SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File Number: 0-25474
MEDCOM USA, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 65-0287558
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18001 Cowan, Suites C & D, Irvine CA 92614 (address of
principal executive offices) (Zip Code)
(949) 261-6665
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X___ No____
As of November 14, 2000 the Company had 33,819,222 shares of Common Stock issued
and outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Part 1. Financial Information
Item 1. Index to Financial Statements
MEDCOM USA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
September 30, 2000 and June 30, 2000 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2000 and 1999 6
Consolidated Statement of Stockholders' Equity
for the Three Months Ended September 30, 2000 7
Notes to Consolidated Financial Statements. 8-18
Management's Discussion and Analysis of
Financial Condition and Results of Operations. 19-22
Part II. Other Information 23
<PAGE>
MEDCOM USA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2000 2000
------------ --------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $521,780 $2,043,603
Accounts receivable, less allowance for
doubtful accounts of $203,541 893,089 919,805
Inventories 233,040 219,953
Prepaid expenses and other current assets 368,290 262,576
Royalty Advances 657,604 676,353
Notes receivable, current portion (Note 2) 57,514 48,000
------ ------
Total Current Assets 2,731,317 4,170,290
PROPERTY AND EQUIPMENT,
Property & Equipment net of accumulated
depreciation of $2,233,729 at September 30,
2000 and $1,995,866 at June 30, 2000 4,677,068 4,163,830
OTHER ASSETS
Notes receivable, less allowance of
$150,000 (Note 2) 745,868 718,500
DSM intellectual property, net of
accumulated amortization of $301,394 at
September 30, 2000 and $136,997 at
June 30, 2000 (Note 3) 2,986,537 3,150,934
Goodwill, net of accumulated amortization
of $597,135 at September 30, 2000 and
$469,278 at June 30, 2000 1,931,023 2,024,973
Contracts, net of accumulated amortization of
$141,265 at September 30, 2000 and $92,241 at
June 30, 2000 772,526 821,550
Other 149,678 99,196
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Total Other Assets 6,585,632 6,815,153
--------- ---------
Total Assets $13,994,017 $15,149,273
=========== ===========
See notes to consolidated financial statements
<PAGE>
MEDCOM USA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $925,721 $592,306
Other current liabilities 575,106 818,085
Note payable (Note 5) 25,000 25,000
Current obligations under capitalized lease (Note 5) 62,143 59,616
Current portion of deferred revenue (Note 4) 241,707 256,272
Dividends payable 52,250 23,750
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Total Current Liabilities 1,881,927 1,775,029
LONG TERM LIABILITIES
Obligations under capitalized lease (Note 5) 97,149 113,666
Non-current portion of deferred revenue (Note 4) 1,958,816 2,110,382
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Total Long Term Liabilities 2,055,965 2,224,048
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Total Liabilities 3,937,892 3,999,077
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Commitments and Contingencies (Notes 5 and 9)
STOCKHOLDERS' EQUITY (Note 6)
Convertible preferred stock, Series A $.001
par value, and Series D, $.01 par value, 52,900
shares authorized 50,000 (A), 2,900 (D); 7,100
shares issued and outstanding (A) 4,250 and (D)
2,850 at September 30, 2000 liquidation preference
of $2,935,000 33 33
Common stock $.0001 par value 80,000,000 shares
authorized:
shares issued and outstanding - 32,729,222 and
31,820,966 at September 30, 2000 and June 30, 2000,
respectively 3,273 3,182
Additional Paid In Capital 48,160,943 47,448,976
Accumulated Deficit (38,122,352)(36,300,132)
Currency translation gain (loss) 14,228 (1,863)
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Total Stockholders' Equity 10,056,125 11,150,196
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Total Liabilities and Stockholders' Equity $13,994,017 $15,149,273
============ ============
See notes to consolidated financial statements
<PAGE>
MEDCOM USA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2000 and 1999
SEPTEMBER 30,
2000 1999
---- ----
(unaudited) (unaudited)
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Revenue (Note 7)
Sales $ 50,778 $ 112,108
Rental 202,069 212,183
Service 71,874 671,116
Software development 274,433 --
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Total revenue 599,154 995,407
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Cost of sales and services, exclusive of
depreciation and amortization
shown separately below (Note 7)
Sales 24,856 105,893
Rental 106,668 80,151
Service 55,540 26,631
Software development 61,856 --
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Total cost of sales and services 248,920 212,675
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Gross profit 350,234 782,732
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Operating expenses
General and administrative 1,345,218 972,654
Depreciation and amortization 516,370 450,439
Selling and marketing 185,705 135,160
Research and development 92,534 --
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Total expenses 2,139,827 1,558,253
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Operating loss (1,789,593) (775,521)
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Other income (expense)
Interest expense (9,780) (30,570)
Interest income 11,881 6,020
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Total Other income (expense) 2,101 (24,550)
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Loss from continuing operations before income taxes (1,787,492) (800,071)
Income tax provision 6,228 2,400
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Net loss from continuing operations (1,793,720) (802,471)
Net loss from discontinued operations (Note 8) -- (67,631)
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Net loss (1,793,720) (870,102)
Preferred stock dividend (28,500) (26,067)
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Net loss applicable to common shareholders (1,822,220) (896,169)
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Other comprehensive gain
Currency translation gain 16,091 --
----------- ----------
Comprehensive loss applicable to common
