As filed with the Securities and Exchange Commission on July 16, 2004
Registration No. 333-[______]
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
PATIENT INFOSYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 8090 16-1476509
--------------------------- ---------------------------- ----------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
46 Prince Street
Rochester, New York 14607
(585) 242-7200
(Address and telephone number of principal executive
offices and principal place of business)
Roger Louis Chaufournier
President and Chief Executive Officer
Patient Infosystems, Inc.
46 Prince Street
Rochester, New York 14607
(585) 242-7200
(Name, address and telephone number of agent for service)
-----------------------------
Copies of Communications to:
Jeffrey A. Baumel, Esq.
McCarter & English, LLP
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
(973) 622-4444
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Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after the
effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
Proposed Proposed
Title of each class Maximum Maximum
of securities to be Amount to be Offering Price Agregate Amount of
Registered Registered(1) Per Unit(2) Offering Price(2) Registration Fee(3)
Common Sotck, par 3,663,611 $3.05 $11,174,013 $1,416
value $0.01 per share
(1) Includes 93,450 shares of common stock issuable upon the exercise of common
stock purchase warrants.
(2) Estimated solley for the purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated July [__], 2004
PRELIMINARY PROSPECTUS
PATIENT INFOSYSTEMS, INC.
877,125 Shares of Common Stock
The stockholders named on page 54 are selling up to 877,125 shares of our
common stock. 62,500 of the shares we are registering are issuable upon the
exercise of outstanding common stock purchase warrants. The selling stockholders
may offer and sell their shares on a continuous or delayed basis in the future.
These sales may be conducted in the open market or in privately negotiated
transactions and at market prices, fixed prices or negotiated prices. We will
not receive any of the proceeds from the sale of shares by the selling
stockholders, but we will receive funds from the exercise of their warrants.
Our common stock is currently listed on the OTC Bulletin Board under the
symbol "PATY." On July 15, 2004, the last reported sale price of our common
stock on the Nasdaq OTC Bulletin Board was $3.05 per share.
Investing in our common stock involves risks. Please read the "Risk
Factors" section beginning on page 6 to read about certain risks that you should
consider before purchasing shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is July [__], 2004
i
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by us, the selling stockholders or any
underwriter. You should rely only on the information contained in this
prospectus. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the common stock offered
by this prospectus, or an offer to sell or a solicitation of an offer to buy any
security by any person in any jurisdiction in which such offer or solicitation
would be unlawful. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, imply that the information in this
prospectus is correct as of any time subsequent to the date of this prospectus.
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TABLE OF CONTENTS
Page
SUMMARY ..............................................................3
RISK FACTORS...........................................................6
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS..........14
USE OF PROCEEDS.......................................................15
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............15
MANAGEMENT 'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...........17
BUSINESS .............................................................33
MANAGEMENT............................................................45
EXECUTIVE COMPENSATION................................................48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........52
SELLING STOCKHOLDERS..................................................54
PLAN OF DISTRIBUTION..................................................56
DESCRIPTION OF CAPITAL STOCK..........................................59
LEGAL MATTERS.........................................................63
EXPERTS...............................................................63
WHERE YOU CAN FIND ADDITIONAL INFORMATION.............................64
INDEX TO FINANCIAL STATEMENTS.........................................65
ii
SUMMARY
You should read this summary together with the more detailed information,
including our financial statements and related notes, appearing elsewhere in
this prospectus. Unless otherwise indicated, all share and per share information
contained herein gives effect to a 1 for 12 reverse stock split effected at the
close of business on January 9, 2004.
Our Company
We are a health management solutions company which primarily engages in
integrating clinical expertise with advanced Internet, call center and data
management capabilities. We have evolved to offer a comprehensive portfolio of
products and services designed to improve patient clinical outcomes and quality
of life, reduce healthcare costs and facilitate patient-provider-payor
communication. These products are now marketed under the label Care Team Connect
for Health. On December 31, 2003, we acquired the assets and assumed the
liabilities of American Caresource Corporation.
Our principal executive offices are located at 46 Prince Street, Rochester,
New York 14607 and our telephone number is (585) 242-7200. We are incorporated
under the laws of Delaware. Our Internet address is www.ptisys.com. The
information on our web site is not incorporated by reference into, and does not
constitute part of, this prospectus.
Recent Developments
On June 17, 2004, Patient Infosystems Inc. sold 3,365,000 shares of common
stock to institutional and other accredited investors for an aggregate purchase
price of $5,653,200 in gross proceeds. C.E. Unterberg, Towbin acted as placement
agent in the transaction. C.E. Unterberg, Towbin was paid $360,158 in fees and
expenses and received a warrant to purchase 93,450 shares of the Company's
common stock. In addition, Lipman Capital Group received 50,000 shares of the
Company's common stock in connection with consulting services relating to the
transaction. Derace Shaffer, our Chairmanommon stock in the private placement.
We agreed to file a registration statement on Form SB-2 for these shares by July
19, 2004.
As a result of the transaction, we were obligated pursuant to the
anti-dilution provisions in our agreements with the Selling Stockholders, to
issue an additional 155,161 shares of common stock to such Selling Stockholders
such that the effective price per share for the shares originally purchased by
the Selling Stockholders would be $1.68, being the price per share for the stock
sold on June 17, 2004.
3
The Offering
Shares of common
stock offered 3,663,611
Use of Proceeds We will not receive any proceeds from the sale of the common
stock offered by the selling stockholders. However, we may
receive an aggregate of $156,996 upon the exercise of all
the warrants held by selling stockholders, if such warrants
are exercised for cash. We will use such funds, if any, for
working capital and general corporate purposes.
OTC Bulletin
Board Symbol PATY
4
Summary Financial Information
The summary financial data is derived from the historical financial
statements of Patient Infosystems, Inc. This summary financial data should be
read in conjunction with "Management's Discussion and Analysis or Plan of
Operation" as well as our historical financial statements and the related notes
thereto, included elsewhere in this prospectus.
Statement of operations data:
Three months ended
March 31 Year Ended December 31,
2004 2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $4,020,937 $ 947,679 $5,687,293 $2,355,677 $1,586,443 $2,139,262 $3,545,207
----------- ----------- ----------- ----------- ----------- ----------- ----------
Costs and expenses:
Cost of sales 3,170,705 761,602 4,162,759 1,914,464 2,420,151 3,906,010 5,219,562
Sales and marketing 371,122 242,603 893,833 746,353 813,975 1,425,990 2,809,554
General and administrative 1,016,861 275,469 1,125,926 1,282,683 2,028,804 2,329,585 1,916,003
Research and development 32,607 31,758 131,782 105,614 190,731 305,543 967,365
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses 4,591,295 1,311,432 6,314,300 4,049,114 5,453,661 7,967,128 10,912,484
---------- ---------- ---------- ---------- ---------- ---------- -----------
Operating loss (570,358) (363,753) (627,007) (1,693,437) (3,867,218) (5,827,866) (7,367,277)
Other income (201,341) (141,453) (2,750,954) (530,924) (598,087) (211,340) (250,897)
----------- --------- ----------- --------- --------- --------- ---------
NET LOSS $ (771,699) $ (505,206) $(3,377,960)$(2,224,361)$(4,465,305)$(6,039,206)$(7,618,174)
Convertible preferred stock dividends (287,217) (22,500) (7,671,557) (90,000) (90,000) (617,500) -
----------- -------- ----------- -------- -------- --------- ----
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (1,058,916) $ (527,706)$(11,049,517)$(2,314,361)$(4,555,305)$(6,656,706)$(7,618,174)
======================================================================================
Net loss per share - basic and diluted $ (0.20) $ (0.58) $ (3.25) $ (2.36) $ (5.17) $ (9.14) $ (11.38)
========== ========== ========== ========== ========== ========== ==========
Weighted average
common shares outstanding 5,348,800 913,002 3,399,616 979,668 880,875 727,969 669,377
========== ======== ========== ======== ======== ======== =======
As of March 31 As of December 31,
2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents $ 703,527 $ 397,851 $ 5,011 $ 29,449 $ 28,231 $ 489,521
Working capital (1,785,484) (2,808,649) (6,135,451) (4,686,322) (1,375,391) 414,132
Total assets 9,479,550 9,111,158 1,217,266 1,222,133 2,292,244 3,844,395
Long term obligations 3,034,098 3,040,295 3,000,000 2,500,000 2,500,000 500,000
Total liabilities 6,558,514 7,174,782 9,887,505 7,578,011 4,481,225 1,427,732
Total stockholders' (deficit) equity 2,921,036 1,936,376 (8,670,239) (6,355,878) (2,188,981) 2,416,663
5
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this prospectus, in connection
with an investment in our common stock. This prospectus contains certain
forward-looking statements, which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including those set forth below and
elsewhere in this prospectus. An investment in our common stock involves a high
degree of risk and is suitable only for investors who can afford to lose their
entire investment.
Working Capital Shortfalls; Urgent Need for Working Capital; Possible Cessation
of Operations
Patient Infosystems has never earned a profit and has depended upon the
over $30 million that the Company has raised to date through its initial public
offering, private placements of its equity securities and debt, to fund its
working capital requirements. Patient Infosystems incurred an operating loss of
approximately $0.6 million with a net loss of approximately $3.4 million for the
year ended December 31, 2003 and had an approximate $2.8 million deficit in
working capital and shareholders' equity of approximately $2 million at December
31, 2003. As of December 31, 2003, Patient Infosystems had total liabilities of
$7,174,782 and a working capital deficit of $2,808,649. Since May 2003, Patient
Infosystems' operation has been supported substantially by its operational cash
flow. On December 31, 2003, Patient Infosystems acquired the assets of and
assumed the liabilities for American Caresource Corporation and placed the
operational assets and liabilities into a wholly-owned subsidiary, American
Caresource Holdings, Inc. ("ACS"). It is anticipated that ACS will require
significant additional working capital until it can fund its operational needs
from operational cash flow, if at all. Existing working capital will last no
more than a few months, and the Company anticipates that it will be required to
raise at least an additional $2 million in 2004 to sustain the operation of ACS.
As with any forward-looking projection, no assurances can be given concerning
the outcome of Patient Infosystems' actual financial status given the
substantial uncertainties that exist. There can be no assurances that Patient
Infosystems can raise either the required working capital through the sale of
its securities or that Patient Infosystems can borrow the additional amounts
needed. If it is unable to identify additional sources of capital, Patient
Infosystems will likely be forced to curtail its operations or the operations of
ACS. As a result of the above, the Auditors' Report on Patient Infosystems'
consolidated financial statements appearing on page 66 includes an emphasis
paragraph indicating that Patient Infosystems' recurring losses from operations
and negative working capital raise substantial doubt about its ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
6
ACS' History of Operating Losses
ACS has incurred losses in each of the past four years and has not, since
its inception, operated profitability. There can be no assurance that the
acquisition of ACS will result in an increase in revenue or cash flows of
Patient Infosystems.
During the last six months, ACS has received written notification of the
termination of contractual relations from Pinnacol Assurance and two of its
other customers which in the aggregate accounted for over 56% of ACS' revenues
during the fiscal year ended December 31, 2003. The termination of these
contracts will result in a significant reduction of ACS' revenues. Although a
variety of reasons may be provided for the termination of each of the customer
agreements, the termination of such an extensive amount of customer business may
reflect a substantial level of customer dissatisfaction with the services
provided by ACS. Although Patient Infosystems believes that it can provide
assistance to ACS and that in combination with Patient Infosystems, ACS will be
able to provide better services, no assurance can be given that more customers
will not terminate their relationships with ACS following the closing of the
Acquisition. In addition, ACS generally does not have long-term contracts with
its other customers. Significant declines in the level of use of ACS services by
one or more of its remaining customers could have a material adverse effect on
ACS' business and results of operations. Additionally, an adverse change in the
financial condition of any of these customers, including an adverse change as a
result of a change in governmental or private reimbursement programs, could have
a material adverse effect on its business.
History of Operating Losses; Continued Limited Patient Enrollment
Patient Infosystems has incurred losses in every quarter since its
inception in February 1995. Patient Infosystems' ability to operate profitably
is dependent upon its ability to develop and market its products in an
economically successful manner. To date, Patient Infosystems has been unable to
do so. No assurances can be given that Patient Infosystems will be able to
generate revenues or ever operate profitably in the future.
Patient Infosystems' prospects must be considered in light of the numerous
risks, expenses, delays and difficulties frequently encountered in an industry
characterized by intense competition, as well as the risks inherent in the
development of new programs and the commercialization of new services
particularly given its failure to date to operate profitably. There can be no
assurance that Patient Infosystems will achieve recurring revenue or
profitability on a consistent basis, if at all.
Patient Infosystems currently has patients enrolled in its disease-specific
programs. Through January 2004, an aggregate of approximately 775,000 persons
have been enrolled in Patient Infosystems' programs. While Patient Infosystems
has been able to enroll a sufficient number of patients to cover the cost of its
programs, it still has not been able to generate sufficient operational margin
to achieve a net profit.
7
Significant Customer Concentration
During 2000, a significant customer ceased operation of services supplied
by Patient Infosystems, which had a material adverse effect on the results of
operations. As of December 31, 2003, Patient Infosystems now has more customers
than it did at December 31, 2001 or 2002. While the customer base is more
diverse, there is still a significant concentration of Patient Infosystems'
business in a small number of customers, with several of Patient Infosystems'
most significant contracts being with IHI, CBCA and CHA Health. Patient
Infosystems expects that its sale of services will be concentrated in a small
number of customers for the foreseeable future. Consequently, the loss of any
one of its customers could have a material adverse effect on Patient Infosystems
and its operations. There can be no assurance that customers will maintain their
agreements with Patient Infosystems, enroll a sufficient number of patients in
the programs developed by Patient Infosystems for Patient Infosystems to achieve
or maintain profitability, or that customers will renew their contracts upon
expiration, or on terms favorable to, Patient Infosystems.
ACS' five largest customers (including its non-continuing customers)
account for approximately 85% of its revenues. In addition, ACS does not have
long-term contracts with its customers. The loss of one or more of these
customers, or an adverse change in the financial condition of one or more of
these customers, could have a material adverse effect on the business and
results of operations of Patient Infosystems.
Consequences of the Need to Raise Additional Working Capital
As Patient Infosystems seeks additional financing or purchases, it is
likely that it will issue a substantial number of additional shares that may be
extremely dilutive to the current stockholders and require substantial and
material charges to earnings which will impact the net loss attributable to the
common shareholders. As a result, the value of outstanding shares of common
stock could decline further.
Independent Director
The Board of Directors of Patient Infosystems now only consists of three
persons. One director, Mr. Chaufournier, is also the Chief Executive Officer of
Patient Infosystems. There are no independent directors. It is anticipated that
it will be difficult to attract additional independent directors to join the
Board of Directors. The Company is seeking to identify additional persons who
can serve as independent members of the Board of Directors and who may serve as
members of its Audit Committee.
Terminability of Agreements
Patient Infosystems' current services agreements with its customers
generally automatically renew and may be terminated by those customers without
cause upon notice of between 30 and 90 days. In general, customer contracts may
include significant performance criteria and implementation schedules for
Patient Infosystems. Failure to satisfy such criteria or meet such schedules
could result in termination of the agreements.
8
New Concept; Uncertainty of Market Acceptance; Limitations of Commercialization
Strategy
In connection with the commercialization of Patient Infosystems' health
information system, Patient Infosystems is marketing relatively new services
designed to link patients, health care providers and payors in order to provide
specialized disease management services for targeted chronic diseases. However,
at this time, services of this type have not gained general acceptance from
Patient Infosystems' customers. This is still perceived to be a new business
concept in an industry characterized by an increasing number of market entrants
who have introduced or are developing an array of new services. As is typical in
the case of a new business concept, demand and market acceptance for newly
introduced services are subject to a high level of uncertainty, and there can be
no assurance as to the ultimate level of market acceptance for Patient
Infosystems' system, especially in the health care industry, in which the
containment of costs is emphasized. Because of the subjective nature of patient
compliance, Patient Infosystems may be unable, for an extensive period of time,
to develop a significant amount of data to demonstrate to potential customers
the effectiveness of its services. Even after such time, no assurance can be
given that Patient Infosystems' data and results will be convincing or
determinative as to the success of its system. There can be no assurance that
increased marketing efforts and the implementation of Patient Infosystems'
strategies will result in market acceptance for its services or that a market
for Patient Infosystems' services will develop or not be limited.
Unpredictability of Patient Behavior May Affect Success of Programs
The ability of Patient Infosystems to monitor and modify patient behavior
and to provide information to health care providers and payors, and consequently
the success of Patient Infosystems' disease management system, is dependent upon
the accuracy of information received from patients. Patient Infosystems has not
taken and does not expect that it will take, specific measures to determine the
accuracy of information provided to Patient Infosystems by patients regarding
their medical histories. No assurance can be given that the information provided
to Patient Infosystems by patients will be accurate. To the extent that patients
have chosen not to comply with prescribed treatments, such patients might
provide inaccurate information to avoid detection. Because of the subjective
nature of medical treatment, it will be difficult for Patient Infosystems to
validate or confirm any such information. In the event that patients enrolled in
Patient Infosystems' programs provide inaccurate information to a significant
degree, Patient Infosystems would be materially and adversely affected.
Furthermore, there can be no assurance that patient interventions by Patient
Infosystems will be successful in modifying patient behavior, improving patient
health or reducing costs in any given case. Many potential customers may seek
data from Patient Infosystems with respect to the results of its programs prior
to retaining it to develop new disease management or other health information
programs. Patient Infosystems' ability to market its system to new customers may
be limited if it is unable to demonstrate successful results for its programs.
9
Competition
The market for health care information products and services is intensely
competitive and we expect this competition to increase. Patient Infosystems
competes with various companies in each of its disease target markets. Many of
Patient Infosystems' competitors have significantly greater financial,
technical, product development and marketing resources than Patient Infosystems.
Furthermore, other major information, pharmaceutical and health care companies
not presently offering disease management or other health care information
services may enter the markets in which Patient Infosystems intends to compete.
In addition, with sufficient financial and other resources, many of these
competitors may provide services similar to those of Patient Infosystems without
substantial barriers. Patient Infosystems does not possess any patents with
respect to its integrated information capture and delivery system.
Patient Infosystems' competitors include specialty health care companies,
health care information system and software vendors, health care management
organizations, pharmaceutical companies and other service companies within the
health care industry. Many of these competitors have substantial installed
customer bases in the health care industry and the ability to fund significant
product development and acquisition efforts. Patient Infosystems also competes
against other companies that provide statistical and data management services,
including clinical trial services to pharmaceutical companies.
Patient Infosystems believes that the principal competitive factors in its
market are the ability to link patients, health care providers and payors, and
provide the relevant health care information at an acceptable cost. In addition,
Patient Infosystems believes that the ability to anticipate changes in the
health care industry and identify current needs are important competitive
factors. There can be no assurance that competitive pressures will not have a
material adverse effect on Patient Infosystems.
Substantial Fluctuation in Quarterly Operating Results
Patient Infosystems' results of operations have fluctuated significantly
from quarter to quarter as a result of a number of factors, including the volume
and timing of sales and the rate at which customers implement disease management
and other health information programs within their patient populations.
Accordingly, Patient Infosystems' future operating results are likely to be
subject to variability from quarter to quarter and could be adversely affected
in any particular quarter.
Dependence on Data Processing and Telephone Equipment
The business of Patient Infosystems is dependent upon its ability to store,
retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors, other computer
problems or interruptions of telephone service could have a material adverse
effect on the business of Patient Infosystems.
10
Quality Control
Patient Infosystems has developed quality control measures designed to
insure that information obtained from patients is accurately transcribed, that
reports covering each patient contact are delivered to health care providers and
patients and that Patient Infosystems' personnel and technologies are
interacting appropriately with patients and health care providers. Quality
control systems include random monitoring of telephone calls, patient surveys to
confirm patient participation and effectiveness of the particular program, and
supervisory reviews of telephone agents.
Patient Infosystems may have difficulty integrating the business of ACS with
existing operations
The acquisition of ACS will involve the integration of a company that has
previously operated in an entirely different business than that of Patient
Infosystems. Patient Infosystems cannot assure you that the integration of
Patient Infosystems with ACS will be successfully completed without encountering
difficulties or experiencing the loss of key Patient Infosystems or ACS
employees, customers or suppliers, or that the benefits from such integration
will be realized. In addition, Patient Infosystems cannot assure you that the
management teams of ACS and Patient Infosystems will be able to successfully
work with each other.
