) Pro Forma Financial Information
None.
(c) Exhibits
Exhibit 27.2 *Financial Data Schedule, Medix Resources, Inc.
Exhibit 99.1 Consolidated Financial Statements of Medix Resources,
Inc. (formerly International Nursing Services, Inc.).
* Previously filed with Form 8-K filed on March 23, 1998
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 30, 1998 By:/s/ John P. Yeros
John P. Yeros, President and Chief
Executive Officer
MEDIX RESOURCES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 28, 1997
MEDIX 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
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
CONSOLIDATED BALANCE SHEET
DECEMBER 28, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MEDIX RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 28, December 29,
1997 1996
------------------ ------------------
<S> <C> <C>
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
============ ===========
</TABLE>
See notes to consolidated financial statements.
MEDIX RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDING DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Number of Number of
Shares Amount Shares Amount
----------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Balance-December 31,
1995 2,894,773 $ 3,000 469,452 $ -
Automatic conversion
of preferred stock 1,173,631 1,000 (469,452) -
Acquisition of
assets (Ellis) 256,250 1,000 - -
Guaranteed value of
common stock issued in
Ellis acquisition - - - -
Conversion of notes
payable to common stock 41,903 - - -
1996 preferred stock
issuance before of
imputed discount
(Note 11) - - 244.00 -
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 - - -
Conversion of preferred
stock and accrued
dividends of $26,000 923,111 1,000 (88.50) -
Common stock options
issued for services - - - -
Exercise of warrants 178,491 - - -
Offering costs related
to 1996 stock issued - - - -
Net loss - - - -
Dividends - - - -
----------- -------- -------- -------
Balance December 29,
1996 5,688,292 6,000 155.50 -
1997 preferred stock
issuance, before
imputed discount
(Note 11) - - - -
Imputed dividend on
1997 preferred stock
(Note 11) - - - -
Exercise of 1996 unit
options - - 20.00 -
Offering costs on 1997
preferred stock - - - -
Imputed value of issuance
of warrants in connection
with debt issued - - - -
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) -
Common stock issued for
satisfaction of debt 100,000 - - -
Common stock issued
for services 13,019 - - -
Net loss - - - -
Dividends declared - - - -
----------- --------- --------- --------
Balance at
December 28, 1997 12,843,567 $ 13,000 26.25 $ -
=========== ========= ====== ========
</TABLE>
Consolidated Statement of Changes in Stockholders' Equity Continued below
<TABLE>
<CAPTION>
Dividend
Payable
Preferred Stock 1997 With
Number of Paid-in Common
Shares Amount Capital Stock
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Balance - December 31,
1997 - $ - $ 6,349,000 $ 441,000
Automatic conversion
of preferred stock - - 440,000 (441,000)
Acqusition of
assets (Ellis) - - 1,058,000 -
Guaranteed value of
common stock issued
in Ellis acquisition - - (560,000) -
Conversion of notes payable
to common stock - - 151,000 -
1996 preferred stock
issuance before of
imputed discount (Note 11) - - 2,440,000 -
Imputed dividend on
1996 preferred stock
(Note 11) - - - -
Common stock options
issued in connection
with finder on
preferred stock - - 125,000 -
Acquisitions of assets
(STAT) - - 467,000 -
Conversion of preferred
stock and accrued
dividends of $26,000 - - 25,000 (26,000)
Common stock options
issued for services - - 48,000 -
Exercise of warrants - - 255,000 -
Offering costs related
to 1996 stock issued - - (507,000) -
Net loss - - - -
Dividends - - (92,000) 92,000
------------- ---------- ----------- --------
Balance - December 29,
1996 - - 10,199,000 66,000
1997 preferred stock
issuance, before
imputed discount
(Note 11) 167.15 - 1,672,000 -
Imputed dividend on 1997
preferred stock
(Note 11) - - - -
Exercise of 1996 unit
options - - 200,000 -
Offering costs on 1997
preferred stock - - (152,000) -
Imputed value of issuance
of warrants in
connection with debt
issued - - 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 (66.65) - 64,000 (71,000)
Common stock issued
for satisfaction of debt - - 100,000 -
Common stock issued
for services - - 18,000 -
Net loss - - - -
Dividends declared - - (44,000) 44,000
------------- ---------- --------- --------
Balance - December 28,
1997 100.50 $ - $12,191,000 $ 39,000
============ ========== ========== =========
</TABLE>
Consolidated Statement of Changes in Stockholders' Equity continue below
<TABLE>
<CAPTION>
Accumulated
Deficit Total
----------- -----------
<S> <C> <C>
Balance, December 31, 1995 $(6,017,000) $ 776,000
Automatic conversion of preferred
stock - -
Acquisition of assets (Ellis) - 1,059,000
Guaranteed value of common stock
issued in Ellis acquisition - (560,000)
Conversion of notes payable to
common stock - 151,000
1996 preferred stock issuance
before of imputed discount (Note 11) - 2,440,000
Imputed dividend on 1996 preferred
stock (Note 11) - -
Common stock options issued in
connection with finder on preferred
stock - 125,000
Acquisitions of (STAT) - 467,000
Conversion of preferred stock and
accrued dividends of $26,000 - -
Common stock options issued for
services - 48,000
Exercise of warrants - 255,000
Offering costs related to 1996
stock issued - (507,000)
Net loss (1,207,000) (1,207,000)
Dividends - -
----------- -----------
Balance - December 29, 1996 (7,224,000) 3,047,000
1997 preferred stock issuance,
before imputed discount
(Note 11) - 1,672,000
Imputed dividend on 1997 preferred
stock (Note 11) - -
Exercise of 1996 unit options - 200,000
Offering costs on 1997 preferred
stock - (152,000)
Imputed value of issuance of
warrants in connection with
debt issued - 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 - -
Common stock issued for satisfaction
of debt - 100,000
Common stock issued for services - 18,000
Net loss - (515,000)
Dividends declared - -
------------ ---------
Balance - December 28, 1997 $(7,739,000) $ 4,504,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
MEDIX RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 28, December 29,
1997 1996
------------------ -----------------
<S> <C> <C>
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 $ -
============ =============
See notes to consolidated financial statements.