shareholders $(1,806,129) $(896,169)
============================
Basic and diluted loss per common share from
continuing operations $ (0.06) $ (0.05)
Basic and diluted loss per common share from (.00) (.00)
discontinued operations ---- ----
Basic and diluted net loss per common share $ (0.06) $ (0.05)
==== ====
Weighted average common shares outstanding
(Note 6) 32,055,113 17,166,025
========== ==========
See notes to consolidated financial statements
<PAGE>
MEDCOM USA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
SEPTEMBER 30,
2000 1999
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (1,793,720) ($870,102)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and Amortization 516,370 450,439
Loss from discontinued operations 67,631
Imputed value of warrants granted for services 17,107 160,646
Stock issued for services 133,265
Recognition of deferred revenue (166,131) (7,500)
Changes in assets and liabilities:
Inventories (13,089) 33,777
Accounts receivable 26,716 (56,838)
Prepaid expenses and other current assets (41,437) (7,704)
Royalty advances 18,749 (39,973)
Other assets (50,481) --
Accounts payable (111,268) 131,232
Other current liabilites (159,722) (245,011)
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NET CASH USED IN OPERATING ACTIVITIES (1,756,906) (250,138)
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (317,839) (79,458)
Notes receivable (36,882) (259,500)
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NET CASH USED IN INVESTING ACTIVITIES (354,721) (338,958)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 10,000
Proceeds from exercise of warrants and options 587,703 --
Payments on debt -- (251,500)
Payments on obligations under capital leases (13,990) (13,222)
Change in currency translation loss 16,091 --
Net proceeds from issuance of common stock -- 430,952
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NET CASH PROVIDED BY FINANCING ACTIVITIES 589,804 176,230
-------- -------
NET DECREASE IN CASH (1,521,823) (412,866)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,043,603 439,772
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 521,780 $ 26,906
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for interest: $ 9,124 $ 778
Cash paid during the period for taxes: $ 12,321 --
See notes to consolidated financial statements
<PAGE>
MEDCOM USA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2000
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
SERIES A SERIES D COMMON STOCK CURRENCY
NUMBER NUMBER NUMBER ADDITIONAL ACCUMU- TRANS-
OF OF OF PAID IN LATED LATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT GAIN/LOSS TOTAL
------ ------ ------ ------ ------ ------ -------- ------- ---------- ------
Balance-
June 30, 2000 4,250 $ 4 2,850 $ 29 31,820,966 $3,182 $47,448,976 $(36,300,132) $(1,863) $11,150,196
Net loss - 3 months
ended September 30,
2000 (1,793,720) (1,793,720)
Settlement of arbitration 25,000 3 42,968 42,971
Imputed value of stock
warrant grants in
exchange for consulting
services and leased
equipment 81,384 81,384
Dividend on Series D
Preferred stock (28,500) (28,500)
Exercise of stock options
and warrants 883,256 88 587,615 587,703
Currency translation 16,091 16,091
gain ------ ---- ------ ---- ------- ---- -------- --------- ------ --------
Balance
September 30, 2000 4,250 $ 4 2,850 $ 29 32,729,222 $3,273 $48,160,943 (38,122,352) $14,228 $10,056,125
(unaudited) =============================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Note 1 - Organization and Significant Accounting Policies
Organization
MedCom USA, Incorporated was incorporated in the state of Delaware on August 15,
1991 under the name of Sims Communications, Inc. The Company changed its name to
MedCom USA, Incorporated in October 1999. The Company provides technology-based
solutions primarily for the medical industry. Solutions include 1) MedCard
point-of-sale (POS) transaction terminals and PC software to provide medical
insurance eligibility verification, claims processing and credit card/ATM
charges and payments, 2) Health Information Gateway, a web-based infrastructure,
featuring advanced data mining capabilities, designed to meet the information
needs of healthcare entities, both payers and insurance entities, and 3) a
comprehensive network of transaction processing applications using its
intelligent debit cash POS terminals with custom software and is operated by a
third party under a License Agreement (Note 4). The Company also operates in the
intelligent vending area, using its previously acquired and developed
technology. The operations in this area include the rental of videocassettes,
the sale of prepaid phone cards and the utilization of script machines, of which
the Company is only actively involved with the rental of videocassettes.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended June 30, 2001. For further information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report on
Form 10-KSB.
Principles of Consolidation
The consolidated financial statements include the accounts of MedCom USA,
Incorporated and its wholly owned subsidiaries, Sims Franchise Group Inc., Sims
Communications International, Inc., JustMed.com, Inc., One Medical Service, Inc.
and Link International Technologies, Inc., and its wholly owned subsidiary New
View Technologies, Inc. The Consolidated Financial Statements include the
accounts of DCB Actuaries and Consultants, s.r.o. (DCB), a wholly owned
subsidiary from the date of acquisition, April 15, 2000. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
<PAGE>
Inventories
Inventories consist primarily of movie videocassettes, terminals and computer
spare parts that are held for sale, other associated miscellaneous parts and CD
ROM and magnetic cassette software that is held for sale and are recorded at the
lower of cost or market determined by the first-in, first-out method and
weighted average methods.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases is
valued at the lower of fair market value or net present value of the minimum
lease payments at inception of the lease. Depreciation and amortization are
recognized utilizing the straight-line method over the estimated useful lives
for owned assets, ranging from 3 to 15 years, and the related lease term for
leasehold improvements and equipment under capital leases. Expenditures for
maintenance and repairs are charged to expense as incurred.