Government Regulation
The health care industry, including the current business of Patient
Infosystems and the expanded operations of Patient Infosystems, including the
business of ACS, is subject to extensive regulation by both the Federal and
state governments. A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide health care
services. Additionally, services provided to health benefit plans in certain
cases are subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") and may be affected by other state and Federal
statutes. Generally, state laws prohibit the practice of medicine and nursing
without a license. Many states interpret the practice of nursing to include
health teaching, health counseling, the provision of care supportive to, or
restorative of, life and well being and the execution of medical regimens
prescribed by a physician. Accordingly, to the extent that Patient Infosystems
assists providers in improving patient compliance by publishing educational
materials or providing behavior modification training to patients, such
activities could be deemed by a state to be the practice of medicine or nursing.
Although Patient Infosystems has not conducted a survey of the applicable law in
all 50 states, it believes that it is not engaged in the practice of medicine or
nursing. There can be no assurance, however, that Patient Infosystems'
operations will not be challenged as constituting the unlicensed practice of
medicine or nursing. If such a challenge were made successfully in any state,
Patient Infosystems could be subject to civil and criminal penalties under such
state's law and could be required to restructure its contractual arrangements in
that state. Such results or the inability to successfully restructure its
contractual arrangements could have a material adverse effect on Patient
Infosystems.
11
Patient Infosystems is subject to state laws governing the confidentiality
of patient information. A variety of statutes and regulations exist to safeguard
privacy and regulating the disclosure and use of medical information. State
constitutions may provide privacy rights and states may provide private causes
of action for violations of an individual's "expectation of privacy." Tort
liability may result from unauthorized access and breaches of patient
confidence. Patient Infosystems intends to comply with state law and regulations
governing medical information privacy.
In addition, on August 21, 1996 Congress passed the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This
legislation required the Secretary of the Department of Health and Human
Services to adopt national standards for electronic health transactions and the
data elements used in such transactions. The Secretary is required to adopt
safeguards to ensure the integrity and confidentiality of such health
information. Violation of the standards is punishable by fines and, in the case
of negligent or intentional disclosure of individually identifiable health
information, imprisonment. The Secretary has promulgated final rules addressing
the standards, however, the implementation time line extends into 2003 and
beyond. Although Patient Infosystems intends to comply with all applicable laws
and regulations regarding medical information privacy, failure to do so could
have an adverse effect on Patient Infosystems' business.
Patient Infosystems and its customers may be subject to Federal and state
laws and regulations that govern financial and other arrangements among health
care providers. These laws prohibit certain fee splitting arrangements among
health care providers, as well as direct and indirect payments, referrals or
other financial arrangements that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Possible sanctions for violation of these
restrictions include civil and criminal penalties. Specifically, HIPAA increased
the amount of civil monetary penalties from $2,000 to $10,000. Criminal
penalties range from misdemeanors, which carry fines of not more than $10,000 or
imprisonment for not more than one year, or both, to felonies, which carry fines
of not more than $25,000 or imprisonment for not more than five years, or both.
Further, criminal violations may result in permanent mandatory exclusions and
additional permissive exclusions from participation in Medicare and Medicaid
programs.
Furthermore, Patient Infosystems and its customers may be subject to
federal and state laws and regulations governing the submission of false
healthcare claims to the government and private payers. Possible sanctions for
violations of these laws and regulations include minimum civil penalties between
$5,000-$10,000 for each false claim and treble damages.
12
Regulation in the health care field is constantly evolving. Patient
Infosystems is unable to predict what government regulations, if any, affecting
its business may be promulgated in the future. Patient Infosystems' business
could be adversely affected by the failure to obtain required licenses and
governmental approvals, comply with applicable regulations or comply with
existing or future laws, rules or regulations or their interpretations.
Significant and Extensive Changes in the Health Care Industry
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of health care industry participants. Several lawmakers have announced that they
intend to propose programs to reform the U.S. health care system. These programs
may contain proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change the operating environment for Patient
Infosystems and its targeted customers. Health care industry participants may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring certain expenditures, including those for Patient
Infosystems' programs. Patient Infosystems cannot predict what impact, if any,
such changes in the health care industry might have on its business, financial
condition and results of operations. In addition, many health care providers are
consolidating to create larger health care delivery enterprises with greater
regional market power. As a result, the remaining enterprises could have greater
bargaining power, which may lead to price erosion of Patient Infosystems'
programs. The failure of Patient Infosystems to maintain adequate price levels
could have a material adverse effect on its business.
Dependence on Customers for Marketing and Patient Enrollment
Patient Infosystems has limited financial, personnel and other resources to
undertake extensive marketing activities. One element of Patient Infosystems'
marketing strategy involves marketing specialized disease management programs to
pharmaceutical companies and managed care organizations, with the intent that
those customers will market the program to parties responsible for the payment
of health care costs, who will enroll patients in the programs. Accordingly,
Patient Infosystems, will to a degree, be dependent upon its customers, over
whom it has no control, for the marketing and implementation of its programs and
for the receipt of valid patient information. The timing and extent of patient
enrollment is completely within the control of Patient Infosystems' customers.
Patient Infosystems has faced difficulty in receiving reliable patient
information from certain customers, which has hampered its ability to complete
certain of its projects. To the extent that an adequate number of patients are
not enrolled in the program, or enrollment of initial patients by a customer is
delayed for any reason, Patient Infosystems' revenue may be insufficient to
support its activities.
13
Control of Patient Infosystems
The executive officers, directors and certain stockholders of Patient
Infosystems who beneficially own in the aggregate approximately 59.75% of the
outstanding common stock control Patient Infosystems. As a result of such
ownership, these stockholders, in the event they act in concert, will have
control over the management policies of Patient Infosystems and all matters
requiring approval by the stockholders of Patient Infosystems, including the
election of directors.
Potential Liability and Insurance
Patient Infosystems will provide information to health care providers and
managed care organizations upon which determinations affecting medical care will
be made. As a result, it could share in potential liabilities for resulting
adverse medical consequences to patients. In addition, Patient Infosystems could
have potential legal liability in the event it fails to record or disseminate
correctly patient information. Patient Infosystems maintains an errors and
omissions insurance policy with coverage of $5 million in the aggregate and per
occurrence. Although Patient Infosystems does not believe that it will directly
engage in the practice of medicine or direct delivery of medical services and
has not been a party to any such litigation, it maintains a professional
liability policy with coverage of $5 million in the aggregate and per
occurrence. There can be no assurance that Patient Infosystems' procedures for
limiting liability have been or will be effective, that Patient Infosystems will
not be subject to litigation that may adversely affect Patient Infosystems'
results of operations, that appropriate insurance will be available to it in the
future at acceptable cost or at all or that any insurance maintained by Patient
Infosystems will cover, as to scope or amount, any claims that may be made
against Patient Infosystems.
Intellectual Property
Patient Infosystems considers its methodologies, processes and know-how to
be proprietary. Patient Infosystems seeks to protect its proprietary information
through confidentiality agreements with its employees. Patient Infosystems'
policy is to have employees enter into confidentiality agreements that contain
provisions prohibiting the disclosure of confidential information to anyone
outside Patient Infosystems. In addition, the policy requires employees to
acknowledge, and, if requested, assist in confirming Patient Infosystems'
ownership of any new ideas, developments, discoveries or inventions conceived
during employment, and requires assignment to Patient Infosystems of proprietary
rights to such matters that are related to Patient Infosystems' business.
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future operating results or of our financial
condition or state other "forward-looking" information.
14
We believe in the importance of communicating our future expectations to
our investors. However, we may be unable to accurately predict or control events
in the future. The factors listed in the sections captioned "Risk Factors" and
"Management's Discussion and Analysis or Plan of Operation," as well as any
other cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. We will receive proceeds upon the exercise of any
warrants. If all of the selling stockholders exercise all of their warrants for
cash, we will receive an aggregate of $156,996. We will use such funds, if any,
for working capital and general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During the fiscal years ended December 31, 2002 and 2003 and through
January 9, 2004, our common stock traded on the OTC Bulletin Board under the
symbol PATI. From January 12, 2004, our common stock has traded on the OTC
Bulletin Board under the symbol PATY. The closing price for our common stock on
July 15, 2004 was $3.05.
The following table sets forth, for the periods indicated, the range of
high and low bid quotations for shares of our common stock as quoted on the OTC
Bulletin Board. The reported bid quotations reflect inter-dealer prices, without
retail markup, markdown or commissions, and may not necessarily represent actual
transactions. Information contained herein gives effect to a 1 for 12 reverse
stock split effected at the close of business on January 9, 2004.
High Low
2002
First Quarter $2.40 $0.72
Second Quarter $2.40 $1.44
Third Quarter $3.60 $1.08
Fourth Quarter $6.12 $0.96
2003
First Quarter $3.12 $1.68
Second Quarter $3.00 $0.96
Third Quarter $3.00 $0.96
Fourth Quarter $4.08 $1.32
2004
First Quarter $6.00 $1.44
Second Quarter $5.50 $2.00
15
Holders of common stock
As of May 28, 2004, there were approximately 95 holders of record of our
common stock.
Dividends
We have never paid or declared a cash dividend on our common stock.
We are obligated to declare 9% cumulative dividends on our 75,000 shares of
Series C Cumulative Convertible Preferred Stock that was issued on March 31,
2000 and our 840,118 shares of Series D Cumulative Convertible Preferred Stock
that was issued between April 2003 and January 2004.
Equity Compensation Plan Information
-------------------------------------------- --------------------- ---------------- ------------------------
Number of Weighted-average Number of
securities to be exercise securities
issued upon the price of remaining available
exercise of outstanding for future issuance
outstanding options, under equity
options, warrants warrants and compensation plans
and rights rights (excluding
securities
reflected in column
(a)
(b)
(a))
(c)
-------------------------------------------- --------------------- ---------------- ------------------------
Equity compensation plans approved by
securities holders 101,160 $9.36 3,376,917
-------------------------------------------- --------------------- ---------------- ------------------------
Equity compensation plans not approved
by securities holders
-------------------------------------------- --------------------- ---------------- ------------------------
Total 101,160 $9.36 3,376,917
-------------------------------------------- --------------------- ---------------- ------------------------
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and plan of operation
should be read in conjunction with our financial statements and the related
notes included elsewhere in this prospectus. This prospectus contains certain
statements of a forward-looking nature relating to future events or our future
financial performance. We caution prospective investors that such statements
involve risks and uncertainties, and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this prospectus,
including the matters set forth under the caption "Risk Factors" which could
cause actual results to differ materially from those indicated by such
forward-looking statements. We disclaim any obligation to update information
contained in any forward-looking statement.
Overview
Patient Infosystems was formed on February 22, 1995. Although Patient
Infosystems has completed the development of its core systems and has developed
several disease management programs for specific diseases, Patient Infosystems
is continuing to refine its products for additional applications. In October
1996, Patient Infosystems began enrolling patients in its first disease
management program and began substantial patient contacts during 1998. Also in
1998, Patient Infosystems expanded its offered products to include demand
management and health related surveys.
On December 31, 2003, Patient Infosystems acquired substantially all the
assets and liabilities of American Caresource Corporation in exchange for
1,100,000 shares of Patient Infosystems common stock. Patient Infosystems
created a wholly-owned subsidiary, American Caresource Holdings, Inc. ("ACS"), a
Delaware corporation, and assigned the acquired assets and liabilities into this
subsidiary, net of certain amounts which represented borrowings between Patient
Infosystems and American Caresource Corporation. ACS enters into agreements with
the providers of ancillary services pursuant to which ACS provides
administrative services for its contracted providers, including patient
scheduling services, call center services, payor contracting services, and
billing and collection services. ACS also enters into agreements with preferred
provider organizations ("PPOs"), third party administrators ("TPAs"), workers
compensation benefits administrators, utilization review companies, case
management companies and other healthcare networks pursuant to which ACS
provides ancillary benefits management services for these payor clients.
Because the acquisition of assets and the operation of ACS occurred on
December 31, 2003, the 2003 consolidated statement of operations of Patient
Infosystems does not include any ACS operational results. Patient Infosystems
acquired $1,118,567 of assets and assumed $2,368,327 of liabilities, resulting
in a deficiency on the fair value of the net assets acquired of $1,249,760.
During 2004, Patient Infosystems will complete an independent valuation of the
identifiable intangible assets acquired and any changes to the estimated amounts
will be offset by a corresponding change in goodwill.
17
Patient Infosystems currently has patients enrolled in more than 30 of its
disease-specific, demand management or survey programs. Through January 2004, an
aggregate of over 775,000 persons have been enrolled or participated in Patient
Infosystems' programs. Patient Infosystems has never been able to enroll a
sufficient number of patients to cover the administrative cost of the business.
The enrollment of patients in Patient Infosystems' programs has been limited by
several factors, including the limited ability of clients to provide Patient
Infosystems with accurate information with respect to the specific patient
populations and coding errors that necessitated extensive labor-intensive data
processing prior to program implementation.
In response to these market dynamics, Patient Infosystems has taken several
tactical and strategic steps including, formal designation of internal personnel
at customer sites to assist clients with implementation; closer integration of
Patient Infosystems' systems personnel with clients to facilitate accurate data
transfers; promotion of a broader product line to enable clients to enter
Patient Infosystems' disease management programs through a variety of channels;
fully integrating demand, disease and case management services to facilitate
internal mechanisms for patient referrals and providing the customers access and
control over their patients' confidential information through targeted use of
Internet technology. The clinical design of the programs has been refined to
enable participation through mail only, retaining those patients who previously
would have been unable to participate because of missing or inaccurate telephone
contact information. Patient Infosystems' demand management services and surveys
(general health and disease-specific), can also provide mechanisms for
enrollment into Patient Infosystems' disease management programs. Patient
Infosystems continues to develop capabilities or relationships that will enable
its customers to more effectively leverage the data stored in their legacy
systems. Nevertheless, no assurance can be given that Patient Infosystems'
efforts will succeed in increasing patient enrollment in its programs.
Patient Infosystems has entered into service agreements to develop,
implement and operate programs for: (i) patients who have recently experienced
certain cardiovascular events; (ii) patients who have been diagnosed with
primary congestive heart failure; (iii) patients suffering from asthma; (iv)
patients suffering from diabetes, (v) patients who are suffering from
hypertension, (vi) demand management, which provides access to nurses, (vii)
case and utilization management services provided by a third party, (viii)
various survey initiatives which assess, among other things, satisfaction,
compliance of providers or payors to national standards, health status or risk
of specific health related events and (ix) the performance of specific
administrative and management functions on behalf of a customer. These contracts
provide for fees paid by its customers based upon the number of patients
participating in each of its programs, as well as initial program implementation
and set-up fees from customers. To the extent that Patient Infosystems has had
limited enrollment of patients in its programs, Patient Infosystems' operations
revenue has been, and may continue to be, limited.
Patient Infosystems has completed the development of its primary disease
management programs, it anticipates that development revenue will continue to be
minimal unless and until Patient Infosystems enters into new development
agreements. Substantially all of the development revenue recognized during the
years ended December 31, 2003, 2002 and 2001 of $51,110, $36,239 and $78,632
related to requested feature modification or customization. These revenues are
recognized upon completion and delivery of the requested feature.
18
Patient Infosystems' contracts typically call for a fee to be paid by the
customer for each patient enrolled for a series of program services, require
payment for services incrementally as they are delivered or require payment of a
fixed fee per patient or member each month for program services. The timing of
customer payments for the delivery of program services varies by contract.
Revenues from program operations are recognized ratably as the program services
are delivered. The amount of the per patient fee varies from program to program
depending upon the number of patient contacts required, the complexity of the
interventions, the cost of the resources used and the detail of the reports
generated.
Patient Infosystems' administration and management services cover a
predefined set of deliverables and responsibilities undertaken on behalf of the
customer. The customer pays for these services on a monthly basis and Patient
Infosystems recognizes revenue each month based upon the services provided.
During the year ended December 31, 2003, revenues received for administrative
and management services were the most significant source of revenue. The
services included: assisting organizations with the development of clinical
registries used to increase effective management of patients with chronic
disease. Patient Infosystems is supporting the development, including project
management and implementation, of a patient registry for federally qualified
health centers, through a national initiative known as the Health Disparities
Collaboratives. The contract for these services is renewed annually. No
assurances can be given that Patient Infosystems will be able to retain his
source of revenue at its current level if at all.
Revenues from operations of $2,241,796 for the year ended December 31,
2003, which includes fees received by Patient Infosystems for operating its
programs, is the most strategically important source of Patient Infosystems'
revenues. Patient Infosystems is continuing to devote significant efforts to
increasing the number of programs that are in operation, as well as developing
resources to expand its products. The revenue from these services currently
exceeds the cost to provide them, but the volume of patients must grow
substantially in order to provide sufficient operating margin to cover the
administrative overhead of Patient Infosystems.
During 2003, Patient Infosystems found new sources of revenue that
increased its revenue from $2.4 million for the fiscal year ended December 31,
2002 to $5.7 million for the same period of 2003. Patient Infosystems maintained
control on costs and reduced its operating loss from $1.7 million for the fiscal
year ended December 31, 2002 to $0.6 million for the same period of 2003. The
most significant new sources of revenue were (i) Provider Innovation and
Improvement support services provided to the Institute for Healthcare
Improvement which provided $3.2 million of revenue in 2003 as compared to $0.1
million in 2002, (ii) Care Team Connect service provided to Park Place
Entertainment which provided $0.6 million of new revenue in 2003 and (iii) the
Care Team Connect smoking cessation program which provided $0.5 million of new
revenue in 2003. No assurances can be given that revenue from these sources will
continue at their current level, if at all, in future periods.
19
One source of additional new revenue in 2004 is ACS. ACS recognizes
revenues for ancillary services when services by providers have been authorized
and performed and collections from payors are reasonably assured. Patient claims
revenues are recognized by ACS as services are provided. Cost of revenues for
ancillary services consist of expenses due to providers for providing employee
(patient) services and ACS' related direct labor and overhead of processing
invoices, collections and payments. ACS is not liable for costs incurred by
independent contract service providers until payment is received by ACS from the
payors. ACS recognizes actual or estimated liabilities to independent contract
service providers as the related revenues are recognized. Patient claim costs of
revenue consist of amounts due the providers as well as ACS' direct labor and
overhead to administer the patient claims. ACS has never operated at a profit,
and will require significant growth in either claims volume from existing
contracts, new contracts or both in order to generate sufficient operational
margin to become profitable. No assurances can be given that sufficient sources
of new revenue will be identified and other sources of capital will have to be
secured by Patient Infosystems to support these operations. If Patient
Infosystems in unable to generate enough working capital either from its own
operations or through the sale of its equity securities, ACS may be required to
curtail or cease operations.
The sales cycle for Patient Infosystems may be extensive from initial
contact to contract execution. During these periods, Patient Infosystems may
expend substantial time, effort and funds to prepare a contract proposal and
negotiate the contract. Patient Infosystems may be unable to consummate a
commercial relationship after the expenditure of such time, effort and financial
resources.
During 2003, the pressure of working capital shortfalls eased for Patient
Infosystems. Patient Infosystems' had $123,998 of net cash provided by operating
activities during 2003. During 2003. Patient Infosystems raised an additional
$3.5 million of working capital and an additional $1.6 million as of March 31,
2004, through and the sale of its equity securities. These additional funds are
being used to provide working capital for ACS. Patient Infosystems and ACS
continue to incur losses and must identify substantial additional capital to
sustain its operations. ACS' working capital shortfall is currently being funded
by Patient Infosystems. There can be no assurances given that Patient
Infosystems can raise either the required working capital through the sale of
its securities or that Patient Infosystems can borrow the additional amounts
needed. In such instance, if Patient Infosystems is unable to identify any
additional sources of capital, it will likely be forced to curtail or cease its
operations or the operations of ACS. As a result of the above, the Auditors'
Report on Patient Infosystems' consolidated financial statements appearing at
page 66 includes an emphasis paragraph indicating that Patient Infosystems'
recurring losses from operations, negative working capital and stockholders'
deficit raise substantial doubt about Patient Infosystems' ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
20
Results of Operations
To assist the reader's understanding the results of operations, each of the
Company's segments will be presented separately using the following segmented
statement of operations, which includes pro forma results of American Caresource
Holdings, Inc. for the three month period ended March 31, 2003 for comparative
purposes:
Patient Infosystems American Caresource
Three Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Pro forma
REVENUES $ 2,344,427 $ 947,679 $ 1,676,510 $ 2,581,617
COSTS AND EXPENSES
Cost of sales 1,526,595 761,602 1,644,110 2,999,403
Sales and marketing 222,010 242,603 149,112 68,228
General and administrative 347,175 275,469 669,686 589,163
Research and development 32,607 31,758
-------------- --------------- ---------------- ----------------
Total costs and expenses 2,128,387 1,311,432 2,462,908 3,656,794
OPERATING PROFIT (LOSS) 216,040 (363,753) (786,398) (1,075,177)
OTHER EXPENSE (196,772) (141,453) (4,569) (5,458)
-------------- --------------- ---------------- ----------------
NET PROFIT (LOSS) 19,268 (505,206) (790,967) (1,080,635)
For the Three Months Ended March 31, 2004, as compared to the Three Months Ended
March 31, 2003
PATIENT INFOSYSTEMS
Revenues
Revenues consist of revenues from operations and other fees. Revenues
increased to $2,344,427 from $947,679 during the three months ended March 31,
2004 and 2003, respectively, or 147%.