</TABLE>
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.
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.
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:
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets $ 160,000
Non compete 50,000
Excess of cost over net
assets acquired (goodwill) 1,965,000
----------
$ 2,175,000
==========
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 5,000
Property and equipment 21,000
Excess of cost over net
assets acquired (goodwill) 2,319,000
----------
$ 2,345,000
==========
</TABLE>
The following table reflects the unaudited historical and pro forma results of
the Company's 1997 and 1998 acquisitions.
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
- -------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Medix Combined
Historical(1) Cymedix Adjustments(2) Totals
------------- -------- --------------- -----------
<S> <C> <C> <C> <C>
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 16,824,824
============ ==========
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
YEAR ENDED DECEMBER 29, 1996
Medix Combined
Historical(1) Theramerica Cymedix Adjustments(3) Totals
------------- ----------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
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) $ (62,000) $ (817,000)$ 91,000 $(3,383,000)
========== ========== ========= ======= ===========
Basic net (loss)
per common share $ (.23) $ - $ (.07) $ .01 $ (.29)
========== ========== ========= ======== =========
Weighted average
shares
outstanding 11,497,111 11,497,111
=========== ============
</TABLE>
(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:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 90,000
Computer hardware and software 536,000
---------
626,000
Less accumulated depreciation (324,000)
----------
$ 302,000
============
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
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
=========
</TABLE>
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
- -----------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ---------
<S> <C> <C>
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 $ -
============ ============
</TABLE>
<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:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 27,000
-----------
Future minimum lease payments 27,000
Less interest (2,000)
----------
Present value of capital leases 25,000
Less current portion (25,000)
---------
Long-term portion $ -
===========
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended December Amount
----------------------------- ------------
<S> <C>
1998 $ 259,000
1999 206,000
2000 155,000
2001 34,000
--------
$ 654,000
============
</TABLE>
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.
During the fourth quarter of 1997, an action was filed against the Company in
the Eastern District of New York under the caption New York Healthcare, Inc.
v. International Nursing Services, Inc., et al., alleging, among other things,
breach of contract against the Company and seeking damages in excess of
$175,000 plus court costs and attorney fees. The Company filed answers and
counterclaims in this action. The Company intends to vigorously defend this
action and to press its counterclaim. The Company does not expect any
possible resolution of this matter to have a material effect on the Company's
financial condition.
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.
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- --------------------------------------------------------
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.
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. The Company has filed a registration statement which
became effective in October of 1996, registering 8,293,133 shares of common
stock. The registered common stock is primarily designated for the conversion
of the related preferred stock and exercise of the associated warrants.
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.
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
1996 Private Placement (continued)
- -------------------------------------
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 257,028 shares of common stock in January 1997.
During 1997, 129.25 units (with accrued dividends) were converted to 3,133,361
shares of common stock. Subsequent to year end, an additional 8.0 units have
been converted resulting in the issuance of an additional 489,315 shares of
common stock in 1998.
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). The Company has filed a
registration statement which became effective in April of 1997, registering
6,732,311 shares of common stock. The registered common stock is primarily
designated for the conversion of the related preferred stock and exercise of
the associated warrants.
During 1997, 66.65 units were converted to 3,651,867 shares of common stock.
Subsequent to year end, an additional 1.0 unit has been converted resulting in
the issuance of an additional 53,981 shares of common stock in 1998.
<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 a decrease in the market value
of the Company's 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 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.
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.
<TABLE>
<CAPTION>
Number of Options
--------------------
Exercise Exercise
Price Per Number of Price Per
Plan Non-Plan Share Warrants Shares
------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<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 also exercised 20 unit options on 1996 preferred stock. On August
15, 1997 the warrants were canceled and reissued at an exercise price of
$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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
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)
</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 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)
- ----------------------------------------------
Warrants (continued)
- ---------------------
Dividends
- ---------
In 1995, the Board of Directors declared a stock dividend on the 12% 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:
<TABLE>
<CAPTION>
<S> <C>
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 $ -
=============
</TABLE>
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)
- --------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- --------
<S> <C> <C>
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 1,737,000
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
=========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Years of Service Vested
------------------ --------------
<S> <C>
1 10%
2 20%
3 30%
4 40%
5 60%
6 80%
7 100%
</TABLE>
Contributions for the year ended December 28, 1997 were $35,000.