(Loss) Per Common Share
(Loss) per common share is based on the weighted average number of common shares
outstanding during each of the respective periods. Common shares issuable upon
exercise of the convertible preferred stock, common stock options and common
stock equivalents are excluded from the weighted average number of shares since
their effect would be anti-dilutive.
Contracts
The value allocated to contracts related to One Medical Services, LLC, and DCB
acquisitions are being amortized over the shorter of the respective terms of the
contracts or the period during which benefits are expected to be received by the
Company on a straight-line basis.
DSM Intellectual Property
The cost of the intellectual property acquired from DSM, LLC is being amortized
over five years on a straight-line basis.
Goodwill
The excess of the cost of the net tangible and identifiable intangible assets of
acquired businesses is stated at cost and is being amortized over five to seven
years.
Revenue Recognition
Sales Income: Revenue from the sale of inventory, which includes videocassettes,
prepaid phone cards through dispensing machines (PCD's), MedCard terminals and
other items are recognized upon shipment. Revenue from the licensing of software
is recognized upon acceptance by the customer if the license agreement includes
such an acceptance provision, otherwise it is recognized upon shipment.
<PAGE>
Rental Income: Revenue from the rental of videocassettes is recognized at the
time of rental for the rental of single videocassettes and upon the usage of
prepaid movie cards upon the issuance of such cards. A movie card entitles the
user to rent an unlimited number of movies during the prescribed time frame.
Service Income: Revenue related to processing of medical and financial
transactions are recorded at the time the transaction is completed. Medical
transactions include the use of the MedCard System and the One Medical Service
Network. Financial transactions pertain to the use of the script machines.
Revenue related to the providing of technical and other support related to the
One Medical Services Network is recognized at the time services are rendered.
Revenue from the billing services using the MedCard System is recorded at the
time the billing service is rendered at the expected net reasonable value of the
Company's share of the moneys to be collected. The Company performs these
services in exchange for a percentage of the moneys collected by the billing
party (medical group or hospital). Service revenue also includes licensing fees
related to the One Medical Service program (Note 4). Revenue from maintenance
agreements on software previously sold is recognized ratably over the
maintenance period.
Software Development Income: Revenue related to time and material contracts is
recognized as the service is provided. Revenue related to long-term software
development contracts is recognized on the percentage of completion method if
the contract does not include a customer acceptance provision or other
contingencies. If the contract provides for customer acceptance or other similar
contingencies, development revenues and expenses are deferred until the customer
accepts the software, or other contingencies are resolved upon which time all
the revenue and expenses related to the contract are recognized. During the
periods ended September 30, 2000 and 1999, the Company did not have any
contracts that required customer acceptance or similar contingencies.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary, DCB, are measured
using the local currency, Czech crowns (CZK) as the functional currency. Assets
and liabilities of this subsidiary are translated at exchange rates as of the
balance sheet date. Revenues and expenses are translated at average rates of
exchange in effect during the period. The resulting cumulative translation
adjustments have been recorded as a separate component of stockholders' equity.
Foreign currency transaction gains and losses, which were not material, are
included in other income and expense in the consolidated statements of
operations. The Company does not believe there are any foreign exchange
restrictions or political, economic or other currency restrictions that will
impact its operations in the Czech Republic.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the statement of operations in the period that includes the enactment date.
<PAGE>
Research and Development
Research and development costs consist primarily of costs related to the
conceptual formation, design, tooling and development of prototypes and are
expensed as incurred.
Reclassifications
Certain accounts in the September 30, 1999 financial statements have been
reclassified to conform to the September 30, 2000 presentation.
Note 2 - Notes Receivable
The Company made a loan to and entered into a joint venture agreement with
Commonwealth Group International, Inc. and Frederick C. Sayle. The $150,000 note
receivable bears interest at a rate of 10% per annum, with principal and
interest originally payable by February 1, 1998. Additionally, the Company is
entitled to 16.7% of the gross revenues from agreements with Commonwealth Group
International, Inc., which includes cable television and cellular communications
licenses owned by CGI-UKRAINE Ltd and ASWEST, Commonwealth Group International,
Inc. joint venture partners. The Company has not received any such revenues and
management believes that it is unlikely the Company will receive any such
revenues in the future. The Company did not receive principal or interest
payments on the note during the year ended June 30, 2000 and, as such, has
commenced legal action against the borrowers. Due to the uncertainty regarding
the collectability of this note receivable the Company has recorded a reserve
for the full amount.
The Company has a note receivable with a balance of $766,500 at September 30,
2000 related to the licensing of the One Medical Service Network. This note is
currently in default. The Company does not anticipate a material adverse impact
from this default, as the deferred revenue related to the license will offset
any portion of the note that is not collected (Note 4).
The Company loaned $36,882 to MedCard Management Systems, Inc., a related party
(MedCard Management Systems, Inc. is owned by two employees of the Company). The
note receivable bears interest at 8% and is payable in monthly installments of
$1,000.