Three Months Ended
March 31,
Revenues 2004 2003
-------- ---- ----
Operations fees
Provider improvement $ 1,858,103 $ 369,996
Disease and demand management 483,638 549,307
-------------- --------------
Total operations fees 2,341,741 919,303
Other fees 2,686 28,376
-------------- --------------
Total revenues $ 2,344,427 $ 947,679
-------------- --------------
21
Provider innovations and improvement fee revenues are primarily
attributable to assistance provided to organizations for the effective
management of patients with chronic disease, including information technology
support, learning organization services, and data analysis and reporting. For a
substantial part of its innovation and improvement work, Patient Infosystems
participates in as a subcontractor to the Institute for Healthcare Improvement.
Provider improvement fee revenues increased to $1,858,103 for the three months
ended March 31, 2004 as compared to $369,996 for the three months ended March
31, 2003. No assurances can be given that Patient Infosystems will continue to
provide these services at the current levels, or at all, and revenue recognized
during the three month period ended March 31, 2004 is not necessarily indicative
of the results to be expected for the entire year ending December 31, 2004. The
contracts for substantially all the provider improvement services are annual in
nature, the largest of which ended as of March 31, 2004. Patient Infosystems
anticipates renewing this contract and is therefore continuing to provide these
services during the renewal process. No assurance can be given that Patient
Infosystems can successfully renew the contract.
Disease and demand management fee revenues are primarily attributable to
the operation of Patient Infosystems' call center and the delivery of the Care
Team Connect for Health directly to patients. Disease and demand management fee
revenues decreased to $483,638 from $549,307 for the three month periods ended
March 31, 2004 and 2003, respectively. The decrease in these fees is primarily
attributable to the termination of one customer on July 1, 2003 for which
Patient Infosystems had $160,620 of revenue during the three month period ended
March 31, 2003. Patient Infosystems is actively marketing its Disease and demand
management services and anticipates continuing to sell its services. No
assurances can be given that Patient Infosystems will sell its demand and
disease management services, if at all, nor that any such sales will have a
material effect on the financial status of Patient Infosystems.
Other fee revenues were $2,686 and $28,376 for the three month periods
ended March 31, 2004 and 2003, respectively. Patient Infosystems received other
revenues for (i) development fees from a variety of customers for creation of,
or modification to, specific programs and (ii) license fees. Patient Infosystems
has completed substantially all services under these agreements. Development fee
revenues include clinical, technical and operational design or modification of
Patient Infosystems' primary disease management programs. Patient Infosystems
anticipates that revenue from development fees will continue to be low unless
Patient Infosystems enters into new development agreements. Patient Infosystems
has not entered into any new licensing agreements and the revenue for the
current period reflects revenue generated exclusively from the existing
agreements.
22
Costs and Expenses
Cost of sales includes salaries and related benefits, services provided by
third parties, and other expenses associated with the implementation and
delivery of Patient Infosystems' provider improvement and demand and disease
management programs. Cost of sales for the three months ended March 31, 2004 was
$1,526,595 as compared to $761,602 for the three months ended March 31, 2003.
The increase in these costs was primarily the result of increased operational
activity. Patient Infosystems' gross margin, being total revenues over cost of
sales, was positive for the three month periods ended March 31, 2004 and 2003.
Patient Infosystems anticipates that revenue must increase for it to recognize
economies of scale adequate to improve its margins. No assurance can be given
that revenues will increase or that, if they do, they will continue to exceed
costs and expenses.
Sales and marketing expenses consist primarily of salaries, related
benefits, travel costs, sales materials and other marketing related expenses.
Sales and marketing expenses for the three months ended March 31, 2004 were
$222,010 as compared to $242,603 for the three months ended March 31, 2003.
Patient Infosystems anticipates expansion of Patient Infosystems' sales and
marketing staff and expects it will continue to invest in the sales and
marketing process, and that such expenses related to sales and marketing may
increase in future periods.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of Patient Infosystems. General and administrative expenses for the
three months ended March 31, 2004 were $347,175, as compared to $275,469 for the
three months ended March 31, 2003. These expenditures have been incurred to
maintain the corporate infrastructure necessary to support anticipated program
operations. General and administrative expenses are expected to remain
relatively constant in future periods..
23
Research and development expenses consist primarily of salaries and related
benefits and administrative costs associated with the development of certain
components of Patient Infosystems' integrated information capture and delivery
system, as well as development of Patient Infosystems' standardized disease
management programs and Patient Infosystems's Internet based technology
products. Research and development expenses for the three months ended March 31,
2004 were $32,607, as compared to $31,758 for the three months ended March 31,
2003.
Patient Infosystems recorded other expenses of $196,772 for the three month
period ended March 31, 2004 as compared to $141,453 for the three month period
ended March 31, 2003, principally due to the interest expense and other related
financing cost on debt.
Patient Infosystems had a net profit of $19,268 as compared to a loss of
$505,206 for the 3 month periods ended March 31, 2004 and 2003, respectively.
AMERICAN CARESOURCE
Revenues
Revenues of American Caresource Holdings, Inc. ("ACS") are comprised of
revenues from ancillary service claims and processing of patient claims.
Revenues decreased to $1.7 million from $2.6 million during the three months
ended March 31, 2004 and 2003, respectively, or 35.0%.
Three Months Ended
March 31
Revenues 2004 2003
-------- ---- ----
Pro forma
Ancillary Health $1,544,848 $ 2,476,944
Patient Claims 131,662 104,673
---------------- ------------------
Total Revenues $1,676,510 $ 2,581,61
24
Ancillary health claims revenue decreased to $1.5 million for the three
months ended March 31, 2004 as compared to $2.5 million for the three months
ended March 31, 2003. This decrease is attributable to the cancellation of
contracts by major clients and to the reduction of revenue from a provider in
ACS' ancillary health provider network. Pinnacol Assurance ("Pinnacol") notified
ACS on December 19, 2003 of its intent to terminate its contract with ACS
effective March 18, 2004, and was winding down throughout the first quarter of
2004. Revenue for Pinnacol decreased 45.4% from $981,269 for the three months
ended March 31, 2003 to $536,035 for the three months ended March 31, 2004. A
provider for which ACS had $314,421 of revenue for the three months ended March
31, 2003, notified ACS of its intent to terminate its contract effective October
13, 2004 and did not generate any revenue for ACS during the three month period
ended March 31 2004. ACS expects relations with providers in its network to
improve as a result of the acquisition by Patient Infosystems. ACS also expects
to expand its provider network by seeking to restore relationships with
providers previously in the network and add new providers as ACS adds new client
payor contracts. No assurances can be given that ACS will be able to expand its
provider or payor relationships, nor that any such expansion will result in an
improvement in the results of operations of ACS.
The processing of patient claims revenues increased 25.8% to $131,662 for
the three months ended March 31, 2004 as compared to $104,673 for the three
months ended March 31, 2003. The Company does not expect to increase its
revenues from claims processing in future periods.
Costs and Expenses
Cost of revenues includes provider payments, direct expenses incurred for
providing services and the related direct labor and overhead of providing such
services. ACS is not liable for costs incurred by its contracted providers
unless and until these providers obtain approval from the appropriate payors and
provide the contracted services and ACS receives payment from the payors. Costs
of revenues also include direct expenses to administer claims, including direct
labor associated with recruitment and contracting with providers, database
maintenance, data entry of claims, claims repricing, fulfillment and overhead
costs. Costs of revenues decreased to $1,644,110 for the three month period
ended March 31, 2004 as compared to $2,999,403 for the three month period ended
March 31, 2003. This decrease was due to a decrease in provider payments,
renegotiation of management fees payable to one client, and to a reduction in
direct expenses and overhead associated with the decrease in claims volume
related to revenue. Provider payments decreased $815,653 in relation to
decreasing revenues. Management fees for client ppoNEXT decreased $127,173 as
contract changes negotiated in July 2003 took effect upon the acquisition of ACS
by Patient Infosystems. Direct expenses and overhead associated with ACS service
provision decreased $342,266 as reductions were made to personnel and other
costs to align ACS' cost structure with its claims volume.
Sales and marketing expenses include the salaries and related benefits of
ACS' account development employees, travel and other costs for those employees,
and sales materials and other marketing or sales expenses of ACS. Commissions
paid to independent outside salespeople are based directly on net margin per
client. Payments to providers and all billing and processing of claims expenses
are included in cost of revenues. Sales and marketing expenses increased to
$149,112 for the three months ended March 31, 2004, as compared to $68,228 for
the three months ended March 31, 2003. The increase was attributable primarily
to a $59,480 salary accrual related to the termination on one employee.
25
General and administrative expenses include the salaries and related
benefits of ACS' executive employees, systems development and finance and
accounting employees, travel and other costs for those employees. General and
administrative expenses increased to $669,686 for the three months ended March
31, 2004, as compared to $589,163 for the three months ended March 31, 2003. The
increase was attributable primarily to a one time warrant compensation expense
of $211,900, offset by a reduction in legal costs of $62,971 and $60,710 from
reductions in personnel costs related to the consolidation of the human
resources function with Patient Infosystems as well as efficiencies and
reductions in payment processing volume.
The Company recorded net interest expense of $4,569 for the three month
period ended March 31, 2004, as compared to $5,458 for the same period of 2003.
Any new financing arrangements will be made by Patient Infosystems.
Consequently, ACS' interest expense is expected to be minimal in future periods.
ACS had a net loss of $790,967 for the three month periods ended March 31,
2004 compared to $1,080,635 for the same period of 2003.
Income (loss)
The Company reported a net loss attributable to common shareholders of
$1,058,913 as compared to $527,706 for the three month periods ended March 31,
2004 and 2003, respectively. This represents a loss per share of $0.20 and $0.58
for the same respective periods. The Company's loss per share for the three
month period ended March 31, 2003, on a pro forma basis, assuming that the
acquisition of substantially all the assets and liabilities of American
Caresource Corporation had occurred on January 1, 2003 is $1.92, as compared to
$0.20 loss per share for the same period of 2004. During the 3 months ended
March 31, 2004, the company recorded $78,180 beneficial conversion feature
related to the issuance of 10,018 shares of the Company's Series D Preferred
Stock, which was recorded as a dividend, and declared $209,034 of dividends on
the outstanding preferred stock.
Liquidity and Capital Resources
At March 31, 2004, the Company had a working capital deficit of $1,785,484
as compared to $2,808,649 at December 31, 2003. Through March 31, 2004, these
amounts reflect the effects of the Company's continuing losses and borrowings.
Since its inception, the Company has primarily funded its operations, working
capital needs and capital expenditures from the sale of equity securities or the
incurrence of debt.
On March 28, 2003, the Company entered into an Amended and Restated Credit
Agreement with Wells Fargo Bank Iowa, N.A., which extended the term of the
Company's $3,000,000 credit facility to January 2, 2004, under substantially the
same terms. Mr. Pappajohn and Dr. Schaffer, directors of the Company, guaranteed
this extension.
On December 31, 2003, the Company entered into the Third Addendum to the
Second Amended and Restated Credit Agreement with Well Fargo Bank Iowa, N.A.,
which extended the term of the $3,000,000 credit facility to July 31, 2005. Mr.
Pappajohn and Dr. Schaffer guaranteed this extension. In consideration of their
guarantees, In February 2004 the Company granted to Dr. Schaffer and Mr.
Pappajohn warrants to purchase an aggregate of 47,500 shares of Series D
Convertible Preferred Stock, convertible into 475,000 shares of the Company's
common Stock for $10.00 per preferred share. The Company valued these warrants
at $1,085,375 using the Black-Scholes method. The value of these warrants was
recorded as unearned debt issuance cost and will be amortized as financing costs
over the nineteen month period of the loan guarantee. During the 3 months ended
March 31, 2004, the company recorded a financing cost of $171,375.
In January 2004, the Company borrowed $200,000 for working capital from Mr.
Pappajohn which was repaid in March 2004 using the proceeds of the sale of the
Company's common stock.
26
On March 28, 2004, Mr. Pappajohn and Dr. Schaffer signed a letter to the
Company in which they made a commitment to obtain the operating funds that the
Company believes would be sufficient to fund its operations through January 1,
2005. There can be no assurances given that Mr. Pappajohn or Dr. Schaffer can
raise either the required working capital through the sale of the Company's
securities or that the Company can borrow the additional amounts needed.
During the three month period ended March 31, 2004, the Company issued
814,625 shares of its Common Stock and 4,700 shares of its Series D Convertible
Preferred Stock to certain investors in exchange for $1,663,180 which consisted
of $1,610,000 of working capital, $53,180 of accrued interest payable and
$44,250 of services. The Company incurred $205,875 of costs directly
attributable to the sale of its common stock.
During the three month period ended March 31, 2003, the Company paid
$113,625 of expenses by issuing shares of its Common Stock and warrants to
purchase shares of its Common Stock. The Company issued 22,125 shares of its
Common Stock as payment of $44,250 in consulting expenses and issued 25,000
warrants to purchase shares of its Common stock which was assigned a fair market
value of $69,375 using a Black-Scholes valuation method.
Of the warrants to purchase 25,000 shares of the Company's Common Stock,
warrants to purchase 12,500 shares assigned a value of $22,750 were an
additional expense related to the purchase of substantially all the assets of
and assumption of liabilities from American Caresource Corporation on December
31, 2003. Accordingly, goodwill related to this acquisition was increased by
$22,750.
The Company has expended significant amounts to expand its operational
capabilities including increasing its administrative and technical costs. While
Patient Infosystems has both curtailed its spending levels and increased its
revenue, to the extent that American Caresource Holdings, Inc. revenues do not
increase substantially, the Company's' losses will continue and its available
capital will diminish further. The Company's' operations are currently being
funded by the sale of equity securities. There can be no assurances given that
the Company can raise either the required working capital through the sale of
its securities or that Patient Infosystems can borrow the additional amounts
needed. In such instance, if Patient Infosystems is unable to identify
additional sources of capital, it will likely be forced to curtail or cease
operations. As a result of the above, the Independent Auditors' Report on
Patient Infosystems' consolidated financial statements for the year ended
December 31, 2003 includes an emphasis paragraph indicating that Patient
Infosystems' recurring losses from operations raise substantial doubt about
Patient Infosystems' ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
27
Inflation
Inflation did not have a significant impact on the Company's costs during
the three month periods ended March 31, 2004 and March 31, 2003 or the years
ended December 31, 2003, 2002 and 2001. The Company continues to monitor the
impact of inflation in order to minimize its effects through pricing strategies,
productivity improvements and cost reductions.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues
Revenues are comprised of revenues from operations fees, development fees
and licensing fees. Revenues increased 141% to $5,687,293 for the fiscal year
ended December 31, 2003 from $2,355,677 for the fiscal year ended December 31,
2002. A summary of these revenues by category is as follows for the fiscal years
ended December 31:
Revenues 2003 2002
-------- ---- ----
Operations Fees $ 2,241,796 $ 2,125,522
Consulting Fees 3,391,867 168,606
Development Fees 51,110 36,239
Licensing Fees 2,520 25,310
--------------- -------------------
Total $ 5,687,293 $ 2,355,677
=============== ===================
Revenues from operations fees increased 5.5% from $2,125,522 for the fiscal
year ended December 31, 2002 to $2,241,796 for the fiscal year ended December
31, 2003. Operations revenues are generated as Patient Infosystems provides
services to its customers for their disease-specific programs, patient surveys,
health risk assessments, patient satisfaction surveys, physician education
programs and marketing support programs. Operations revenues increased in 2002
due to the growth of its disease and demand management business despite the loss
of $1,125,823 of revenue from a customer who terminated as of December 31, 2002.
This growth is attributable primarily to Park Place Entertainment which added
$622,067 of new revenues and a new smoking cessation program which added
$491,362 of new revenues. Patient Infosystems has devoted the majority of its
sales and marketing efforts toward increasing revenue from operations, and
anticipates that it will retain most of its existing business and continue to
add additional new clients. No assurances can be given that these revenues will
increase, or that any change will be material to Patient Infosystems operating
results.
28
Revenues from consulting increased 1,912% from $168,606 for the fiscal year
ended December 31, 2002 to $3,391,867 for the fiscal year ended December 31,
2003. This increase is due to Patient Infosystems' expanded role in support of
the Health Disparities Collaboratives funded by the Bureau of Primary Healthcare
and administered by the Institute for Healthcare Improvement. Revenues from
consulting may increase during 2004. No assurances can be given that these
revenues will increase, or that any change will be material to Patient
Infosystems operating results.
Revenues from development fees increased 41% from $36,239 for the fiscal
year ended December 31, 2002 to $51,110 for the fiscal year ended December 31,
2003. In 2002 and 2003, Patient Infosystems received development revenues in
connection with the enhancement of its existing programs. Development revenues
include clinical, technical and operational design or modification of Patient
Infosystems' primary disease management programs. Patient Infosystems
anticipates that revenue from development fees will remain immaterial.
Revenues from licensing fees decreased 90% from $25,310 for the fiscal year
ended December 31, 2002 to $2,520 for the fiscal year ended December 31, 2003.
Licensing revenue represents amounts that Patient Infosystems charges its
customers, either on a one-time only or continuing basis, for the right to
enroll patients in, or the right to license other entities, certain of its
programs, primarily Patient Infosystems' Internet-based Case Management Support
System. Patient Infosystems anticipates that revenue from licensing will remain
immaterial in future periods.
Costs and Expenses
Cost of sales includes salaries and related benefits, services provided by
third parties, and other expenses associated with the development of Patient
Infosystems' customized disease state management programs, as well as the
operation of each of its disease state management programs.
Cost of sales increased 117.4% from $1,914,464 for the fiscal year ended
December 31, 2002 to $4,162,759 for the fiscal year ended December 31, 2003. The
increase in these costs primarily reflects an $1,187,960 increase in the use of
outsourced services and addition of $893,680 in staff costs related to the 141%
increase in revenue.
Sales and marketing expenses increased 19.8% from $746,353 for the fiscal
year ended December 31, 2002 to $893,833 for the fiscal year ended December 31,
2003. These costs consist primarily of salaries, related benefits and travel
costs, sales materials and other marketing related expenses. Increased spending
in this area is attributed primarily to an $155,051 increase in staff related
expenses. It is anticipated that Patient Infosystems will need to invest heavily
in the sales and marketing process in future periods, and intends to do so as
funds are available. To the extent that Patient Infosystems has limited funds
available for sales and marketing, or cannot leverage its marketing partnerships
adequately, it will likely be unable to invest in the necessary marketing
activities to generate substantially greater sales.
29
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of Patient Infosystems. General and administrative expenses decreased
12.2% from $1,282,683 for the fiscal year ended December 31, 2002 to $1,125,926
for the fiscal year ended December 31, 2003. Patient Infosystems expects that
general and administrative expenses will increase during 2004 due to the
addition of the administrative costs of its new subsidiary, American Caresource
Holdings, Inc. and then remain relatively constant in future periods, but may
experience fluctuations due to uncertainties related to financing costs.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to Patient Infosystems' research and
development personnel for development of certain components of its integrated
information capture and delivery system, its Internet-based software products
and its standardized disease state management programs. Research and development
expenses decreased 24.8% from $105,614 for the fiscal year ended December 31,
2002 to $131,782 for the fiscal year ended December 31, 2003. The addition of
American Caresource Holdings, Inc. is expected to increase overall research and
development expenses during 2004. Patient Infosystems expects these costs to
remain approximately at 15% of its total investment into information technology
resources.