<PAGE>
Note 3 - Acquisitions
DCB Actuaries & Consultants
In April 2000, the Company acquired 100% of the stock of DCB Actuaries &
Consultants, s.r.o. (DCB), a Czech Republic based company. DCB developed and
currently operates a health insurance decision support system with advanced data
structures. The purchase price of DCB was at $2,095,270 and was comprised of the
following:
Purchase price - preferred stock - Series D $ 494,000
Purchase price - cash 1,403,847
Direct costs of acquisition - including 12,880
shares of common stock 197,423
-------
Total acquisition cost $ 2,095,270
=========
The aggregate purchase price has been allocated based on the fair market values
at the date of acquisition as follows:
Current assets $ 421,715
Fixed assets 1,910,313
Other assets 1,322
Contracts 813,791
Goodwill 813,791
Liabilities (1,865,662)
---------
$ 2,095,270
Pro Forma Statement of Operations
The unaudited pro forma results of operations had the Company acquired DCB
Actuaries & Consultants, s.r.o. as of July 1, 1999 are as follows for the three
month period ended September 30, 1999:
Revenue $ 1,227,400
Net loss $(1,058,730)
Comprehensive net loss applicable
to common shareholders $(1,113,297)
Net loss per share $(.06)
Intellectual Property from DSM
In April 2000, the Company acquired certain intellectual property from DSM, LLC
(DSM), a Florida limited liability company. The purchase price for the
intellectual property acquired from DSM was $3,287,930 and was comprised of the
following:
Purchase price - preferred stock - Series D $ 2,356,000
Purchase price - cash 746,153
Direct costs of acquisition - including 24,249
shares of common stock 185,777
-------
Total acquisition value $ 3,287,930
===========
The aggregate purchase price has been attributed entirely to the intellectual
property based on the fair market value at the date of acquisition.
<PAGE>
Note 4 - License Agreement and Deferred Revenue
On July 20, 1999, the Company licensed the exclusive rights to market the One
Medical Service Network to an unrelated corporation (Licensee). The Company
received initial payments totaling $567,000, which was included in service
revenue in the three months ended September 30, 2000. The Company also received
a 7-year, 8% unsecured note receivable in the amount of $810,000 as part of the
transaction. The note was to be paid by monthly payments equaling $8.00 per
platform using the One Medical Service network, with a minimum of $1,000 and a
maximum of $6,000 per month, plus $3,000 of prepaid phone card credits amounts
over its term. The deferred revenue related to this note is being recognized as
revenue as the amounts were earned. A total of $613,000 of revenue was
recognized during the year ended June 30, 2000, including the initial $567,000,
leaving a balance of deferred revenue of $764,000 as of June 30, 2000. The
Licensee has defaulted on the License Agreement as it is delinquent with respect
to making payments on the note receivable. The Company is currently in
negotiations with an unrelated third party to assume the License Agreement and
operations of the One Medical Service Network. The Company does not anticipate a
material adverse impact from the default by the current Licensee, as it
anticipates that it will consummate a new agreement with the third party and the
deferred revenue related to the license will offset any portion of the note that
is not collected.
In 1998, DCB entered into a ten-year contract with an insurance company. Under
the contract, DCB is responsible for building, maintaining and updating a
specialized data warehouse in the health care insurance sector of the Czech
Republic and providing the insurance company with access to the data warehouse.
The insurance company paid $2,353,000 for services to be provided by DCB over
the ten-year period beginning in the year 1998. Despite the fact that the
project was stopped in 1999, the contract is still valid and DCB fulfilled all
conditions defined by the contract. The project may be re-launched any time
during the ten-year period. DCB recorded the payment as deferred revenue, and is
amortizing the payment to revenue over ten years on a straight-line basis.
Except for ongoing maintenance of the system, DCB does not expect to incur
significant additional costs related to the contract.
The total balance of the deferred revenue related to the DCB contract was
$1,436,523 at September 30, 2000. Revenue recognized during the quarter ended
September 30, 2000 was $55,501 and is included in software development income in
the accompanying consolidated statement of operations for the quarter ended
September 30, 2000.
Note 5 - Note Payable and Capital Leases
Note payable is comprised of the following at September 30, 2000:
8.0% convertible note payable - individual, interest payable quarterly,
principal due at maturity date of February 1998. Debt includes conversion to
common stock feature with conversion rate of $1.25 per
share. Currently in default. $25,000
-------
Total current maturities $25,000
<PAGE>
Capital Leases
The Company leases equipment under capitalized leases, with a total balance
outstanding of $159,292 as of September 30, 2000, of which $62,143 is current.
The terms of the leases vary from 48 to 60 months and the leases are
collateralized by the underlying equipment.
Note 6 - Stockholders' Equity
Equity Transactions
During the three months ended September 30, 2000, the following equity
transactions occurred:
The Company issued 879,923 shares of its common stock upon the exercise of
warrants and options at prices ranging from $0.59 to $1.00 per share, and
received $584,370, net of $62,205 of expenses upon such exercise. As an
inducement for these existing shareholders to convert their existing options and
warrants into common stock, the Company issued warrants to purchase 1,319,885
shares of its common stock at $5.00 per share with an expiration in September
2005.
The Company issued 3,333 shares of its common stock to an employee upon the
exercise of their option to purchase 3,333 shares at a price of $1.00 per share.