Financing costs were $2,143,120 in 2003. This cost relates to the issuance
of equity to, and incurrence of debt from, certain lenders pursuant to the Note
and Stock Purchase Agreement dated April 10, 2003 and as amended on September
11, 2003, pursuant to which the lenders agreed to make short term loans to the
Company. The total value received by the lenders from the Company under the Note
and Stock Purchase Agreement as amended was $8,852,458. In accordance with APB
Opinion No. 14, a portion of the cash received totaling $2,143,120 for year
ended December 31, 2003 is allocable to equity resulting in a debt discount in
that same amount, which was fully amortized as of December 31, 2003.
Other Income/Expense is comprised of interest expense and losses on
investments. The totals are as follows for the fiscal years ended December 31:
2003 2002
--------------------- ----------------------
Interest expense $ (753,685) $ (535,269)
Interest income 145,473
Other income (expense) 376 4,345
--------------------- ----------------------
Total Expense $ (607,836) $ (530,924)
--------------------- ----------------------
Interest expense is due to debt. Interest expense increased to $753,685 for
the fiscal year ended December 31, 2003 from $535,269 for the fiscal year ended
December 31, 2002. The increase in interest expense reflects the increased debt
required to fund operations and obtain capital which was loaned to American
Caresource Corporation.
30
Interest income was realized from loans to American Caresource Corporation,
which offset substantially all interest expense which Patient Infosystems
incurred to obtain these funds.
Patient Infosystems had no tax benefit in 2003 due, in part, to recording a
full valuation allowance to reduce its deferred tax assets. Patient Infosystems'
deferred tax assets consist primarily of the tax benefit associated with its net
operating loss carryforwards.
Management of Patient Infosystems has evaluated the available evidence
about future taxable income and other possible sources of realization of
deferred tax assets. The valuation allowance reduces deferred tax assets to
zero, which represents management's best estimate of the amount of such deferred
tax assets that more likely than not will be realized.
For the fiscal year ended December 31, 2003, Patient Infosystems recorded
$7,671,557 in dividends on convertible preferred stock as compared to $90,000
for the year ended December 31, 2002. The increase was due to: (i) $153,257 of
dividends on 830,100 shares of Series D 9% Cumulative Convertible Preferred
Stock ("Series D Preferred Stock") which was issued at various times between
April and December 2003, (ii) a $2,143,120 beneficial conversion feature related
to shares of Series D Preferred Stock issued to certain lenders in connection
with borrowings and (iii) $5,285,180 beneficial conversion feature for the
shares of Series D Preferred Stock issued on December 31, 2003 upon the exercise
of the lender's option to convert their debt and accrued interest.
Patient Infosystems had a net loss attributable to common stockholders of
$11,049,518 for the fiscal year ended December 31, 2003, compared to $2,314,361
for the fiscal year ended December 31, 2002. This represents a loss of $3.25 per
basic and diluted share for 2003 and $2.36 for 2002, after giving effect to the
1 for 12 reverse stock split which was approved by the shareholders on December
31, 2003.
Critical Accounting Policies
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
Patient Infosystems significant accounting policies are described in Note 1
to the Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, the following accounting policies are deemed to
be critical by the Company's management.
31
Use of Estimates. In preparing the consolidated financial statements
Patient Infosystems uses estimates in determining the economic useful lives of
its assets, provisions for doubtful accounts, tax valuation allowances and
various other recorded or disclosed amounts. Estimates require management to use
its judgment. While Patient Infosystems believes that its estimates for these
matters are reasonable, if the actual amount is significantly different than the
estimated amount, its assets, liabilities or results of operations may be
overstated or understated.
Impairment of Long-Lived Assets. Patient Infosystems records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted future cash
flows estimated to be generated by those assets are less than the carrying
amount of those assets. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. If the actual
value is significantly less than the estimated value, Patient Infosystems assets
may be overstated.
32
Description of Business
General
Patient Infosystems, Inc. ("Patient Infosystems") was incorporated in the
State of Delaware on February 22, 1995 under the name DSMI Corp., changed its
name to Disease State Management, Inc. on October 13, 1995, and then changed its
name to Patient Infosystems, Inc. on June 28, 1996. Patient Infosystems'
principal executive offices are located at 46 Prince Street, Rochester, New York
14607 and its telephone number is 585-242-7200. Patient Infosystems' Internet
address is www.ptisys.com.
Patient Infosystems is a health management solutions company that
integrates clinical expertise with advanced Internet, call center and data
management capabilities. Founded in 1995 as a disease management company,
Patient Infosystems has evolved to offer a comprehensive portfolio of products
and services designed to improve patient clinical outcomes and quality of life,
reduce healthcare costs and facilitate patient-provider- payor communication.
These products are now marketed under the label Care Team Connect for Health.
Patient Infosystems has historically marketed its services to a broad range
of clients, including self-insured employers and trust funds, insurance
companies, pharmaceutical and medical equipment and device manufacturers,
pharmacy benefit managers ("PBMs"), other healthcare payors, such as managed
care organizations ("MCOs") and healthcare providers, including integrated
delivery networks ("IDN's"). Current marketing efforts are targeted to
self-insured employers, employer groups, union health and welfare funds, and
others who pay for the health care of defined populations.
During its first two years of operations, Patient Infosystems emphasized
the development of pure disease management programs, which accounted for a
substantial portion of its revenue through 1997. However, beginning in 1998,
Patient Infosystems devoted resources to the development of broader applications
of its technology platform, and its additional products grew to account for
nearly 45% of the total revenue of Patient Infosystems during the fiscal year
ended December 31, 2002. During 2003, the Company further expanded its product
mix to include services in support of providers and their clinical improvement
efforts. These services include support for development, training and
maintenance of clinical registry software, consultative services in improvement
methodologies and support of web-based informational and reporting resources. On
December 31, 2003, Patient Infosystems acquired the assets of American
Caresource Corporation and placed these assets into its wholly owned subsidiary,
American Caresource Holdings, Inc. ("ACS"). ACS provides ancillary benefits
management services, including a network of ancillary specialty providers and
value-added services that assist our clients control the cost of a range of
ancillary medical services.
The Care Team Connect portfolio now represents 40% percent of the Company's
revenue; innovation and improvement services for providers represent 60% of the
2003 revenue.
33
Products and Capabilities
Care Team Connect for Health
Care Team Connect for Health, which is Patient Infosystems' principal
product line, provides a complete solution for population health management that
can be marketed as a comprehensive solution or a set of discrete services that
complement a client's existing operations. Care Team Connect integrates a number
of components that had historically been marketed by the Company as stand alone
products. During the 2002 year, the clinical content of these components was
revised and all components were migrated to an updated technology platform.
During 2003, the Care Team Connect product was expanded to include certain
wellness services, as well as utilization management and case management
services, provided through subcontract relationships with partner organizations.
Care Team Connect includes the following:
o 24-hour nurse help/triage line,
o Population analysis and identification,
o Disease management services,
o Care management,
o Smoking cessation program,
Nurse help line
The Care Team Connect for Health nurse help line is a triage, advice,
referral and health-counseling service that provides employees and members
with round-the-clock access to registered nurses who use algorithm-based
assessment tools and have access to provider and/or network information.
The help line can provide users with information about a specific health
problems or answers to their health-related questions. Use of nationally
recognized clinical algorithms assist callers in determining the most
cost-effective options for acute care treatment and has effectively been
able to reduce the use of emergency rooms and after hours physician
contact. Through the Nurse Help Line, individuals may also be identified
for referral into disease management or case management intervention. The
nurse help line is operated from Patient Infosystems' Utilization Review
Accreditation Commission ("URAC") accredited call center.
Population analysis and identification
As part of its disease management services, Patient Infosystems
provides comprehensive medical and pharmaceutical claims analysis that
includes the administration of proprietary algorithms to identify patients
with chronic disease and then stratifies them by level of risk for high
resource utilization.
34
The stratification algorithm employed is categorical in nature as
patients are classified into low, moderate, high and critical groupings.
The data employed in the algorithm are both nominal (using claim codes
known as "ICD9" and procedure codes known as "CPT") and ratio (usage of
resources). The nominal data determines the presence of a particular
chronic condition and thus identifies patients with a specific condition. A
combination of the nominal and ratio data, as defined in the algorithm for
each condition, determines the risk level for the individual patient.
Following identification and stratification, patients/employees can be
enrolled into the appropriate (low, moderate or high) disease management
intervention program.
The first time the claims analysis is completed on the client's
historical claims data, the client will be provided with a summary report
that profiles its population as related to health care dollars spent,
prevalence of disease, and the numbers of identified at-risk members by
risk level. Claims data is used on a retrospective basis to assess the
financial impact of the Care Team Connect programs and calculate savings
and return on investment.
Disease management services
Patient Infosystems' disease management services are provided for
individuals with a diagnosis of asthma, diabetes, hypertension, or
congestive heart failure. These services are comprehensive in approach and
focus on both the medical and behavioral aspects of chronic health care
management. The programs involve clinical assessments and the delivery of
messages on self-care, medication compliance and treatment adherence.
Through monitoring and on-going assistance, they empower the participants
to become more proficient and proactive in managing their disease or
condition. By including 24-hour access to the nurse help line, participants
always have a place to turn for questions or issues that arise with their
disease. The long-term goal of Patient Infosystems' disease management
services is a judicious use of health care resources through health care
education, as well as reinforcement of the provider's treatment plan.
The disease management programs are based on nationally recognized
treatment guidelines for each disease state. The programs provide
condition-specific assessment, support and education with behavior-based
interventions according to the patient's identified risk level. Each of
Patient Infosystems' chronic condition management programs is reviewed and
updated as needed on an annual basis to assure that these programs reflect
current knowledge and practices in clinical management.
35
Disease management interventions include various components according
to the risk level of the target individual. These components are as
follows:
--------------- -----------------------------------------------------
o Quality of life surveys
Low risk: o Reminders
o Static educational mailings
o 24-hour nurse help line
--------------- -----------------------------------------------------
o Nurse engagement
Moderate risk: o Quality of life surveys
o Chronic condition management program
o Reminders
o Static educational mailings
o 24-hour nurse help line
--------------- -----------------------------------------------------
o Nurse engagement
High risk: o Quality of life surveys
o "Gold" chronic condition management program
o Telemonitoring signs and symptoms assessment
o Reminders
o Static educational mailings
o 24-hour nurse help line
--------------- -----------------------------------------------------
o Dedicated registered nurse as disease care
Critical risk: manager
o Baseline clinical assessment and treatment
action plan
o Regularly scheduled on-going clinical patient
assessments
--------------- -----------------------------------------------------
Disease management program components
Nurse engagement call
All moderate, high and critical risk disease management programs begin
with a nurse engagement call. The nurse care counselor explains the
specific program for which the member is targeted and the benefits of the
program, while starting to build a relationship with the member. The nurse
care counselor confirms the patient's acceptance to participate and obtains
pertinent member information.
The nurse intervention assesses specific areas of clinical management
based on national clinical practice guidelines. Specific to each disease,
these include the following types of information:
o Healthcare utilization.
o Disease status.
o Functional status.
o Quality of care.
o Treatment adherence and self-care practices.
o Education/knowledge.
o Motivation and program evaluation.
36
The assessment focuses on the most important health behaviors the
patient must manage in order to effectively control symptoms of their
disease.
Chronic condition management program
Moderate risk patients are enrolled in our chronic condition
management programs. Each of the chronic condition management programs
utilize a combination of telephone and mail interventions to monitor
patients while providing educational information about disease-specific
treatment guidelines.
By providing unique, individually tailored intervention strategies,
Patient Infosystems provides each patient with personalized, educational
feedback and positive reinforcement, both verbally and through written
communication. Each telephonic intervention also generates an on-demand
published report for the patient's physician/case manager.
"Gold" chronic condition management program
High risk patients are enrolled in our "gold" chronic condition
management program. The "gold" program includes all of the components of
the chronic condition management programs described previously, plus the
incorporation of symptom assessment and monitoring throughout the duration
of the contract.
Quality of life re-assessment and on-going monitoring
Quality of life surveys are periodically administered to assess
patients' functional status.
Educational mailings
During the re-assessment and on-going monitoring portion of the
program, patients receive disease-specific educational or reminder
mailings.
Reminders
Patients are periodically reminded of preventive measures they should
take to better manage their health.
Disease care management for critical risk patients
Disease care management is a specialized clinical intervention. The
highly specialized clinical support by a registered nurse provides the
management and coordination of patient care services for critical-risk
individuals in a population.
37
The program's key functions are the following:
1. One-on-one support by a dedicated registered nurse.
2. Establishing an extensive baseline clinical assessment and treatment
action plan.
3. Regularly scheduled on-going clinical patient assessments that include
extensive disease monitoring and surveillance.
All facets of the individual's care are comprehensively and regularly
reviewed by the disease care manager and regular communication is made with
all members of the health care team.
At any point during a disease care management intervention, if the
patient is assessed to require even more intense management, the Nurse will
connect the patient with traditional case management.
Care management services
Care management programs include the components of utilization
management and case management and ensure that participants receive quality
medical care at the best possible price, while maximizing plan benefits.
The programs assist in avoiding unnecessary expenditures with an objective,
information-intensive approach that combines clinical judgment with
accepted practice patterns.
Care management services are provided through subcontracts with
partner companies that are accredited by URAC. All policies and procedures
reflect compliance with URAC standards and are further developed to ensure
compliance with the legislative requirements of the states in which
utilization review functions are performed.
The data collected from the Care Team Connect for Health interventions
is stored in an integrated information warehouse which links the numerous
programs and services. This integrated data warehouse allows our clients,
the patient's providers and other associated service providers access to
program data as necessary in order to best manage the member's health.
Smoking Cessation Services
During 2003, Patient Infosystems began providing the call center
operations for a smoking cessation program which is owned by and marketed
by Behavioral Solutions. Patient Infosystems has the right to independently
market this program for direct sales.
38
Provider innovation and improvement support
In 2003, Patient Infosystems expanded its role in services to certain
federally funded health centers that are sponsored by the Bureau of Primary
Healthcare through the Institute for Healthcare Improvement that promote disease
management programs directly to the providers in the health centers.
Population Health Disease Management Systems and Strategies
Patient Infosystems provides technical assistance to the health centers
relative to management of chronic disease. This includes organizations such as
the federal government, health plans, state primary care associations, and the
National Association of Community Health Centers.
Learning Organization Services
Patient Infosystems serves as a teaching organization promoting improvement
in care delivery systems. This includes logistics support for learning sessions,
training; recruitment, development and support of faculty, subject matter
experts in key topics; training in improvement methods and knowledge management
of best practices. Topics include chronic disease management, idealized clinical
practice design and the business case for planned care. Patient Infosystems
collaborates with the Institute for Healthcare Improvement on such initiatives.
Technical assistance
Patient Infosystems assists with the development of clinical registries
used to more effectively manage patients with chronic disease. Patient
Infosystems services include (i) project management and Implementation of a
patient registry for federally qualified health centers through a national
initiative known as the Health Disparities Collaboratives and (ii) Patient
Infosystems provides technical assistance in web based reporting applications
for clinical outcomes. This project is administered as a subcontract through the
Institute for Healthcare Improvement.
Outcome Assessment, Data Collection and Reporting
Patient Infosystems collects data about clinical, financial, quality of
life and satisfaction. This data is analyzed and outcomes are reported.
39
Ancillary benefits management
Ancillary healthcare services include a broad array of services that
supplement or support the care provided by hospitals and physicians, including
the non-hospital, non-physician services associated with surgery centers,
free-standing diagnostic imaging centers, home health and infusion, durable
medical equipment, orthotics and prosthetics, laboratory and many other
services. These ancillary services are provided to patients as benefits under
Group Health plans and Workers Compensation plans.
o OrthoticsOandaProstheticspy/Rehab
o Home Health Services o Pain Management
o Surgical Centers o Pharmacy
o Laboratory Services o Respiratory Services
o Home Infusion therapy o Sleep Studies
o Chiropractic Services o Sub-Acute and Skilled Nursing facilities
o Diagnostic Imaging/Radiology o Hospice Services
o Dialysis Services o Bone Growth Stimulators
o Durable Medical Equipment
ACS manages the administration of these non-hospital, non-physician
services.
Through its contracts with over 5000 ancillary service providers (with over
13,000 sites nationwide), ACS is able to offer its clients direct cost savings
in the form of discounted rates for contracted services and administrative cost
savings by functioning as a single point of contact for managing a comprehensive
array of ancillary benefits. ACS benefits management services include processing
the claims submitted by its covered providers, re-pricing the claims, submitting
the claims for payment, receiving and disbursing claims payments and performing
customer service functions for its clients and contracted providers. For
preferred provider organization ("PPO"), third party administrator ("TPA") and
similar clients, contracting with ACS also allows the clients to market
comprehensive, efficient and affordable ancillary service benefits to their
payor customers.
As part of its ancillary benefits management services, ancillary providers
submit claims at full retail charges to ACS for services performed for covered
members. ACS re-prices these claims under the relevant payor fee schedules,
performs electronic conversion and HIPAA formatting services, and submits the
re-priced claims to the appropriate payors. After adjudication of the claims by
the Payor, the Payor issues an Explanation of Benefits and check for each claim.
In most cases, these checks are sent to ACS. ACS then pays the providers under
the relevant provider fee schedules. The difference between the amounts received
by ACS from its clients and the amounts paid by ACS to its contracted providers
represents ACS gross margin on its benefits management services.
Value-added services that ACS provides to its clients include the
following:
Ancillary network analysis. ACS analyzes the available claims history from
each client and develops a specific plan to meet their needs. This analysis
identifies high-volume providers that are not already in ACS network. ACS
attempts to contract with such providers to maximize discount levels and
capture rates.
40
Ancillary out-of-network negotiations. For services performed by providers
outside of the ACS network, ACS negotiates a discounted rate for the client
on a case specific basis.
Ancillary custom network. ACS customizes its network to meet the needs of
each client. In particular, ACS reviews the "out-of-network" claims history
through its network analysis service and develops a strategy to create a
network that efficiently serves the client's needs. This may involve adding
additional providers for a client and removing providers the client wants
excluded from their network.
Ancillary reimbursement. ACS uses its network analysis to develop a single
reimbursement level for all ancillary providers. ACS also processes denials
and appeals for its clients and for its contracted providers.
Ancillary network management. ACS manages ancillary service provider
contracts, reimbursement and credentialing for its clients. This provides
administrative benefits to ACS clients and reduces the burden on providers
who typically must supply credentialing documentation and engage in
contract negotiation with separate payors.
Ancillary utilization management support. ACS provides support for
utilization and case management efforts used by each payor. ACS facilitates
preauthorization at the point of referral based on pre-established
criteria. ACS also "flags" cases for follow-up, review, and concurrent
reviews to ensure all the payor guidelines are followed by each service
provider and the efficacy of services and progress of the patient is
satisfactory. There are a large number of high demand cases that are
subject to case management efforts. For those cases, ACS helps coordinate
the supporting documentation and preparation of reports to manage and
monitor progress and establishment of reserves for specific claims.
Ancillary systems integration. ACS has created a proprietary software
system that enables it to manage many different customized accounts and
includes the following modules:
o Provider network management
o Credentialing
o Eligibility management and card printing
o Claims and case referral management
o Data transfer management/EDI
o Repricing and auto-adjudication
o Multi-level reimbursement management
o Posting, EOB, check, and e-funds processes
o Customer service management
o Directory management
o Claim repricing / adjudication
o Advanced data reporting
41
Ancillary reporting. ACS provides a complete suite of reports to each
client monthly. The reports cover contracting efforts and capture rates,
discount levels, referral volumes by service category and complete claims
and utilization reports.
Ancillary claims management. ACS provides claims management services
through its operation in Pittsboro, Indiana. ACS can manage ancillary
claims flow, both electronic and paper, and integrate into the client's
process electronically or through repriced paper claims. ACS can also
perform a number of customized processes that add additional value for each
client. As part of the claims management process, ACS manages the
documentation requirements specific to each payor. When claims are
submitted from the service provider without required documentation, ACS
works with the provider to get the documentation so that the claim is not
denied by the payor. This also saves labor costs for the payors.
ACS estimates that at least 80% of all claims in ACS ancillary categories
are submitted by paper. ACS is able to provide a conversion of these paper
claims into the HIPAA-compliant Electronic Data Interchange ("EDI") form
through its scanning operations.