The Company issued 25,000 shares of its common stock for $42,971 in settlement
of arbitration, such amount was included in other current liabilities at June
30, 2000.
The Company issued warrants to purchase 35,000 shares of its common stock at
prices ranging from $2.00 to $2.47 with a total value of $17,107 (based on
imputed values ranging from $0.45 to $0.59 per share) for consulting services,
which have been charged to expense on the accompanying consolidated statements
of operations. A warrant to purchase 25,000 shares expires in July 2001 and the
warrant to purchase the remaining 10,000 shares expires in July 2002.
The Company issued a warrant to purchase 106,756 shares of its common stock at a
price of $1.86 per share, with a total value of $64,277 (based on an imputed
value of $0.60 per share) as a deposit for a capital lease agreement. The
warrant expires in September 2003, and is included in other current assets on
the accompanying consolidated balance sheets as the lease was not yet in effect
as of September 30, 2000 (Note 9).
The Company accounts for stock based compensation in accordance with Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock Based
Compensation," ("FAS 123"), which encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments to employees. FAS 123 requires the recognition of expense for
such grants, described above, to acquire goods and services from all
nonemployees. Additionally, although expense recognition is not mandatory for
issuances to employees, FAS 123 requires companies that choose not to adopt the
new fair value accounting rules to disclose pro forma net income and earnings
per share information using the new method.
<PAGE>
The Company has adopted the disclosure-only provisions of FAS 123. Accordingly,
no compensation cost has been recognized for the issuances of stock options to
employees. For the three months ended September 30, 2000, employees of the
Company were issued options to purchase a total of 260,000 shares of the
Company's common stock, at rates ranging from $1.87 to $2.50 per share, which
equaled or exceeded market value at the time of grant, expiring from August 2003
to August 2005 (unrecognized imputed charge of $139,255, or $0.35 to $0.54 per
share). The Company did not issue any stock options to employees of the Company
during the quarter ended September 30, 1999.
The Company uses the Black Scholes option pricing model to determine the imputed
value of all options and warrants issued using the following assumptions:
Three Months Ended
September 30, 2000
Expected life 1 to 2 years
Volatility 50%
Risk free interest rate 6.5%
Dividend rate 0%
Note 7 - Business Segments
The Company has three reportable segments: intelligent vending machines,
healthcare management software development and medical transaction processing.
The intelligent vending machine segment is comprised of the sales of prepaid
phone cards, the processing of monetary transactions utilizing a script machine
that are used primarily in major fast food chains and the rental of
videocassettes through automated dispensing units in hotels and time share
facilities, primarily located in the states of Florida and California.
The medical transaction processing segment includes revenue from the MedCard
System, including the sale of terminals, processing fees and billing service
revenue and the licensing, sales and services related to the Company's One
Medical Services Network. The One Medical Services Network was licensed to an
unrelated third party in July 1999, and as such, approximately 87% of the
revenue ($606,000) was in the form of licensing and other revenue during the
three months ended September 30, 1999. There was no revenue recorded during the
quarter ended September 30, 2000 related to the One Medical Services Network.
The healthcare management software development segment includes the licensing of
the Health Information Gateway and related developmental services, as well as
the licensing of other software and hardware products and services. It operates
under the name of the DCB division in the United States and DCB Actuaries and
Consultants, s.r.o., in Europe.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company's reportable segments
are strategic business units that offer different products and services.
<PAGE>
Operating results and other financial data are presented for the three
reportable segments of the Company for the three months ended September 30, 2000
and 1999. The healthcare management software development did not exist in the
three months ended September 30, 1999; it arose because of the acquisition of
DCB in April 2000. The 1999 segment information has been restated to exclude the
results of operations from the discontinued operations related to the ACDC line
of machines (Note 8).
Net revenue includes sales and services to external customers within that
segment and related licensing revenue. There are no significant transfers
between segments. Cost of sales and services includes costs associated with net
revenue within the segments. Depreciation and amortization includes expenses
related to depreciation and amortization directly allocated to the segment.
Segment income (loss) does not include general and administrative expenses,
selling and marketing, research and development, other operating expenses, other
income (expense) items or income taxes. Identifiable assets are those assets
used in segment operations, which consist primarily of receivables, inventory,
prepaid expenses, machinery, equipment, licensing rights, technology, goodwill
and cash maintained at DCB in the Czech Republic. Corporate assets are
principally cash maintained in the United States and assets used at the
corporate office.