Sales and Marketing
Through 1997, Patient Infosystems' efforts focused primarily on the
development of disease management programs. Beginning in 1998, Patient
Infosystems began aggressively marketing the other services that its technology
platform can provide, including demand management, patient surveys,
pharmaceutical support programs and outcomes analysis. During 2002 and 2003,
Patient Infosystems has marketed its integrated Care Team Connect for Health
product. Its target market is the organization that pays for health care
services on behalf of its members, employees or beneficiaries. These industry
organizations include several groups: insurance companies, managed care
organizations, third party administrators (TPA's), Taft-Hartley health and
welfare funds, purchasing coalitions, and self-funded employer groups.
Sales and marketing efforts for the ACS product line are currently focused
on healthcare payor organizations as well as certain value-added re-sellers in
the form of TPAs or PPOs. ACS spent several years developing its business model,
know-how, infrastructure, client base and provider base and until 2001, ACS
focused on managing ancillary benefits in the Workers Compensation market. In
early 2001, ACS expanded and refocused its business to address the management of
ancillary benefits in the Group Health market. It launched its Group Health
initiatives by marketing to healthcare networks such as TPAs and PPOs. As of the
end of 2003, ACS began to focus its marketing efforts on the direct payor
community. This is in alignment with the marketing focus for the Care Team
Connect product line.
42
Patient Infosystems currently employs a sales and marketing staff of three
persons to market its services. The Ancillary Network of ACS is marketed through
one full time sales person and independent contractors providing additional
commission salespersons. In addition, the senior members of Patient Infosystems'
management are actively engaged in marketing Patient Infosystems' programs.
Patient Infosystems has agreements in place with several organizations to
co-market Patient Infosystems' products and services. These agreements are in
place with CBCA, formerly USI Administrators, Inc., Gilsbar, and Behavioral
Solutions. CBCA and Gilsbar are third-party administrators; Behavioral Solutions
is a subsidiary of Nelson Communications and the developers of the Quitting Your
Way smoking cessation program. These agreements permit either company to
co-market and sub-contract for the services of the other company.
Competition
The market for health care information products and services is intensely
competitive. Competitors vary in size and in scope and breadth of products and
services offered, and Patient Infosystems competes with various companies in
each of its disease target markets. Patient Infosystems' competitors include
specialty health care companies, health care information system and software
vendors, health care management organizations, pharmaceutical companies and
other service companies within the health care industry. Many of these
competitors have substantial installed customer bases in the health care
industry and the ability to fund significant product development and acquisition
efforts. Patient Infosystems also competes against other companies that provide
statistical and data management services, including clinical trial services to
pharmaceutical companies.
Research and Development
Research and development expenses consist primarily of salaries, related
benefits and administrative costs allocated to Patient Infosystems' research and
development personnel. These personnel are actively involved in the conversion
of Patient Infosystems' technology platform to a fully web-enabled design.
Patient Infosystems' research and development expenses were $131,782, or 2.3% of
total revenues for the fiscal year ended December 31, 2003, $105,614, or 4.5% of
total revenues, for the fiscal year ended December 31, 2002, and $190,731, or
12.0%, of total revenues, for the fiscal year ended December 31, 2001. Patient
Infosystems anticipates that the amount spent on research and development will
remain relatively constant in future periods as it continues its internal
process to update its products.
Government Regulation
The health care industry, including the current business of Patient
Infosystems and the expanded operations of Patient Infosystems, including the
business of ACS, following the closing of the acquisition described in the Asset
Purchase Agreement, is subject to extensive regulation by both the Federal and
state governments. A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide health care
services. Additionally, services provided to health benefit plans in certain
cases are subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
43
Furthermore, state laws govern the confidentiality of patient information
through statutes and regulations that safeguard privacy rights. In addition, on
August 21, 1996 Congress passed the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This legislation required
the Secretary of the Department of Health and Human Services to adopt national
standards for electronic health transactions and the data elements used in such
transactions. Patient Infosystems and its customers may be subject to Federal
and state laws and regulations that govern financial and other arrangements
among health care providers. Furthermore, Patient Infosystems and its customers
may be subject to federal and state laws and regulations governing the
submission of false healthcare claims to the government and private payers.
Possible sanctions for violations of these laws and regulations include minimum
civil penalties between $5,000-$10,000 for each false claim and treble damages.
Therefor, Patient Infosystems must continually adapt to changing
regulations. If Patient Infosystems' fails to comply with these applicable laws,
the company may be subject to fines, civil penalties, or criminal prosecution.
Employees
As of July 16, 2004, Patient Infosystems had 94 full time and 28 part-time
employees.
Legal Proceedings
A former employee of American Caresource Corporation filed a lawsuit on
June 16, 2004 entitled Schrier v. American Caresource Corporation, (Ind.
Superior Ct.), alleging that she was terminated on February 5, 2003 in
retaliation for refusing to engage in illegal conduct. She alleges that American
Caresource Corporation engaged in various activities that would have constituted
violations of agreements with customers, various laws, rules and regulations and
would have resulted in inaccurate financial information being provided to
Patient InfoSystems in connection with the acquisition transaction. The
plaintiff has demanded damages of $123,000. We have conducted a preliminary
investigation into the allegations and ACS and we intend to contest the
plaintiff's claims vigorously.
44
MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our current directors and executive
officers are as follows:
Name Age Position
Roger Louis Chaufournier 46 Director, President and Chief Executive Officer
Kent A. Tapper 47 Vice President Financial Planning,
Acting Chief Financial Officer
Christine St. Andre 53 Chief Operating Officer
Derace L. Schaffer, MD 57 Chairman of the Board
John Pappajohn 75 Director
There are no familial relationships among our directors and/or officers.
Directors hold office until the next annual meeting of our stockholders or until
their respective successors have been elected and qualified.
Roger Louis Chaufournier, 46 Mr. Chaufournier has been the President and
Chief Executive Officer of Patient Infosystems since April 1, 2000. Prior to
joining Patient Infosystems, Mr. Chaufournier was President of the STAR Advisory
Group, a healthcare consulting firm he founded in 1998. From August 1996 to July
1999, Mr. Chaufournier was the Chief Operating Officer of the Managed Care
Assistance Company, a company that developed and operated Medicaid health plans.
Managed Care Assistance Company filed for protection under the federal
bankruptcy laws in June 2000. From 1993 to 1996, Mr. Chaufournier was Assistant
Dean for Strategic Planning for the Johns Hopkins University School of Medicine.
In addition, Mr. Chaufournier spent twelve years in progressive leadership
positions with the George Washington University Medical Center from 1981 to
1993. Mr. Chaufournier was also Chairman of the Board and acting President of
Metastatin Pharmaceuticals, a privately held company developing therapeutics in
the area of prostate cancer. Mr. Chaufournier was a three time Examiner with the
Malcolm Baldrige National Quality Award and has served as the national
facilitator for the federal Bureau of Primary Health Care chronic disease
collaboratives.
45
Kent Tapper, 47 Vice President, Financial Planning of the Company since
April 1999. Mr. Tapper has served as Chief Information Officer and Vice
President, Systems Engineering and has been with Patient Infosystems since July
1995. Mr. Tapper became the acting Chief Financial Officer of Patient
Infosystems in April 2000. From 1992 to 1995, Mr. Tapper served as Product
Manager, Audio Response and Call Center Platforms for Northern Telecom, Inc.
From 1983 to 1992, Mr. Tapper held Product Manager, Systems Engineering Manager
and various engineering management positions with Northern Telecom.
Christine St. Andre, 53 Ms. St. Andre has been the Executive Vice President
and Chief Operating Officer of Patient Infosystems since June 5, 2000. Ms. St.
Andre has more than 20 years experience managing complex healthcare
organizations. From 1994 to 2000, Ms. St. Andre was Chief Executive Officer for
the University of Utah Hospitals and Clinics. Prior to 1994, Ms. St. Andre
served as Chief Executive Officer of George Washington University Medical
Center. Ms. St. Andre's career in healthcare began in the area of information
technology at the Thomas Jefferson University.
Derace L. Schaffer, M.D., 57 Dr. Schaffer has been Chairman of the Board
and a Director of Patient Infosystems since its inception in February 1995. Dr.
Schaffer is the founder and CEO of the Lan Group, a venture capital firm
specializing in healthcare and high technology investments. He serves as a
director of Allion Healthcare, Inc., a public company. He is also a director of
several private companies, including Source Medical Inc. and Logisticare, Inc.
Dr. Schaffer is a board certified radiologist. He received his postgraduate
radiology training at Harvard Medical School and Massachusetts General Hospital,
where he served as Chief Resident. Dr. Schaffer is a member of Alpha Omega
Alpha, the national medical honor society, and is Clinical Professor of
Radiology at the University of Rochester School of Medicine.
John Pappajohn, 75 Mr. Pappajohn has been a Director of Patient Infosystems
since its inception in February 1995, and served as its Secretary and Treasurer
from inception through May 1995. Since 1969, Mr. Pappajohn has been the sole
owner of Pappajohn Capital Resources, a venture capital firm and President of
Equity Dynamics, Inc., a financial consulting firm, both located in Des Moines,
Iowa. He serves as a director for the following public companies: Allion
Healthcare, Inc., MC Informatics, Inc. and Pace Health Management Systems, Inc.
Board Composition
We currently have three directors, each serving a term until the next
annual meeting of stockholders.
46
Compensation of Directors
Our directors do not receive compensation pursuant to any standard
arrangement for their services as directors. All directors are reimbursed for
expenses incurred in connection with attending meetings, including travel
expenses to such meetings.
Our directors are eligible to participate in the Company's Stock Option
Plan. Pursuant to the Stock Option Plan, non-employee directors of the Company
receive a one-time grant of a non-qualified stock option to purchase 36,000
shares of the Company's Common Stock at an exercise price equal to fair market
value per share on the date of their initial election to the Company's Board of
Directors. Such non-qualified stock option vests as to 20% of the option grant
on the first anniversary of the grant, and 20% on each subsequent anniversary,
is exercisable only during the non-employee director's term and automatically
expires on the date such director's service terminates. Upon the occurrence of a
change of control, as defined in the Stock Option Plan, all outstanding unvested
options immediately vest.
Indemnification Matters
Our Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware. In
addition, our Certificate of Incorporation includes provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against those persons by reason of serving or having served
as officers, directors or in other capacities to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware.
Our bylaws provide the power to indemnify our officers, directors,
employees and agents or any person serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the fullest extent permitted by Delaware law.
47
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by us and our predecessors during each of the last three fiscal years to
our Chief Executive Officer and any other executive officer who received
compensation greater than $100,000 during any of the last three fiscal years.
Summary Compensation Table
Annual Compensation Long-Term
Compensation Awards
Securities Underlying
Name and Principal Position Year Salary ($) Bonus Options
--------------------------- ---- ---------- -----
Roger L. Chaufournier, 2003 219,611 25,385 -
President and Chief Executive Officer
2002 180,841 - -
2001 196,502 - 16,666
Christine St. Andre, 2003 184,050 22,212 -
Vice President, Chief Operating Officer
2002 157,512 - -
2001 171,893 - 12,500
Kent A. Tapper, 2003 124,154 14,913 -
Vice President, Financial Planning 2002 107,942 - -
2001 116,628 - 8,333
* No stock options were granted to the Chief Executive Officer and the named
executive officers of the Company during 2003
No stock options were exercised by the Chief Executive Officer or the named
executive officers of the Company during 2003. The following table sets forth
certain information regarding unexercised options held by the Chief Executive
Officer and the named executive officers of the Company at December 31, 2003.
The table does not give effect to grants of options that occurred after December
31, 2003. For additional information with respect to these grants, see "Stock
Option Plan".
48
Aggregated Option Exercises during 2003
and Option Values on December 31, 2003
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 2003(#) December 31, 2003($)(1)
-------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Roger L. Chaufournier 23,415 9,917 $1,500 1,000
Christine St. Andre 17,499 7,501 1,125 750
Kent A. Tapper 9,582 1,751 3,187 263
(1) Calculated based upon $2.40 market value of the underlying securities as of
December 31, 2003.
Employment Agreements
There were no employment agreements with any of the Company's executive
officers.
Stock Option Plan
The Company's Amended and Restated Stock Option Plan (the "Plan") was
adopted by the Board of Directors and stockholders in December 2003. As of April
20, 2004, up to 3,500,000 shares of Common Stock are authorized and reserved for
issuance under the Plan. Under the Plan, options may be granted in the form of
incentive stock options ("ISOs") or non-qualified stock options ("NQOs") from
time to time to salaried employees, officers, directors and consultants of the
Company, as determined by the Compensation Committee of the Board of Directors.
The Compensation Committee determines the terms and conditions of options
granted under the Plan, including the exercise price. The Plan provides that the
Committee must establish an exercise price for ISOs that is not less than the
fair market value per share at the date of the grant. However, if ISOs are
granted to persons owning more than 10% of the voting stock of the Company, the
Plan provides that the exercise price must not be less than 110% of the fair
market value per share at the date of the grant. The Plan also provides for a
non-employee director to be entitled to receive a one-time grant of a NQO to
purchase 36,000 shares at an exercise price equal to fair market value per share
on the date of their initial election to the Company's Board of Directors. Such
NQO is exercisable only during the non-employee director's term and
automatically expires on the date such director's service terminates. Each
option, whether an ISO or NQO, must expire within ten years of the date of the
grant.
49
As of July 15, 2004, options to acquire 1,518,827 shares of Common Stock
have been granted to employees and directors of the Company. The following table
sets forth information regarding the number of options outstanding and the
exercise price of these options.
Number of Options
Outstanding at July
15, 2004 Exercise Price
-------------------- --------------
499 $1.08
3,000 $1.67
43,748 $2.25
1,426,000 $2.28
12,500 $6.00
6,000 $8.33
6,417 $16.50
2,500 $22.56
16,666 $24.72
789 $29.26
708 $33.00
Of these options, 92,827 of the options granted before December 31, 2003
were fully vested, 1,426,000 were granted on January 9, 2004, 456,400 of which
vested immediately. The remaining options and all other options granted under
the Plan vest as to 20% of the option grant on the first anniversary of the
grant, and 20% on each subsequent anniversary.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1999, Patient Infosystems established a credit facility for
$1,500,000 guaranteed by Derace Schaffer and John Pappajohn, two directors of
Patient Infosystems. In March 2000, the facility was increased by $1,000,000
under substantially the same terms, also guaranteed by the same Board members.
On March 28, 2001, Patient Infosystems entered into an Amended and Restated
Credit Agreement with Wells Fargo Bank Iowa, N.A. ("Wells Fargo"), which
extended the term of Patient Infosystems' credit facility to March 31, 2002
under substantially the same terms. Dr. Schaffer and Mr. Pappajohn guaranteed
this extension.
On March 28, 2002, Wells Fargo extended the term of the credit facility to
March 31, 2003 under substantially the same terms. Dr. Schaffer and Mr.
Pappajohn also guaranteed this extension.
On June 28, 2002, Patient Infosystems and Wells Fargo agreed on an addendum
to the Amended and Restated Credit Agreement which extends the credit facility
by an additional $500,000, increasing the total credit facility to $3,000,000.
Mr. Pappajohn and Dr. Schaffer also guaranteed this extended credit facility.
50
On March 28, 2003, Wells Fargo extended the term of the credit facility to
January 2, 2004 under substantially the same terms. Dr. Schaffer and Mr.
Pappajohn also guaranteed this extension.
On December 31, 2003, Patient Infosystems and Wells Fargo further amended
the credit facility, which is due and payable on June 30, 2005. Dr. Schaffer and
Mr. Pappajohn also guaranteed this extension. In consideration for their
guarantees, in February 2004 the Company granted to Dr. Schaffer and Mr.
Pappajohn warrants to purchase an aggregate of 47,500 shares of Series D
Convertible Preferred Stock, convertible into 475,000 shares of the Company's
common stock for $10.00 per preferred share.
Prior to December 31, 2003, the Company had borrowings from Mr. Pappajohn
and Dr. Schaffer. At December 31, 2002, such borrowings totaled $5,077,500. The
Company borrowed an additional $150,000 from these directors during 2003.
On December 31, 2003, the Company converted $4,482,500 in debt and $438,099
of accrued interest owed to Mr. Pappajohn and Dr. Schaffer into common stock by
issuing 2,928,986 shares of the Company's common stock using a value of $1.68
per common share. Additionally on December 31, 2003, Mr. Pappajohn agreed to
convert his remaining debt of $745,000 and accrued interest of $711,110 into
145,611 shares of the Company's Series D Convertible Preferred Stock at a price
of $10.00 per preferred share.
Between April 2003 and January 2004, Patient Infosystems issued 840,118
shares of Series D 9% Cumulative Convertible Preferred Stock ("Series D
Preferred Stock") under the terms of the Note and Stock Purchase Agreement dated
April 11, 2003 and as amended on September 10, 2003. These shares can be
converted into common stock at a rate of 10 shares of common stock to 1 share of
Series D Preferred Stock. Each share of Series D Preferred Stock has voting
rights equivalent to 10 shares of common stock. John Pappajohn and Derace
Schaffer, members of the Board of Directors of Patient Infosystems, hold 424,233
and 5,318 shares of Series D Preferred Stock, respectively.
In January 2004, Patient Infosystems borrowed $200,000 from Mr. Pappajohn,
a director of the Company, in exchange for an unsecured note that bore no
interest if repaid on or before March 31, 2004. The note was repaid on March 29,
2004 and bore no interest as of that date.
During April and May of 2004, Patient Infosystems borrowed $570,000 from
Mr. Pappajohn, a director of the Company, in exchange for unsecured zero
interest notes. The notes were repaid on June 21, 2004.
On June 17, 2004, Patient Infosystems Inc. sold 3,365,000 shares of common
stock to institutional and other accredited investors for an aggregate purchase
price of $5,653,200 in gross proceeds. Derace Shaffer, our Chairman of the
Board, purchased 100,000 shares of common stock in the private placement.
51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common and Common equivalent Preferred
Stock as of September 13, 2004, (i) by each person the Company knows to be the
beneficial owner of 5% or more of the outstanding shares of Common Stock, (ii)
the Chief Executive Officer and each named executive officer listed in the
Summary Compensation Table below, (iii) each director and nominee for director
of the Company and (iv) all executive officers and directors of the Company as a
group. As of July 15, 2004, there were 9,638,067 shares outstanding. None of the
persons listed below are Selling Stockholders.
Shares Percentage
Beneficially Beneficially Owned
Beneficial Owner(1) Owned
John Pappajohn(2) 7,640,090 53.52%
Principle Life Insurance(3) 3,551,490 26.93%
810 Grand Ave.
Des Moines, IA 50392
American Caresource Corporation 1,100,000 11.41%
17400 Dallas Parkway
Dallas, TX 75287
Derace L. Schaffer(4) 1,014,470 10.01%
Crestview Capital Master, LLC 500,000 5.19%
95 Revere Drive, Suite A
Northbrook, IL 60062
Gibralt Capital Corporation 500,000 5.19%
2600-1075 W. Georgia Street
Vancouver, BC V6E3C9
Roger Louis Chaufournier(5) 233,332 2.36%
Christine St. Andre(6) 125,000 1.28%
Kent A. Tapper(7) 73,841 0.76%
All directors and executive officers as a group (6 persons) 9,086,733 59.75%
Total Shares Outstanding as of July 15, 2004 9,638,067
(1) Unless otherwise noted, the address of each of the listed persons is c/o
the Company at 46 Prince Street, Rochester, New York 14607.
(2) Includes 30,000 shares held by Halkis, Ltd., a sole proprietorship owned by
Mr. Pappajohn, 30,000 shares held by Thebes, Ltd., a sole proprietorship
owned by Mr. Pappajohn's spouse and 30,000 shares held directly by Mr.
Pappajohn's spouse. Mr. Pappajohn disclaims beneficial ownership of the
shares owned by Thebes, Ltd. and by his spouse. Includes options to
purchase 3,000 shares which are either currently exercisable or which
become exercisable within 60 days of July 15, 2004, 110,000 Common Share
equivalents for the 11,000 shares of Series C Convertible Preferred Stock
and 4,242,330 Common Share equivalents for the 424,233 shares of Series D
Convertible Preferred Stock beneficially owned as of July 15, 2004.
52
(3) Includes 3,551,490 Common Share equivalents for the 355,149 shares of
Series D Convertible Preferred Stock beneficially owned as of July 15,
2004.
(4) Includes 12,000 shares held by Dr. Schaffer's children. Also includes 3,000
shares which are issuable upon the exercise of options that are either
currently exercisable or which become exercisable within 60 days of July
15, 2004, 250,000 Common Share equivalents for the 25,000 shares of Series
C Convertible Preferred Stock and 53,180 Common Share equivalents for the
5,318 shares of Series D Convertible Preferred Stock beneficially owned as
of July 15, 2004.