Healthcare
Intelligent Medical Management
Vending Transaction Software Corporate Consoli
Machines Processing Development And Other dated
September 30, 2000:
Net revenues $ 216,309 108,732 $ 274,113 $ -- $599,154
Cost of sales and $106,669 $ 80,395 $ 61,856 $ -- $248,920
services
Depreciation and $ 74,021 $ 88,303 $ 341,958 $ 12,088 $516,370
amortization
Selling, General &
Administrative, $ -- $ -- $ -- $1,621,356 $1,621,356
Research & Development
and other
Income (loss) from
continuing operations $ 35,619 $ (59,966) $(129,701)(1,633,444) $(1,787,492)
before income taxes
Identifiable assets $1,036,837 $4,414,028 $7,792,052 $751,100 $13,994,017
<PAGE>
Healthcare
Intelligent Medical Management
Vending Transaction Software Corporate Consoli
Machines Processing Development And Other dated
Net revenues $295,493 $ 699,914 $ - $ - $995,407
Cost of sales and $154,373 $ 58,302 $ - $ - $ 212,675
services
Depreciation and $ 141,326 $ 290,658 $ - $18,45 $ 450,439
amortization
Selling, General &
Administrative, $ -- $ -- $ - $1,132,364 1,132,364
Research &
Development and other
Income (loss) from
continuing operations $ (206) $ 350,954 $ - $(1,150,819 (800,071)
before income taxes
Identifiable assets $1,214,604 $4,212,040 $ - $ 533,512 5,960,156
Identifiable assets as of September 30, 1999 excludes assets totaling $904,913
related to the discontinued ACDC operations (Note 8). There were no such assets
as of September 30, 2000.
Note 8 - Discontinued Operations
During the quarter ended June 30, 2000, the Company decided to discontinue its
ACDC operations, as they had not generated any revenue for the Company in two
years. The lack of prospects for future revenue generation, coupled with the
Company's focus on medical technology led the Company to reach this decision.
The ACDC equipment and phones will be disposed of prior to December 31, 2000,
except for certain computer components and related hardware that will be
retained. These components will be used as replacement parts in the Company's
other intelligent vending machines, primarily video vending machines. The total
net book value of the ACDC equipment and phones was reduced to $48,312 and
reclassified to fixed assets for the Movie Vision operations during the quarter
ended June 30, 2000. This amount equaled the lower of the net book value and
fair market value of the retained component parts. These are being depreciated
over the remaining useful life of the equipment.
During the fiscal year ended June 30, 1997, the Company sold equipment (ACDC
units) to a customer for a total sales price of $664,000. The total amount of
$664,000 is payable under the terms of a note receivable that bears interest at
8.5%. Principal and interest is payable commencing by December 31, 1997 in equal
monthly installments of approximately $14,000 through November 30, 2002. No
payments have been received as of June 30, 2000. The note is collateralized by
the original equipment (ACDC machines). The Company had been reducing the value
of the note to equal the estimated market value of the underlying collateral.
The Company is pursuing legal action against the customer, however, collection
of this amount is uncertain.
<PAGE>
Accordingly, the Company wrote off the note receivable in full at June 30, 2000
and recorded a fixed asset of $11,978 which equaled the lower of amortized cost
or fair market value of the component parts of the equipment held as collateral.
The only expenses related to the ACDC operations for the quarter ended September
30, 1999 was depreciation of $67,631. There were no expenses related to the ACDC
operations during the quarter ended September 30, 2000.
No other expenses are anticipated in connection with the disposal of the assets.
Note 9 - Commitments and Contingencies
Leases
In September 2000, the Company signed an agreement with EMC Corporation whereby
the Company will obtain equipment under a three-year lease through EMC and
issued a warrant to purchase 106,756 shares of the Company's common stock to EMC
with an exercise price of $1.86 (the market price at the time the lease
agreement was executed), with a total value of $64,277 (based on an imputed
value of $0.60 per share), which is included in other current assets on the
accompanying consolidated balance sheets, as the lease was not yet in effect as
of September 30, 2000. This amount will be capitalized as part of the cost of
the equipment and amortized over the life of the related equipment when it is
placed into service. The equipment was received in October 2000, and will be
used in the Company's storage service provider operations.
Litigation
In October 2000, the Company received a summons naming it as a co-defendant in a
matter between MedCard Management Systems, Inc., Dream Technology, LLC, the
owners of those entities and an individual. The plaintiff is seeking repayment
of moneys he allegedly invested in MedCard Management Systems between November
1996 and December 1997, related interest and a 7% ownership interest in MedCard
Management Systems. The plaintiff is also seeking the establishment of a
constructive trust of the assets of MedCard, Dream and MedCom and an injunction
from further issuing shares of stock in any of the defendant corporations. The
Company believes all claims with respect to MedCom are without merit as the
Company had no involvement with the plaintiff, no knowledge of his pending claim
and negotiated all of the transactions regarding the MedCard System in an arms
length manner. The Company will actively seek removal from this claim. The
Company has been indemnified for all costs, including attorney's fees related to
this matter as part of the original license agreement with MedCard and Dream.
The Company is also involved in various claims and legal actions arising in the
ordinary course of business.
Note 10 - Related Party Transactions
During the three month period ended September 30, 2000, the Company purchased
$168,693 and $50,553 of equipment and services, respectively, from DSM.net, a
company owned by an officer of the Company. The Company believes that it
purchased such goods and services at prices equal to or below what it could have
purchased such amounts from an unrelated party. There were no such transactions
during the period ended September 30, 1999.
<PAGE>
Note 11 - Subsequent Event
Between October 1, 2000 and October 10, 2000, the Company issued 1,090,000
shares of its common stock upon the exercise of options and warrants at prices
ranging from $0.59 to $1.00 per share, and received $1,046,728, net of $6,372 of
expenses upon such exercise. As an inducement for these existing shareholders to
convert their existing options and warrants into common stock, the Company
issued warrants to purchase 2,135,000 shares of its common stock at $5.00 per
share with an expiration in October 2005.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations-Three Months Ended September 30, 2000
The Company continued its shift towards the healthcare industry during the three
month period ended September 30, 2000. Revenues from the medical transaction
processing business segment declined from $699,914 for the quarter ended
September 30, 1999 to $108,732 for the quarter ended September 30, 2000. The
decrease in revenues reflects the recognition of over $600,000 in licensing and
related sales revenue from the Licensee of the One Medical Service Network in
the first quarter of 1999, for which there were no corresponding revenues in the
quarter ended September 30, 2000.