(5) Includes options to purchase 233,332 shares which are either currently
exercisable or which become exercisable within 60 days of the date of July
15, 2004. Does not include 200,000 shares subject to outstanding options
that are not exercisable within 60 days of July 15, 2004.
(6) Includes options to purchase 125,000 shares which are either currently
exercisable or which become exercisable within 60 days of the date of July
15, 2004. Does not include 100,000 shares subject to outstanding options
that are not exercisable within 60 days of July 15, 2004.
(7) Includes options to purchase 73,933 shares which are either currently
exercisable or which become exercisable within 60 days of July 15, 2004.
Does not include 62,500 shares subject to outstanding options that are not
exercisable within 60 days of July 15, 2004.
53
SELLING STOCKHOLDERS
The following table lists the name of each selling stockholder, the number
of shares owned by each selling stockholder and the number of shares that may be
offered for resale under this prospectus. To the extent permitted by law, the
selling stockholders who are not natural persons may distribute shares, from
time to time, to one or more of their respective affiliates, which may sell
shares pursuant to this prospectus. We have registered the shares to permit the
selling stockholders and their respective permitted transferees or other
successors in interest that receive their shares from the selling stockholders
after the date of this prospectus to resell the shares. An aggregate of up to
3,663,611 shares of our common stock may be offered and sold pursuant to this
prospectus by the selling stockholders. We will file a post-effective amendment
to identify any additional selling shareholders.
With the exception of Derace Schaffer, a director of the company, no
selling stockholder has held any position or office or had a material
relationship with us within the past three years other than as a result of the
ownership of our common stock and other securities.
The following table sets forth certain information as of July 15, 2004
regarding the sale by the selling stockholders of 3,663,611 of common stock in
this offering.
Shares Beneficially Shares to be Shares
Owned Before the Registered Beneficially
Offering (1) Pursuant to this Owned After the
Selling Stockholder Offering Offering
------------------------------------------------ ----------------------- ------------------- -------------------
John C. Lipman (2) 201,014 62,309 201,014
------------------------------------------------ ----------------------- ------------------- -------------------
Jack Erlanger 83,043 9,523 83,043
------------------------------------------------ ----------------------- ------------------- -------------------
Mark Finkle 59,523 9,523 59,523
------------------------------------------------ ----------------------- ------------------- -------------------
Edward Newman 29,761 4,721 29,761
------------------------------------------------ ------------------- -------------------
Patrick Tully 208,333 33,333 208,333
------------------------------------------------ ----------------------- ------------------- -------------------
Wasatch Micro Cap Value Fund (3) 297,619 47,619 297,619
------------------------------------------------ ----------------------- ------------------- -------------------
Tucson Traditions (4) 59,523 9,523 59,523
------------------------------------------------ ----------------------- ------------------- -------------------
American High Growth Equities Retirement Fund (5) 119,047 19,047 119,047
------------------------------------------------ ----------------------- ------------------- -------------------
Joseph Giamanco (6) 159,523 109,523 159,523
------------------------------------------------ ----------------------- ------------------- -------------------
Gibralt Capital Corp. (7) 500,000 500,000 500,000
------------------------------------------------ ----------------------- ------------------- -------------------
Northsound Legacy International Ltd. (8) 301,500 301,500 301,500
------------------------------------------------ ----------------------- ------------------- -------------------
Northsound Legacy Institutional Fund LLC (8) 139,500 139,500 139,500
------------------------------------------------ ----------------------- ------------------- -------------------
Northsound Legacy Fund LLC (8) 9,000 9,000 9,000
------------------------------------------------ ----------------------- ------------------- -------------------
Baystar Capital II, L.P. (9) 300,000 300,000 300,000
54
------------------------------------------------ ----------------------- ------------------- -------------------
P.A.W. Long Term Partners, LP (10) 240,000 240,000 240,000
------------------------------------------------ ----------------------- ------------------- -------------------
Steve M. Barnett 50,000 50,000 50,000
------------------------------------------------ ----------------------- ------------------- -------------------
Crestview Capital Master, LLC (11) 500,000 500,000 500,000
------------------------------------------------ ----------------------- ------------------- -------------------
Stonestreet L.P (12) 180,000 180,000 180,000
------------------------------------------------ ----------------------- ------------------- -------------------
Vitel Ventures Corporation (13) 30,000 30,000 30,000
------------------------------------------------ ----------------------- ------------------- -------------------
Greenwich Growth Fund Limited (14) 60,000 60,000 60,000
------------------------------------------------ ----------------------- ------------------- -------------------
Whalehaven Fund Limited (15) 60,000 60,000 60,000
------------------------------------------------ ----------------------- ------------------- -------------------
Freya Fanning & Co. (16) 200,000 200,000 200,000
------------------------------------------------ ----------------------- ------------------- -------------------
Trinad Capital, LP (17) 90,000 90,000 90,000
------------------------------------------------ ----------------------- ------------------- -------------------
Richard Genovese 30,000 30,000 30,000
------------------------------------------------ ----------------------- ------------------- -------------------
Landmark Capital Inc. (18) 25,000 25,000 25,000
------------------------------------------------ ----------------------- ------------------- -------------------
Maybach Capital Inc. (19) 50,000 50,000 50,000
------------------------------------------------ ----------------------- ------------------- -------------------
DKR SoundShore Oasis Holding Fund Ltd. (20) 160,000 160,000 160,000
------------------------------------------------ ----------------------- ------------------- -------------------
DKR SoundShore Strategic Holding Fund Ltd (20) 40,000 40,000 40,000
------------------------------------------------ ----------------------- ------------------- -------------------
Allied Funding, Inc. (21) 50,000 50,000 50,000
------------------------------------------------ ----------------------- ------------------- -------------------
Goldfield Partners (22) 25,000 25,000 25,000
------------------------------------------------ ----------------------- ------------------- -------------------
2216 Partners (22) 25,000 25,000 25,000
------------------------------------------------ ----------------------- ------------------- -------------------
Derace Schaffer 1,014,470 100,000 1,014,470
------------------------------------------------ ----------------------- ------------------- -------------------
Argyris Vassiliou & Ann Vassiliou 100,000 100,000 100,000
------------------------------------------------ ----------------------- ------------------- -------------------
C.E. Unterberg, Towbin (23) 93,450 93,450 93,450
------------------------------------------------ ----------------------- ------------------- -------------------
(1) Beneficial ownership is determined in accordance with rules and regulations
of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days of the date of this prospectus are deemed
outstanding. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, each stockholder named in
the table has sole voting and investment power with respect to the shares
beneficially owned by him. Selling stockholders are deemed to beneficially
own the shares of common stock issuable upon the exercise of their
warrants.
(2) Includes 50,000 shares of common stock issued in connection with consulting
services relating to the June 17, 2004 private placement
(3) Brian Bythrow exercises voting control over the shares held by Wasatch
Micro Cap Value Fund.
(4) Edward Burger exercises voting control over the shares held by Tucson
Traditions.
(5) Brad Butler exercises voting control over the shares held by American High
Growth Equities Retirement Fund.
(6) Includes 9,523 shares of common stock issued because the purchase price for
the investors in the private placement that occurred on June 17, 2004 was
lower than the price paid per share by the Selling Shareholders.
55
(7) Samuel Belzberg exercises voting control over the shares held by Gibralt
Capital Corp.
(8) Thomas McAuley, Chief Investment Officer and Managing Member of the
Investment Advisor, of Northsound Capital LLC exercises voting control over
the shares held by Northsound Legacy International Ltd., Northsound Legacy
Institutional Fund LLC, and Northsound Legacy Fund LLC.
(9) Lawrence Goldfard, Managing Member, exercises voting control over the
shares held by Baystar Capital II, LP.
(10) Peter A. Wright, Head of the General Partnership, exercises voting control
over the shares held by P.A.W. Long Term Partners, LP.
(11) Stewart Flink and Richard Levy exercise voting control over the shares held
by Crestview Capital Master, LLC.
(12) Michael Finkelstein, President, exercises voting control over the shares
held by Stonestreet, LP.
(13) Mark Tompkins exercises voting control over the shares held by Vitel
Ventures Corporation.
(14) Evan Schemenauer, Jonathan Walk and Don Dunstan exercise voting control
over the shares held by Greenwich Growth Fund Limited.
(15) Evan Schemenauer, Arthur Jones and Jennifer Kelly exercise voting control
over the shares held by Whalehaven Fund Limited.
(16) Jack Doorly and Tom Halowell exercise voting control over the shares held
by Freya Fanning & Co.
(17) Robert Ellin, Jay Wolf and Irwin Ross exercise voting control over the
shares held by Trinad Capital, LP.
(18) Nicholas Lizzio exercises voting control over the shares held by Landmark
Capital Inc.
(19) Joseph Giamanco, Jr. and Christian Giamanco exercise voting control over
the shares held by Maybach Capital Inc.
(20) Seth Fischer, Managing Partner of Oasis Management Holdings, LLC, exercises
voting control over the shares held by DKR SoundShore Oasis Holding Fund
Ltd. and DKR SoundShore Strategic Holding Fund.
(21) Kerry S. Perry, President, exercises voting control over the shares held by
Allied Funding, Inc.
(22) Matt Kinley, General Partner of Goldfield Partners and 2116 Partners,
exercises voting control over the shares held by Goldfield Partners and
2116 Partners.
(23) Includes shares of common stock issuable upon exercise of a warrant to
purchase 93,450 shares of common stock. The Management Committee of C.E.
Unterberg, Towbin exercises voting control over the shares held by C.E.
Unterberg, Towbin. C.E. Unterberg, Towbin is a registered broker-dealer and
therefore, is considered an underwriter with respect to these securities.
On June 17, 2004, Patient Infosystems Inc. sold 3,365,000 shares of common
stock to institutional and other accredited investors for an aggregate purchase
price of $5,653,200 in gross proceeds. C.E. Unterberg, Towbin acted as placement
agent in the transaction. C.E. Unterberg, Towbin was paid $360,158 in fees and
expenses and received a warrant to purchase 93,450 shares of the Company's
common stock. In addition, Lipman Capital Group received 50,000 shares of the
Company's common stock in connection with consulting services relating to the
transaction. Derace Shaffer, our Chairmanommon stock in the private placement.
We agreed to file a registration statement on Form SB-2 for these shares by July
19, 2004.
56
Plan Of Distribution
The selling stockholders and any of their pledgees, donees, transferees,
assignees or other successors-in-interest may, from time to time, sell any or
all of the shares of common stock offered hereby on any stock exchange, market
or trading facility on which the shares are traded or in private transactions.
Our common stock currently trades on the OTC Bulletin Board. Any sales by the
selling stockholders may be at fixed or negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholder to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in any of their warrants or common stock issuable upon conversion of
their warrants and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares
underlying the warrants from time to time under this prospectus.
57
The selling stockholders also may transfer their warrants or shares of
common stock issuable upon conversion of their warrants in other circumstances,
in which case the pledges, donees, transferees, assignees or other
successors-in-interest will be a "selling stockholder" for purposes of this
prospectus.
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The selling stockholders have informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We will not receive any proceeds from sales of any shares by the selling
stockholders. However, we may receive an aggregate of $162,500 upon the exercise
of all the warrants held by selling stockholders, if such warrants are exercised
for cash. We will use such funds, if any, for working capital and general
corporate purposes.
58
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 100,000,000 shares of capital stock divided into
(i) 80,000,000 shares of common stock, par value $0.01 per share and (ii)
20,000,000 shares of preferred stock, par value $0.01 per share. As of July 15,
2004, there are 9,638,067 shares of our common stock outstanding, held of record
by approximately 750 stockholders. There are 915,118 shares of Preferred Stock
outstanding, held by 39 stockholders.
Common Stock
The holders of our common stock are entitled to one vote for each share
held of record in the election of directors and in all other matters to be voted
on by the stockholders. There is no cumulative voting with respect to the
election of directors. As a result, the holders of more than 50% of the shares
voting for the election of directors can elect all of the directors. Holders of
common stock are entitled:
o to receive any dividends as may be declared by the Board of Directors
out of funds legally available for such purpose after payment of
accrued dividends on the outstanding shares of preferred stock; and
o in the event of our liquidation, dissolution, or winding up, to share
ratably in all assets remaining after payment of liabilities and after
provision has been made for each class of stock having preference over
the common stock.
All of the outstanding shares of common stock are validly issued, fully
paid and nonassessable. Holders of our common stock have no preemptive right to
subscribe for or purchase additional shares of any class of our capital stock.
Preferred Stock
Our Board of Directors has the authority, within the limitations set forth
in our certificate of designations and certificate of incorporation to provide
by resolution for the issuance of preferred stock, in one or more classes or
series, and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series.
Series C Preferred Stock
The holders of Series C Preferred Stock are entitled to eight votes for
each share held of record on all matters submitted to a vote of stockholders.
Holders of Series C Preferred Stock are entitled to receive cumulative 9%
dividends on an annual basis and ratably such dividends as may be declared by
the Board of Directors of Patient Infosystems out of funds legally available
therefor. In the event of any voluntary or involuntary liquidation, dissolution
or winding up of Patient Infosystems, then, prior, and in preference to any
distribution of any assets to the holders of common stock, the holders of Series
C Preferred Stock will be entitled to be paid in full in an amount equal to (i)
a per share price for each share of Series C Preferred Stock outstanding plus
(ii) an amount equal to a cumulative, unpaid dividend at a 9% rate per annum
plus (iii) an amount equal to all declared but unpaid dividends on each such
share accrued up to such date of distribution. For purposes of calculating these
preference payments, the per share price has been $10.00 for the Series C
Preferred Stock. One share of the Series C Preferred Stock may be converted at
any time, at the holder's option, into eight shares of common stock. Holders of
Series C Preferred Stock have no preemptive rights.
59
The conversion rate will be adjusted if Patient Infosystems pays a dividend
on its common stock or subdivides or combines its outstanding common stock. If
at any time, Patient Infosystems proposes to offer and sell shares of preferred
stock having a conversion rate that is less than $1.25 per share of common
stock, then the conversion rate for the Series C Preferred Stock will be
adjusted such that each share of Series C Preferred Stock will be convertible
into such number of shares that equals $10.00 divided by the conversion rate of
the new shares of preferred stock offered and sold. As a result, each share of
Series C Preferred Stock will be convertible into 10 shares of common stock or
an aggregate of 750,000.
Series D Preferred Stock
The holders of Series D Preferred Stock are currently entitled to one
hundred twenty votes for each share held of record on all matters submitted to a
vote of stockholders. Holders of Series D Preferred Stock are entitled to
receive cumulative 9% dividends on an annual basis and ratably such dividends as
may be declared by the Board of Directors of Patient Infosystems out of funds
legally available therefore. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Patient Infosystems, then, prior, and
in preference to any distribution of any assets to the holders of Common Stock,
the holders of Series D Preferred Stock will be entitled to be paid in full in
an amount equal to (i) a per share price for each share of Series D Preferred
Stock outstanding plus (ii) an amount equal to a cumulative, unpaid dividend at
a 9% rate per annum plus (iii) an amount equal to all declared but unpaid
dividends on each such share accrued up to such date of distribution. For
purposes of calculating these preference payments, the per share price will be
$10.00 for each share of Series D Preferred Stock. One share of the Series D
Preferred Stock may be converted at any time, at the holder's option, into one
hundred twenty shares of Common Stock. Holders of Series D Preferred Stock have
no preemptive rights. The 840,118 shares of Series D Preferred Stock outstanding
may be convertible into 8,401,180 shares of common stock.
The conversion rate will be adjusted if Patient Infosystems pays a dividend
on its common stock or subdivides or combines its outstanding common stock. The
conversion rate will also be adjusted if Patient Infosystems issues or sells
common stock or securities convertible into common stock at a price less than
the then effective conversion rate, in which case the conversion rate will be
adjusted to an amount equal to the effective price per share of the securities
sold in the transaction giving rise to the adjustment.
Holders of a majority in voting power of the Series D Preferred Stock have
the right to elect two members of the Board of Directors of Patient Infosystems.
Warrants
60
As of July 15, 2004, we have outstanding warrants to purchase the
equivalent of 663,450 shares of our common stock. We issued warrants to purchase
93,450 shares of our common stock at an exercise price of $1.68 per share
pursuant to a private placement that occurred in June 2004.
Market for Common Stock
Shares of our common stock are listed on the OTC Bulletin Board under the
symbol PATY.
Transfer Agent and Registrar
Our transfer agent and registrar is Continental Stock Transfer and Trust
Company, 17 Battery Place, New York, New York 10004.
Shares Eligible for Future Sale
We currently have 9,638,067 shares of common stock outstanding. Of the
9,638,067 shares of common stock outstanding, up to 2,618,009 shares are freely
tradable without restriction or further registration under the Securities Act,
except for any shares purchased by an "affiliate", which will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act.
All of the remaining shares of common stock currently outstanding are
"restricted securities" or owned by "affiliates", as those terms are defined in
Rule 144, and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. The restricted securities are not eligible for sale without
registration under Rule 144. As of July 15, 2004, there were outstanding options
and warrants to purchase 2,182,277 shares of our common stock.
62
Rule 144
Generally, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including any of our
affiliates or persons whose shares are aggregated with an affiliate, who has
owned restricted shares of common stock beneficially for at least one year, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
o 1% of our then outstanding shares of common stock; or
o the average weekly trading volume of shares of our common stock during
the four calendar weeks preceding such sale.
A person who is not an affiliate, has not been an affiliate within three
months prior to sale, and has beneficially owned the restricted shares for at
least two years is entitled to sell such shares under Rule 144(k) without regard
to any of the limitations described above.
Charter and Bylaws Provisions and Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents Delaware corporations from
engaging under certain circumstances, in a "business combination", which
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder", or a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such persons, for three years following the date such stockholder became an
"interested stockholder", unless (i) the business combination or the transaction
in which such stockholder became an "interested stockholder" is approved by the
board of directors prior to the date the "interested stockholder" attained such
status; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an "interested stockholder", the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (x) persons who are directors and
also officers and (y) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or after the
date the "interested stockholder" attained such status the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested stockholder."
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. Our bylaws eliminate the right of
stockholders to call special meetings of stockholders. These and other
provisions may have the effect of delaying, deferring or preventing hostile
takeovers or changes in the control or management of Patient Infosystems, Inc.
even if doing so would be beneficial to our stockholders.
62
Reports to Stockholders
We have and will continue to comply with the periodic reporting, proxy
solicitation and other applicable requirements of the Securities Exchange Act of
1934.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon by McCarter & English, LLP.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of Patient Infosystems, Inc. as of December 31, 2003 and 2003 and for
each of the three years ended December 31, 2003 included in this prospectus have
been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph
expressing substantial doubt about the Company's ability to continue as a going
concern), and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of American Caresource Corporation
that have been audited by McGladrey & Pullen LLP, an independent registered
public accounting firm, as stated in their report appearing herein (which report
expresses an unqualified opinion), and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
a) Deloitte & Touche LLP resigned as the Registrant's independent accountants
on April 21, 2004.
b) The Audit Committee of the Board of Directors of the Registrant approved on
April 28, 2004 the engagement of the accounting firm of McGladrey & Pullen,
LLP as accountants for the Registrant for the year ending December 31,
2004.
c) Deloitte & Touche LLP's reports on the financial statements for the past
two years ended December 31, 2003 and 2002 contained no adverse opinion or
disclaimer of opinion. Deloitte & Touche LLP's reports on the financial
statements contained an explanatory paragraph expressing substantial doubt
about the Registrant's ability to continue as a going concern.
d) In connection with its audits for the two most recent fiscal years ended
December 31, 2003 and 2002 and through April 21, 2004, there have been no
disagreements with Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements if not resolved to the satisfaction of
Deloitte & Touche LLP would have caused them to make reference thereto in
their report on the financial statements for such years.
63
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a Registration
Statement on Form SB-2 under the Securities Act of 1933 with respect to the
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
us and the common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Additionally, we file annual, quarterly and current
reports, proxy statements and other documents with the Securities and Exchange
Commission. You may read and copy any materials we file with the Securities and
Exchange Commission at the Securities and Exchange Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the Securities and Exchange Commission's Web site is
http://www.sec.gov.
64
Index to Financial Statements
Patient Infosystems, Inc.