The three month period ended September 30, 2000 includes healthcare management
software development revenues of $274,113, which were generated by the Company's
subsidiary, DCB, which was acquired in April of 2000. Accordingly, there are no
corresponding revenues in the first quarter of the prior year. Of these
revenues, $254,893 were generated in Europe and $19,220 was generated in the
United States.
Revenues from the intelligent vending machine segment decreased from $295,493
during the quarter ended September 30, 1999 to $216,309 in the quarter ended
September 30, 2000. This decrease is a result of the Company focusing its
efforts and resources on its healthcare/medical business operations.
Revenues from sales of products decreased from $112,108 for the quarter ended
September 30, 1999 to $50,778 for the quarter ended September 30, 2000 due to
decreased equipment sales associated with products related to the One Medical
Service Network, which were sold to the Licensee of the Network in 1999, but no
such sales were made in 2000. The remainder of the decrease reflects the
Company's shift from an internal sales force which generates a higher revenue
per unit, to a primarily independent sales organization effort for the Company's
MedCard products, whose training and development was taking place in the first
quarter of 2000, resulting in lower sales for the quarter.
Revenues from rentals decreased from $212,183 during the quarter ended September
30, 1999 to $202,069 in the quarter ending September 30, 2000 as the company
experienced lower rentals of videos as it focused its attention on the
healthcare segment of its business.
Service revenues decreased from $671,116 for the quarter ended September 30,
1999 to $71,874 for the quarter ended September 30, 2000 primarily due to the
decrease of $575,000 in revenues recognized on the licensing of the One Medical
Service Network in the quarter ended September 30, 1999 without any
corresponding revenues in the quarter ended September 30, 2000.
Cost of sales of products decreased from $105,893 for the quarter ended
September 30, 1999 to $24,856 for the quarter ended September 30, 2000, while
costs as a percent of sales decreased from 94% to 49% due to the decrease in
<PAGE>
equipment sales related to the One Medical Service Network, which were being
sold to the licensee of the network at a very low profit margin in 1999, while
there were no such sales in 2000. Additional decreases in cost of sales resulted
from the Company recording fewer MedCard terminal sales, as it focused on
building its relationship with its independent sales organizations.
Cost of rentals increased from $80,151 during the quarter ended September 30,
1999 to $106,668 in the quarter ending September 30, 2000, while costs as a
percent of sales increased from 38% to 53%, as the lower revenues were not
offset by a comparable decline in costs, but instead experienced increased costs
related to maintaining the aging vending machines and general operating
expenses.
Cost of services increased from $26,631 for the period ended September 30 1999
to $55,540 for the period ended September 30, 2000 as a result of adding to the
production staff in the medical transaction processing segment to prepare for
anticipated increased future sales. The cost of services as a percent of service
revenues increased from 4% in the quarter ended September 30 1999 to 77% for the
period ended September 30, 2000 as there were no costs associated with the
licensing of the One Medical Service Network, which revenues were recognized in
July of 1999. Cost of services as a percent of services revenue would have been
28% during the period ended September 30, 1999 exclusive of the One Medical
Services Network licensing revenue.
Cost of software development was $61,856, or 23% as a percent of revenues. There
were no corresponding costs in the previous year, as the Company began its
efforts in this segment with the purchase of DCB in April of 2000. The expense
as a percent of revenues may fluctuate in future years as more revenue is
generated in this area.
General and administrative expenses increased from $972,654 for the period ended
September 30 1999 to $1,345,218 for the period ended September 30, 2000.
Approximately $200,000 of the increase is related to the Company's DCB
operations in Europe and the United States. Additional costs were incurred for
salary, facilities, attracting key employees and advisors, and the related
infrastructure improvements to prepare the Company to focus on the medical
transaction and healthcare software businesses.
Depreciation and amortization increased from $450,439 for the period ended
September 30, 1999 to $516,370 for the period ended September 30, 2000. The
increase is due to the amortization of costs associated with the purchase of DCB
and deprecation of its related assets of $177,561, amortization of the
technology acquired from DSM of $164,397, and the amortization of $37,950 of
costs related to purchasing the MedCard technology in May of 2000. Offsetting
this increase is a decrease in amortization of $280,521 related to goodwill from
the One Medical Services Network, which is being amortized in proportion to the
revenue recognized under the license agreement in the prior year, and the
write-off in the prior year of patents which were no longer being used.
Selling and marketing expenses increased from $135,160 to $185,705 as the
Company increasingly focused its attention on selling its products in the
healthcare marketplace.
Research and development expenses of $92,534 were incurred in the three months
ended September 30, 2000. These costs are related to product development
completed on the Company's healthcare management software. There were no
corresponding costs in the previous year, as the Company began its efforts in
this segment with the purchase of DCB in April of 2000.