Annual Financial Statements
Report of Independent Registered Public Accounting Firm.....................66
Consolidated Balance Sheets at December 31, 2003 and 2002...................67
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.........................................68
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2003, 2002 and 2001.........................69
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.........................................70
Notes to Consolidated Financial Statements..................................71
Schedule-II.................................................................85
Quarterly Financial Statements
Consolidated Balance Sheets at of March 31, 2004 and December 31, 2003......86
Consolidated Statements of Operations (unaudited) for the
three month ended March 31, 2004.........................................87
Consolidated Statements of Cash Flows for the years ended
three month ended March 31, 2004.........................................88
Notes to Consolidated Financial Statements for the
three month ended March 31, 2004.........................................89
American CareSource Corporation
Annual Financial Statements
Independent Auditor's Reports...............................................94
Balance Sheets at December 31, 2003 and 2002................................96
Statements of Operations for the years ended December 31, 2003 and 2002.....98
Statements of Changes in Stockholders'
Equity for the years endedDecember 31, 2003 and 2002.....................99
Statements of Cash Flows for the years ended December 31, 2003 and 2002....100
Notes to Consolidated Financial Statements.................................101
Unaudited Pro Forma Combined Condensed Financial Statement
Unaudited Pro Forma Combined Condensed Financial Statement.................112
Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 2003..........................113
Notes to Unaudited Pro Forma Combined Condensed Statements
of Operations for the year ended December 31, 2003.......................114
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Patient InfoSystems, Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheets of Patient
Infosystems, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2003. Our audits also included the financial statement schedule on page 85.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Patient Infosystems, Inc. and
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's recurring losses from
operations and negative working capital raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning this
matter are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Deloitte & Touche LLP
Rochester, New York
March 30, 2004
66
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
-------------------------------------------------------------------------------------------------- ------------------
ASSETS 2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 397,851 $ 5,011
Accounts receivable (net of doubtful accounts allowance of $52,141 and $55,000) 771,258 441,216
Prepaid expenses and other current assets 156,729 105,827
Notes receivable - 200,000
----------------- ------------------
Total current assets 1,325,838 752,054
PROPERTY AND EQUIPMENT, net 305,551 285,747
OTHER ASSETS:
Intangible assets (net of accumulated amortization of $586,830 and $443,258) 497,893 179,465
Goodwill 6,981,876
----------------- ------------------
TOTAL ASSETS $ 9,111,158 $ 1,217,266
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $ 189,608 $ -
Accounts payable 1,337,862 379,004
Accrued salaries and wages 442,299 208,752
Accrued expenses 1,472,445 351,621
Accrued interest 61,558 713,554
Current maturities of long-term debt 294,117 -
Borrowings from directors - 5,077,500
Deferred revenue 336,598 157,074
----------------- ------------------
Total current liabilities 4,134,487 6,887,505
LINE OF CREDIT 3,000,000 3,000,000
LONG-TERM DEBT 40,295 -
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - $.01 par value: shares authorized: 20,000,000
Series C, 9% cumulative, convertible
issued and outstanding: 2003 & 2002 - 100,000 1,000 1,000
Series D, 9% cumulative, convertible
issued and outstanding: 2003 - 830,100 8,301 -
Common stock - $.01 par value:
authorized: 80,000,000; issued and outstanding: 2003 - 4,960,354
authorized: 20,000,000; issued and outstanding: 2002 - 10,956,024 49,604 109,560
Additional paid-in capital 45,596,684 24,132,153
Accumulated deficit (43,719,213) (32,912,952)
----------------- ------------------
Total stockholders' equity (deficit) 1,936,376 (8,670,239)
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 9,111,158 $ 1,217,266
----------------- ------------------
See notes to consolidated financial statements.
67
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
-----------------------------------------------------------------------------------------------
2003 2002 2001
REVENUES $ 5,687,293 $ 2,355,677 $ 1,586,443
------------------- ------------------ -------------------
COSTS AND EXPENSES:
Cost of revenue 4,162,759 1,914,464 2,420,151
Sales and marketing 893,833 746,353 813,975
General and administrative 1,125,926 1,282,683 2,028,804
Research and development 131,782 105,614 190,731
------------------- ------------------ -------------------
Total costs and expenses 6,314,300 4,049,114 5,453,661
------------------- ------------------ -------------------
OPERATING LOSS (627,007) (1,693,437) (3,867,218)
Amortization of debt discount (2,143,120) - -
Other expense, net (607,834) (530,924) (598,087)
------------------- ------------------ -------------------
NET LOSS (3,377,961) (2,224,361) (4,465,305)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (7,671,557) (90,000) (90,000)
------------------- ------------------ -------------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (11,049,518) $ (2,314,361) $ (4,555,305)
=================== ================== ===================
NET LOSS PER SHARE - BASIC
AND DILUTED $ (3.25) $ (2.36) $ (5.17)
=================== ================== ===================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,399,616 979,668 880,875
See notes to consolidated financial statements.
68
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity(Deficit)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2000 8,220,202 $ 82,202 100,000 $ 1,000 $23,951,103 $(26,223,286) $ (2,188,981)
Compensation expense related to
issuance of stock 2,319,156 23,191 - - 329,482 - 352,673
Debt issuance costs in the form
stock warrants - - - - 35,735 - 35,735
Immaculate exercise of stock warrants 416,666 4,167 - - (4,167) - -
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Net loss for the year ended
December 31, 2001 - - - - - (4,465,305) (4,465,305)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2001 10,956,024 109,560 100,000 1,000 24,222,153 (30,688,591) (6,355,878)
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Net loss for the year ended
December 31, 2002 - - - - - (2,224,361) (2,224,361)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2002 10,956,024 109,560 100,000 1,000 24,132,153 (32,912,952) (8,670,239)
Exercise of stock options 400 4 - - 32 - 36
Give effect to 1 for 12 reverse split of
common stock (10,043,389) (100,434) - - 100,434 - -
Issuance of common stock 4,047,319 40,474 - - 6,759,023 - 6,799,497
Issuance of Series D Preferred - - 830,100 8,301 7,419,999 - 7,428,300
Beneficial Conversion on Series D issuance - - - - 7,428,300 (7,428,300) -
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Series D Convertible Preferred Stock - - - - (153,257) - (153,257)
Net loss for the year ended
December 31, 2003 - - - - - (3,377,961) (3,377,961)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2003 4,960,354 $ 49,604 930,100 $ 9,301 $45,596,684 $(43,719,213) $ 1,936,376
============ ========== ========= ======== ============ ============== =============
See notes to consolidated financial statements.
69
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
OPERATING :
Net loss $ (3,377,961) $ (2,224,361) $ (4,465,305)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 310,433 374,099 695,369
Amortization of debt discount 2,143,120 - -
Gain on sale of property - (400) 4,772
Noncash interest income (129,499) - -
Loss on investments - - 200,000
Compensation expense related to issuance of stock warrants and options - - 352,673
Decrease (increase) in accounts receivable 156,393 (167,425) 137,645
(Increase) decrease in prepaid expenses and other current assets (34,960) (17,378) 77,718
Increase (decrease) in accounts payable 172,084 267,986 (122,527)
Increase in accrued salaries and wages 40,025 32,134 460
Increase (decrease) in accrued expenses 19,007 (215,584) 198,745
Increase in accrued interest 645,832 431,024 232,429
Increase (decrease) in deferred revenue 179,524 33,934 (38,821)
-------------- --------------- -----------------
Net cash provided by (used in) operating activities 123,998 (1,485,971) (2,726,842)
-------------- --------------- -----------------
INVESTING:
Property and equipment additions (34,185) (8,867) (9,240)
Proceeds from sale of property and equipment - 400 800
Increase in notes receivable - (200,000) -
Acquisition of American Caresource, net of cash acquired of $1,710 (3,348,290) - -
Acquisition expenses (173,719) - -
-------------- --------------- -----------------
Net cash used in investing activities (3,556,194) (208,467) (8,440)
-------------- --------------- -----------------
FINANCING:
Exercise of stock options 36 - -
Borrowings from directors 150,000 1,170,000 2,736,500
Borrowings from shareholders 3,675,000 - -
Proceeds from line of credit - 500,000 -
-------------- --------------- -----------------
Net cash provided by financing activities 3,825,036 1,670,000 2,736,500
-------------- --------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 392,840 (24,438) 1,218
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,011 29,449 28,231
-------------- --------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 397,851 $ 5,011 $ 29,449
-------------- --------------- -----------------
Supplemental disclosures of cash flow information
Cash paid for interest expense $ 97,559 $ 102,856 $ 169,490
============== =============== =================
See notes to consolidated financial statements.
70
PATIENT INFOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Patient Infosystems, Inc. (the "Company") designs and
develops health care information systems and services to manage, collect
and analyze patient-related information to improve patient compliance with
prescribed treatment protocols. Through its various patient compliance
programs for disease state management, the Company provides important
benefits for the patient, the health care provider and the payor.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Patient Infosystems Canada, Inc., which
ceased operations in January 2001 and American Caresource Holdings, Inc.
which was created in December 2003. Significant intercompany transactions
and balances have been eliminated in consolidation.
Acquisition - On December 31, 2003, the Company acquired substantially all
the assets and liabilities of American Caresource Corporation for a total
purchase price of $5,732,116. The purchase consideration included (a)
1,100,000 shares of common stock valued at $1,848,000; (b) $3,679,499 of
notes and accrued interest owed the Company by American Caresource
Corporation that was extinguished by the business combination and (c)
$204,617 of direct expenses associated with the acquisition. The common
stock issued in the transaction was valued at $1.68 per share based upon
the measurement date for this transaction of April 14, 2003, which is the
date the terms of the proposed transaction were agreed upon and announced
to the public.
Information related to the acquisition is as follows:
Purchase price $ 5,732,116
================
Purchase allocation:
Current assets $ 504,087
Property and equipment 152,480
Identifiable intangible assets 462,000
Current liabilities, excluding current
portion of long-term debt (2,033,915)
Long-term debt (334,412)
Goodwill 6,981,876
---------------
$ 5,732,116
This acquisition has been accounted for using the purchase method of
accounting and accordingly, the results of the operations of this
acquisition have been included in the consolidated financial statements
from the date of the acquisition. Since the acquisition occurred at the
close of business on December 31, 2003, there are no operating results
reflected in the accompanying 2003 consolidated statement of operations.
The allocation of the purchase price to identifiable intangible assets and
goodwill has not been finalized, and any required adjustments will be
recorded as necessary in 2004.
71
The following unaudited pro forma summary presents the Company's
consolidated results of operations for 2003 and 2002 as if the acquisition
had been consummated at January 1, 2002. The pro forma consolidated results
of operations include certain pro forma adjustments, including the
amortization of identifiable intangible assets and interest on certain
debt.
December 31,
2003 2002
--------------------- ---------------------
Revenue $ 14,851,682 $ 11,996,817
Operational costs (18,882,522) (17,936,490)
Other costs (2,490,533) (166,707)
--------------------- ---------------------
Net loss (6,521,373) (6,106,380)
Dividends and beneficial conversions (837,090) (8,265,390)
--------------------- ---------------------
Net loss attributable to common shareholders $ (7,358,463) $(14,371,770)
===================== =====================
Net loss per share (using 3,399,616 weighted average
shares outstanding at December 31, 2003. $ (2.16) $ (4.23)
===================== =====================
The pro forma results are not necessarily indicative of those that would
have occurred had the acquisition taken place at the beginning of the
periods presented.
Going Concern - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. As shown in the accompanying consolidated financial statements,
the Company incurred a net loss for 2003 of $3,377,961 and had negative
working capital of $2,808,649 at December 31, 2003. These factors, among
others, may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability of assets and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependant upon
its ability to generate sufficient cash flow to meet its obligations, to
obtain additional financing and, ultimately, to attain successful
operations.
Management is currently assessing the Company's operating structure for the
purpose of reducing ongoing expenses, increasing sources of revenue and is
negotiating the terms of additional debt or equity financing. The recently
completed acquisition of American Caresource Corporation is being
integrated into the operation of the Company. Opportunities to expand the
existing customer relationships of both organizations to include the
services of both organizations are being assessed by management. Management
believes that the access to capital will provide the newly acquired entity
the stability needed to begin a period of growth. In addition, successes in
outcomes from disease management programs are being leveraged in an attempt
to increase revenues from sales.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
amounts could differ from those estimates.
72
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, borrowings from directors, a line of
credit and long-term debt. The fair value of instruments is determined by
reference to various market data and other valuation techniques, as
appropriate. Unless otherwise disclosed, the fair value of short-term
financial instruments approximates their recorded values due to the
short-term nature of the instruments. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, the fair value of long-term debt approximates its
carrying value.
Revenue Recognition and Deferred Revenue - The Company's principal source
of revenue to date has been from contracts with various pharmaceutical
companies and managed care organizations for the development and operation
of disease management programs for chronic diseases, disease management
programs and other health care information system applications. Deferred
revenue represents amounts billed in advance of delivery under these
contracts.
Development Contracts - The Company's program enhancements consist of
specific changes or modifications to existing products requested by
customers and are short-term in nature. Therefore, revenue is recognized
upon delivery of the enhancement.
Program Operations - The Company's program operation contracts call for a
per-enrolled patient fee to be paid by the customer for a series of program
services as defined in the contract. The timing of customer payments varies
by contract, but typically occurs in advance of the associated services
being provided. Revenues from program operations are recognized ratably as
the program services are delivered.
Licenses - Revenue derived from software license fees is recognized when
the criteria established by Statement of Position 97-2, Software Revenue
Recognition, is satisfied. License fees associated with hosting
arrangements (e.g., arrangements that include the right of the customer to
use the software stored on the Company's hardware), are recognized ratably
over the hosting period when such fees are fixed and determinable. Hosting
fees with payment terms extending past one year are recognized as payments
become due.
Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid debt instruments with original maturities of three months or less.
Concentrations of Credit Risk - Financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
cash and cash equivalents and accounts receivable. The Company places its
cash and cash equivalents with high credit quality institutions.
The Company's current contracts are concentrated in a small number of
customers, consequently, the loss of any one of its customers could have a
material adverse effect on the Company and its operations. During the years
ended December 31, 2003, 2002 and 2001, approximately $3,635,661 (64%),
$1,680,475 (71%), and $1,027,931 (65%), respectively, of the Company's
revenues arose from contracts with three customers. At December 31, 2003
and 2002, accounts receivable included balances of $151,688 and $317,046,
respectively, from contracts with these customers.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 10 years.
Asset Impairment - The Company regularly assesses all of its long lived
assets for impairment and recognizes a loss when the carrying value of an
asset exceeds its fair value. The Company determined that no impairment
loss of long lived assets need be recognized for applicable assets in 2003,
2002 and 2001.
73
Intangible Assets - Intangible assets at December 31, 2002 represent a
purchased software asset of the Company's web based services that is being
amortized over 4 years using the straight-line method. This asset balance
at December 31, 2003 totaled $35,893. At December 31, 2003, intangible
assets also includes, among other things, a customer list and relationships
acquired from American Caresource Corporation on December 31, 2003 totaling
$462,000.
Research and Development - Research and development costs are expensed as
incurred.
Income Taxes - Deferred income 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 bases and net operating loss and tax credit
carryforwards.
Net Loss Per Share - The calculations for the basic and diluted loss per
share were based on net loss attributable to common stockholders of
$11,049,518, $2,314,361 and $4,555,305 and a weighted average number of
common shares outstanding, including convertible preferred shares, of
3,399,616, 979,668 and 880,875 for the years ended December 31, 2003, 2002
and 2001 after giving effect to the 1 for 12 reverse stock split approved
by the Company's stockholders on December 31, 2003, respectively. All per
share information included in the consolidated financial statements and the
footnotes thereto have been restated for effect of the 1 for 12 reverse
stock split. The computation of fully diluted loss per share for 2003, 2002
and 2001 did not include 101,160, 92,928 and 103,128 shares of common
stock, respectively, which consist of outstanding convertible preferred
shares, options and warrants because the effect would be antidilutive due
to the net loss in those years.
The calculation of the Company's net loss per share for the years ended
December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
---- ---- ----
Net loss per share - basic and diluted
Net loss attributable to common stockholders $(11,049,518) $(2,314,361) $(4,555,305)
----------------- ----------------- ----------------
Actual weighted average common shares outstanding 924,109 913,002 814,209
Weighted average preferred shares outstanding
convertible into common shares 2,475,507 66,666 66,666
----------------- ----------------- ----------------
Total weighted average common shares outstanding 3,399,616 979,668 880,875
----------------- ----------------- ----------------
Net loss per share - basic and diluted $ (3.25) $ (2.36) $ (5.17)
================= ================= ================
Retirement Plan - The Company has a retirement plan that qualifies under
Section 401(k) of the Internal Revenue Code. This retirement plan allows
eligible employees to contribute a portion of their income on a pretax
basis to the plan, subject to the limitations specified under the Internal
Revenue Code. The Company's annual contribution to the plan is at the
discretion of the Board of Directors. The Company made no contributions to
this plan in 2003, 2002 and 2001.
New Accounting Pronouncements - In January 2003, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires disclosure about
variable interest entities for which it is reasonably possible that the
Company will be required to consolidate or disclose information when the
Interpretation becomes effective. The Company has determined that it does
not have any variable interest entities which would require consolidation
in accordance with FIN 46.
74
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity, ("SFAS No. 150"). SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). The adoption of
SFAS No. 150 in 2003 did not have an effect on the Company's consolidated
financial statements.
Stock-Based Compensation - In 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This standard
provides alternative methods of transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, the standard also requires prominent disclosures in the
Company's financial statements about the method of accounting used for
stock-based employee compensation, and the effect of the method used when
reporting financial statements.
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation". As permitted by SFAS
No. 123, the Company continues to measure compensation for such plans using
the intrinsic value based method of accounting, prescribed by Accounting
Principles Board ("APB"), Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the date of
grant for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
2003 2002 2001
---- ---- ----
Net loss attributable to common
shareholders - as reported $ (11,049,518) $ (2,314,361) $ (4,555,305)
Stock compensation expense (118,257) (136,306) (210,471)
----------------- --------------- ---------------
Net loss - pro forma $ (11,167,775) $ (2,450,667) $ (4,765,776)
================= =============== ===============
Net loss per share - basic
and diluted - as reported $ (3.25) $ (2.36) $ (5.17)
================= =============== ===============
Net loss per share - basic
and diluted - pro forma $ (3.29) $ (2.50) $ (5.41)
================= =============== ===============
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using assumed risk-free interest
rates of 3.79% for the year ended December 31, 2003, 3.63% for the year
ended December 31, 2002 and 4.86% for the year ended December 31, 2001 and
an expected life of 7 years. The assumed dividend yield was zero. The
Company has used a volatility factor of .98 for the year ended December 31,
2003, 1.78 for the year ended December 31, 2002 and 1.24 for the year ended
December 31, 2001. For purposes of pro forma disclosure, the estimated fair
value of each option is amortized to expense over that option's vesting
period.
75
Consolidated Statements of Cash Flows - Supplemental noncash investing and
financing activities for the years ended December 31, 2003, 2002 and 2001
are as follows:
2003 2002 2001
Common stock activities:
Borrowings from directors converted into
common stock $4,482,500 $ - $ -
Accrued interest converted into common stock 438,099 - -
Common stock issued in acquisition 1,848,000 - -
Common stock issued for acquisition expenses 30,898 - -
------------- ------------ ------------
Total of noncash common stock activities $6,799,497 $ - $ -
============= ============ ============
Preferred stock activities:
Borrowings from directors converted to
preferred stock $ 745,000 $ - $ -
Borrowings from shareholders converted into
preferred stock 3,675,000 - -
Accrued interest converted into preferred
stock 865,180 - -
Issuance of preferred stock in connection
with issuance of debt 2,143,120 - -
------------- ------------ ------------
Total noncash preferred stock activities $7,428,300 $ - $ -
============= ============ ============
Dividends declared on Series C & D Convertible
Preferred Stock $ 243,257 $ 90,000 $ 90,000
============= ============ ============
Value of beneficial conversion feature on Series
D Convertible Preferred Stock recognized as
a dividend $7,428,300 $ - $ -
============= ============ ============
Segments - Prior to the American Caresource Corporation acquisition, the
Company operated in one segment. As a result of the acquisition, the
Company anticipates that it will operate in two segments. Accordingly, the
required segment information will be disclosed commencing in 2004.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2003 2002
Computer software $ 686,792 $ 665,286
Computer equipment 1,514,547 1,168,445
Telephone equipment 365,204 362,887
Leasehold improvements 64,897 41,504
Office furniture and equipment 395,720 354,329
------------- -----------
3,027,160 2,592,451
Less accumulated depreciation 2,721,609 2,306,705
------------- -----------
Property and equipment, net $ 305,551 $ 285,746
------------- -----------
76
3. Debt
Line of Credit - At December 31, 2003, the Company has borrowings
outstanding totaling $3,000,000 under a line of credit, which is the
maximum amount available under the line of credit. The amount borrowed is
due and payable on July 31, 2005. Interest is due and payable at maturity
at a floating rate based upon LIBOR plus 1.75% (effective LIBOR rate at
December 23, 2003 was 1.2%). There is a commitment fee of 0.25% per annum
on the average daily unused amount of the line of credit to be paid
quarterly in arrears. The line of credit is secured by substantially all of
the Company's assets and is guaranteed by Dr. Schaffer and Mr. Pappajohn,
directors of the Company. In consideration for their guarantees, in
February 2004, the Company granted to Dr. Schaffer and Mr. Pappajohn
warrants to purchase an aggregate of 47,500 shares of Series D Convertible
Preferred Stock, convertible into 475,000 shares of the Company's common
stock for $10.00 per preferred share.