<PAGE>
Interest expense declined from $30,570 to $9,780 as a result of the reduction of
long term debt and the pay off of the Company's other liabilities. Interest
income increased from $6,020 to $11,881 due to increased levels of cash onhand
as compared to the previous year.
The Company recorded preferred stock dividends totaling $28,500 during the
quarter ended September 30, 2000 related to the Series D preferred stock, versus
a preferred stock dividend of $26,067 in the quarter ended September 30, 1999
related to the Series C preferred stock, which was retired in January 2000.
There was no Series D preferred stock outstanding during the quarter ended
September 30, 1999.
Liquidity and Sources of Capital
During the quarter ended September 30, 2000, the Company's operating cash
requirement was $1,756,906, attributable to a net loss of $1,793,720 mitigated
by non-cash charges for depreciation and amortization ($516,370) and stock and
warrant based services ($17,107). This shortfall was primarily funded by
exercise of stock options and warrants for $587,703, along with the cash
balances on hand at the beginning of the fiscal year. In addition, the company
incurred capital expenditures of $317,839.
Between October 1, 2000 and October 10, 2000, the Company received approximately
$1,053,000 from the exercise of options and warrants to purchase 1,090,000
shares of the Company's common stock at prices ranging from $0.59 to $1.00. The
Company issued five-year warrants to purchase 2,135,000 of its common stock at a
price of $5.00 per share to warrant holders exercising their warrants.
At September 30, 2000 the Company's stockholders' equity totaled $10.1 million
and net tangible assets was $8.1 million, compared to $11.2 million and $9.1
million, respectively as of June 30, 2000. When compared to June 30, 2000, the
Company's working capital declined from $2,395,261 to $849,390.
The Company has received a lease commitment from an unrelated entity. This lease
facility will provide the Company with up to $1,000,000 for equipment. The
Company has already purchased approximately $400,000 of equipment that is
expected to be covered under this facility and the amounts paid will be refunded
to the Company. The Company anticipates it will utilize the balance by the end
of calendar 2000.
The Company believes that both its MedCard and DCB operations will provide
positive cash flow from operations during the year ending June 30, 2001,
although both will operate under different strategies. MedCard will focus on
generating a large number of small dollar transactions. While the sale of each
MedCard unit will generate cash flow, residual processing fees are expected to
generate the greatest cash flow. The Company believes the foundation and
infrastructure are in place and the Company expects the MedCard revenue and cash
flow will undergo rapid growth during the year ending June 30, 2001.
DCB's cash flow will come from a comparatively small number of high dollar
transactions. An outright sale or license of the software will yield the
greatest upfront cash flow to the Company, plus cash in the future for
<PAGE>
maintenance and support. Transactions under the Application Service Provider
(ASP) alternative are expected to yield a long-term, continuous cash flow to the
Company. However, because the market for DCB's systems is relatively new, it is
difficult to predict when the revenue and cash will be realized.
The Company believes that with the funds received from the exercise of warrants
in October and the equipment lease facility it has adequate cash resources
available until such time as positive cash flow is generated from operations.
However, if the Company does need additional cash in the future, the Company may
need to sell additional shares of its common stock or borrow funds from private
lenders. There can be no assurance, however, that the Company will be successful
in obtaining additional funding if is determined to be necessary. If the Company
is unsuccessful in obtaining additional funding for its operations, the Company
will, if necessary, either sell certain assets or divisions, reduce its
operations or otherwise reorganize its operations so that its operating expenses
would be less than its revenues. Other than the above mentioned equipment lease
facility, the Company does not have any available credit, bank financing or
other external sources of liquidity.
The Company's long-term debt consists entirely of obligations under capital
leases. As of September 30, 2000, the Company is in compliance with the
covenants and provisions of these leases.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings.
See Item 3 to the Company's annual report on Form 10-KSB for the year
ended June 30, 2000 for information concerning the Company's legal proceedings.
See Note 10 to the financial statements included as part of this report for
information concerning recent litigation involving the Company.
Item 2. Changes in Securities.
Note 6 to the financial statements included as part of this report
discloses the shares of the Company's common stock which were issued or sold
during the quarter ended September 30, 2000.
The shares issued or sold during the quarter ended September 30, 2000 were
not issued under the Securities Act of 1933 but were issued or sold in reliance
upon the exemption provided by Section 4(2) of the Act. The persons who acquired
these shares were either accredited or sophisticated investors. The shares of
common stock were acquired for investment purposes only and without a view to
distribution. The persons who acquired these shares were fully informed and
advised about matters concerning the Company, including the Company's business,
financial affairs and other matters. The persons acquired these shares for their
own accounts. The certificates representing the shares of common stock bear
legends stating that the shares may not be offered, sold or transferred other
than pursuant to an effective registration statement under the Securities Act of
1933, or pursuant to an applicable exemption from registration. The shares are
"restricted" securities as defined in Rule 144 of the Securities and Exchange
Commission.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
During the three months ending September 30, 2000, the Company did
not file any reports on Form 8-K.
<PAGE>
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 thereunto duly authorized.
MEDCOM USA, INC.
By: /s/ Mark Bennett
-------------------------
Mark Bennett, President
/s/ Alan Ruben
----------------------------
Alan Ruben, Principal Financial
and Accounting Officer
Date: November 15, 2000