At December 31, 2002, the Company's borrowings outstanding under the line
of credit totaled $3,000,000. This line of credit was amended during 2003,
the amended terms of which are described in the preceding paragraph.
Borrowings from directors - Prior to December 31, 2003, the Company had
borrowings from Mr. Pappajohn and Dr. Schaffer. At December 31, 2002, such
borrowings totaled $5,077,500. The Company borrowed an additional $150,000
from these directors during 2003.
On December 31, 2003, the Company converted $4,482,500 in debt and $438,099
of accrued interest owed to Mr. Pappajohn and Dr. Schaffer into common
stock by issuing 2,928,986 shares of the Company's common stock using a
value of $1.68 per common share. Additionally on December 31, 2003, Mr.
Pappajohn agreed to convert his remaining debt of $745,000 and accrued
interest of $711,110 into 145,611 shares of the Company's Series D
Convertible Preferred Stock at a price of $10.00 per preferred share. See
Note 5.
77
Long-Term Debt - Long-term debt, which was acquired from American
Caresource Corporation, consists of the following at December 31, 2003:
Unsecured non-interest bearing note to a stockholder, payable in monthly
installments of $10,127, matured in December 2003 $ 40,507
Unsecured non-interest bearing obligation to a stockholder, payable in
monthly installments of $5,000, maturing in April 2004 15,732
Unsecured loan at index rate plus 2.5% (6.5%) to a stockholder, due on demand
30,478
19% obligation assumed and due an individual in connection with the purchase
of certain assets, payable in monthly installments of $2,000, matured in
December 2003 11,577
5% unsecured note payable to a client, with principal and interest maturing
in March 2004 165,000
Other 7,610
Capital lease obligations (see Note 7) 63,508
------------
Total debt 334,412
Less current portion (294,117)
------------
Total long-term debt $ 40,295
============
Scheduled payments in each of the next four years are as follows:
Year ended December 31,
------------------------ --------------
2004 $ 294,117
2005 21,360
2006 12,748
2007 6,187
------------------------ --------------
Total $ 334,412
==============
78
4. INCOME TAXES
There was no income tax expense for the years ended December 31, 2003, 2002
and 2001.
Income tax expense for the years ended December 31 differed from the U.S.
federal income tax rate of 34% as a result of the following:
2003 2002 2001
Computed "expected" tax benefit $ (1,148,507) $ (756,283) $ (1,518,203)
Change in the valuation allowance
for deferred tax assets 487,000 885,000 1,795,000
Amortization of debt discount is not deductible 728,660 - -
State and local income taxes at statutory rates,
net of federal income tax benefit (73,350) (133,462) (267,918)
Other, net 6,197 4,745 (8,879)
-------------- -------------- --------------
$ - $ - $ -
-------------- -------------- --------------
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax
liabilities at December 31, are presented below.
Deferred income tax assets: 2003 2002
Accounts receivable, principally due
to allowance for doubtful accounts $ 21,000 $ 22,000
Deferred revenue 135,000 63,000
Compensation 53,000 40,000
Net operating loss carryforwards 13,053,000 12,698,000
Tax credit carryforwards 75,000 75,000
Amortization of intangibles 153,000 112,000
Other 36,000 36,000
------------- --------------
Total gross deferred income tax assets 13,526,000 13,046,000
Less valuation allowance (13,461,000) (12,974,000)
------------- --------------
Net deferred income tax assets 65,000 72,000
------------- --------------
Deferred income tax liabilities:
Property and equipment, principally due to
differences in depreciation and amortization (9,000) (30,000)
Other (56,000) (42,000)
------------- --------------
Total gross deferred income tax liability (65,000) (72,000)
------------- --------------
Net deferred income taxes $ - $ -
------------- --------------
79
Management of the Company has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax
assets. The valuation allowance reduces deferred tax assets to zero, which
represents management's best estimate of the amount of such deferred tax
assets that more likely than not will be realized.
At December 31, 2003 the Company has net operating loss carryforwards of
approximately $32,684,000, which are available to offset future taxable
income, if any, which begin to expire in 2010. The Company also has
investment tax credit carryforwards for federal income tax purposes of
approximately $75,000, which are available to reduce future federal income
taxes, if any, which begin to expire in 2010. These loss and tax credit
carryforwards may be subject to limitation by certain sections of the
Internal Revenue Code relating to ownership changes.
5. PREFERRED STOCK
On March 31, 2000, the Company completed a private placement of 100,000
shares of newly issued Series C 9% Cumulative Convertible Preferred Stock
("Series C Preferred Stock"), raising $1,000,000 in total proceeds. These
shares can be converted at any time by the holder into common stock at a
rate of 8 shares of common stock to 1 share of Series C Preferred Stock. In
2003, this rate changed to 10 shares of common stock to 1 share of Series C
Preferred Stock. Each share of Series C Preferred Stock has voting rights
equivalent to 10 shares of common stock. As of December 31, 2003, the
Company has accrued $337,500 in dividends since inception, which was
payable to the Series C stockholders.
During 2003 the Company issued a total of 301,582 shares of Series D 9%
Cumulative Convertible Preferred Stock ("Series D Preferred Stock") in
connection with certain borrowings during 2003. In accordance with APB
Opinion No. 14, a portion of the cash received totaling $2,143,120 was
allocated to the preferred stock resulting in a debt discount in the same
amount, which was fully amortized by December 31, 2003. Additionally, a
beneficial conversion feature has arisen since the value recorded for the
preferred stock, which is convertible into common stock, is less than the
fair market value of the common stock totaling $5,177,458. While the
resulting beneficial conversion feature totals $3,034,338, the Company can
only record a beneficial conversion equal to the value of the preferred
stock recorded, $2,143,120. Such amount is reflected in the net loss
attributable to the common stockholders for the year ended December 31,
2003 because the preferred stock is immediately convertible into the
Company's common stock. As of December 31, 2003, the Company has accrued
$153,257 in dividends since inception, which was payable to the Series D
stockholders.
On December 31, 2003, $5,285,180 of debt and accrued interest was converted
into 528,518 shares of Series D Preferred Stock at a price of $10.00 per
share. Because the effective purchase price per common share was $1.00 per
share while the fair market value on December 31, 2003 was $2.40 per share,
there is a beneficial conversion feature of these Series D Convertible
Preferred shares totaling $7,399,252. While the resulting beneficial
conversion feature totals $7,399,252, the Company can only record a
beneficial conversion equal to the value of the preferred stock recorded,
$5,285,180. Such amount is reflected in the net loss attributable to the
common stockholders for the year ended December 31, 2003 because the
preferred stock is immediately convertible into the Company's common stock.
80
6. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Stock Option Plan") for
the benefit of certain employees, non-employee directors, and key advisors.
On December 31, 2003, the stockholders approved an amendment to the Stock
Option Plan that increased its authorized shares from 1,680,000 shares on a
pre-split basis to 3,500,000 shares after giving effect to the 1 for 12
reverse stock split and increase in the Company's overall authorized
capital. On May 2, 2000, the Company filed a Form S-8 registering 1,680,000
of the Stock Option Plan shares, the Company plans to file an amended Form
S-8 which will register the full 3,500,000 shares now authorized. Stock
options granted under the Stock Option Plan may be of two types: (1)
incentive stock options and (2) nonqualified stock options. The option
price of such grants shall be determined by a Committee of the Board of
Directors (the "Committee"), but shall not be less than the estimated fair
market value of the common stock at the date the option is granted. The
Committee shall fix the terms of the grants with no option term lasting
longer than ten years. The ability to exercise such options shall be
determined by the Committee when the options are granted. Generally,
outstanding options vest at the rate of 20% per year. During 2001, some
grants had a portion of the options vest immediately with the balance of
the options vesting at a rate of 20% per year.
81
A summary of stock option activity follows:
Outstanding Weighted-Average
Options Exercise Price
Options outstanding at December 31, 2000 701,880 $ 1.28
Options granted during the year ended December 31, 2001
(weighted average fair value of $0.18) 536,500 $ 0.19
Options forfeited by holders during the year
ended December 31, 2001 (40,840) $ 1.83
Options outstanding at December 31, 2001 1,197,540 $ 0.77
Options forfeited by holders during the year
ended December 31, 2002 (82,400) $ 0.86
-----------
Options outstanding at December 31, 2002 1,115,140 $ 0.76
Options granted during the year ended December 31, 2003
(weighted average fair value of $0.20) 100,000 $ 0.20
Options forfeited by holders during the year
ended December 31, 2003 (700) $ 0.09
Options exercised during the year ended December 31, 2003 (400) $ 0.09
-----------
Options outstanding at December 31, 2003
before giving effect to the 1 for 12 reverse stock split 1,214,040 $ 0.78
===========
Options outstanding at December 31, 2003
after giving effect to the 1 for 12 reverse stock split 101,160 $ 9.36
===========
Options exercisable at December 31, 2003 70,565 $ 8.54
===========
Options available for grant at December 31, 2003 3,376,917
===========
82
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2003, after giving effect to the 1 for
12 reverse stock split:
Options Outstanding Options Exercisable
------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
$1.08 - $11.99 65,747 5.73 $ 3.48 51,449 $ 3.47
$12.00 - $23.99 17,250 4.88 $15.20 7,917 $ 17.65
$22.00 - $33.00 18,163 5.55 $25.24 11,199 $ 25.40
-------------- -------------
101,160 70,565
============== =============
7. COMMITMENTS
The Company leases an automobile, certain equipment and other office space
under non-cancelable lease agreements, which expire at various dates
through April 2008.
Rent expense for office space for the years ended December 31, 2003, 2002
and 2001 was $139,256, $95,508 and $136,045, respectively.
At December 31, 2003 minimum annual lease payments for operating and
capital leases are as follows:
Leases
Years ending December 31, Capital Operating
--------------------------------- --------- -----------
2004 $ 28,467 $ 386,839
2005 24,362 324,993
2006 14,036 308,783
2007 7,040 304,951
2008 - 110,888
Less amount representing interest (10,397)
--------------------------------- --------- -----------
Net present value of
minimum lease payments $ 63,508 $1,436,454
83
8. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited interim results of operations
by quarter:
First Second Third Fourth
-------------------------------------------------------------------------------------------
Year ended December 31, 2003:
Revenues $ 947,679 $ 1,580,037 $ 1,429,692 $ 1,729,885
Gross margin 186,077 395,182 321,916 621,359
Net loss (505,206) (1,006,198) (1,190,639) (675,918)
Net loss attributable to common shareholders (527,706) (2,496,016) (1,858,563) (6,167,233)
Net loss per common share (0.54) (0.70) (0.45) (1.26)
Year ended December 31, 2002:
Revenues $ 499,328 $ 542,716 $ 586,100 $ 727,533
Gross margin 11,475 80,990 118,938 229,810
Net loss (661,521) (556,519) (474,147) (532,174)
Net loss attributable to common shareholders (684,021) (579,019) (496,647) (554,674)
Net loss per common share (0.70) (0.59) (0.51) (0.57)
84
Schedule II
Patient InfoSystems, Inc.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002 and 2001
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
Allowance for Doubtful Accounts:
2003 $ 55,000 $ 92 $ 2,951 $ 52,141
2002 $ 37,217 $ 59,117 $ 41,334 $ 55,000
2001 $ 48,122 $ 15,447 $ 26,352 $ 37,217
Deferred Tax Assets Valuation
Allowance:
2003 $ 12,974,000 $ 487,000 - $ 13,461,000
2002 $ 12,089,000 $ 885,000 - $ 12,974,000
2001 $ 10,294,000 $ 1,795,000 - $ 12,089,000
85
PATIENT INFOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF
ASSETS March 31, 2004 December 31, 2003
-------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 703,527 $ 397,851
Accounts receivable 878,505 771,258
Prepaid expenses and other current assets 156,900 156,729
-------------- -------------
Total current assets 1,738,932 1,325,838
Property and equipment, net 297,093 305,551
OTHER ASSETS:
Intangible assets
(net of accumulated amortization of $633,859 and $586,830) 438,900 497,893
Goodwill 7,004,625 6,981,876
-------------- -------------
TOTAL ASSETS $ 9,479,550 $ 9,111,158
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ - $ 189,608
Accounts payable 1,282,552 1,337,862
Accrued salaries and wages 518,832 442,299
Accrued expenses 852,758 1,043,247
Accrued dividends 699,790 490,756
Current maturities of long-term debt 64,795 294,117
Deferred revenue 105,689 336,598
-------------- -------------
Total current liabilities 3,524,416 4,134,487
-------------- -------------
LINE OF CREDIT 3,000,000 3,000,000
LONG-TERM DEBT 34,098 40,295
STOCKHOLDERS' DEFICIT:
Preferred stock - $.01 par value: shares authorized: 20,000,000
Series C, 9% cumulative, convertible, issued and outstanding - 75,000
as of March 31, 2004, 100,000 as of December 31, 2003 750 1,000
Series D, 9% cumulative, convertible, issued and outstanding - 840,118
as of March 31, 2004, 830,100 as of December 31, 2003 8,401 8,301
Common stock - $.01 par value: shares authorized:
80,000,000; issued and outstanding - 6,024,979 as of March 31, 2004,
4,960,354 as of December 31, 2003 60,250 49,604
Additional paid-in capital 48,334,726 45,596,684
Unearned debt issuance cost (914,000) -
Accumulated deficit (44,569,091) (43,719,213)
-------------- -------------
Total stockholders' deficit 2,921,036 1,936,376
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,479,550 $ 9,111,158
============== =============
See notes to unaudited consolidated financial statements.
86
PATIENT INFOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION (UNAUDITED)
Three Months Ended
March 31,
2004 2003
---- ----
REVENUES
Disease and Demand Management Fees $ 2,344,427 $ 947,679
Ancillary Benefits Management Fees 1,676,510 -
-------------- -------------
Total revenues 4,020,937 947,679
-------------- -------------
COSTS AND EXPENSES
Cost of sales 3,170,705 761,602
Sales and marketing 371,122 242,603
General and administrative 1,016,861 275,469
Research and development 32,607 31,758
-------------- -------------
Total costs and expenses 4,591,295 1,311,432
-------------- -------------
OPERATING LOSS (570,358) (363,753)
OTHER EXPENSE
Financing Cost (171,375) -
Interest expense, net (29,966) (141,453)
-------------- -------------
NET LOSS (771,699) (505,206)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (287,214) (22,500)
-------------- -------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (1,058,913) $ (527,706)
============== =============
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.20) $ (0.58)
============== =============
WEIGHTED AVERAGE COMMON SHARES 5,348,800 913,002
See notes to unaudited consolidated financial statements.
87
PATIENT INFOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
OPERATING ACTIVITIES:
Net loss $ (771,699) $ (505,206)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 280,687 82,138
Compensation expense related to warrants 223,088 -
(Increase) decrease in accounts receivable (107,247) 87,946
(Increase) decrease in prepaid insurance, expenses and other current assets (171) 2,642
Decrease in accounts payable (55,310) (45,449)
Increase in accrued salaries and wages 76,533 78,562
(Decrease) increase in accrued expenses (190,489) 128,815
Decrease in deferred revenue (230,909) (31,800)
-------------- ---------------
Net cash used in operating activities (775,517) (202,352)
-------------- ---------------
INVESTING ACTIVITIES:
Property and equipment additions (41,860) (18,572)
Increase in notes receivable - (300,000)
-------------- ---------------
Net cash used in investing activities (41,860) (318,572)
-------------- ---------------
FINANCING ACTIVITIES:
Borrowing from directors, net - 600,000
Decrease in bank overdraft (189,608)
Payment of debt (235,519) -
Proceeds from the sale of common stock 1,663,180 -
Expenses related to the sale of common stock (115,000) -
-------------- ---------------
Net cash provided by financing activities 1,123,053 600,000
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 305,676 79,076
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 397,851 5,011
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 703,527 $ 84,087
=========== ========
Supplemental disclosures of non-cash information
Dividend declared on Convertible Preferred Stock $ 209,034 $ 22,500
=========== ========
Beneficial conversion feature of Convertible Preferred Stock $ 78,180
==========
Fair market value of:
Warrants issued as an expense of sale of Common Stock $ 46,625
==========
Warrants issued as acquisition expense $ 22,750
==========
Warrants issued or debt guarantee $1,085,375
==========
Common Stock issued for services $ 44,250
==========
See notes to unaudited consolidated financial statements.
88
PATIENT INFOSYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements for the period ended
March 31, 2004
1. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Patient Infosystems Canada, Inc., which
ceased operations in January 2001 and American Caresource Holdings, Inc.
("ACS") which was created in December 2003. Significant intercompany
transactions and balances have been eliminated in consolidation.
Acquisition - On December 31, 2003, the Company acquired substantially all
the assets and liabilities of American Caresource Corporation for a total
purchase price of $5,754,866. The Company recorded this acquisition using
the purchase method of accounting and therefore, the operations of ACS are
included only since the date of the acquisition.
The accompanying consolidated financial statements for the three month
periods ended March 31, 2004 and March 31, 2003 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. These
unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition
and results of operations contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2003. Certain reclassifications of
2003 amounts have been made to conform to 2004 presentations. The results
of operations for the three months ended March 31, 2004 are not necessarily
indicative of the results for the entire year ending December 31, 2004.
All share and per share information contained herein gives effect to the 1
for 12 reverse stock split which was effective as of January 9, 2004.
The calculations for the basic and diluted loss per share for the three
month periods ended March 31, 2004 and 2003 did not include 1,527,160 and
92,877, respectively, options to purchase shares of common stock nor the
common equivalent shares issuable upon conversion of the 100,000 and
915,188, respectively, shares of preferred stock which were outstanding
because the effect would have been antidilutive due to the net loss in
those periods. The computation of basic and diluted net loss per share is
as follows:
89
Three Months Ended
March 31,
2004 2003
---- ----
Net loss $ (771,699) $ (505,206)
Convertible preferred Stock dividends (287,214) (22,500)
------------- -----------
Net loss attributable to
Common Stockholders $ (1,085,913) $ (527,706)
------------- -----------
Weighted average common shares 5,348,800 913,002
------------- -----------
Net loss per share - Basic and diluted $ (0.20) $ (0.58)
============= ===========
Stock-Based Compensation - In 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This standard
provides alternative methods of transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, the standard also requires prominent disclosures in the
Company's financial statements about the method of accounting used for
stock-based employee compensation, and the effect of the method used when
reporting financial statements.
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation". As permitted by SFAS
No. 123, the Company continues to measure compensation for such plans using
the intrinsic value based method of accounting, prescribed by Accounting
Principles Board ("APB"), Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the date of
grant for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
Three Months Ended
March 31,
2004 2003
---- ----
Net loss attributable to common
shareholders - as reported $1,058,913) ($527,706)
Stock compensation expense (1,161,959) (26,334)
------------ -------------
Net loss - pro forma (2,220,872) (554,040)
Net loss per share - basic
and diluted - as reported ($0.20) ($0.58)
============ =============
Net loss per share - basic
and diluted - pro forma ($0.42) ($0.61)
============ =============
Weighted average common shares 5,348,800 913,002
90
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using an assumed risk-free interest
rates of 3.31% for the three month period ended March 31, 2004, 3.79% for
the year ended December 31, 2003 and an expected life of 7 years. The
assumed dividend yield was zero. The Company has used a volatility factor
of 113% for the three month period ended March 31, 2004 and 98% for the
year ended December 31, 2003. For purposes of pro forma disclosure, the
estimated fair value of each option is amortized to expense over that
option's vesting period and only the compensation expense related to the
three month periods ended March 31, 2003 and 2004 were used to adjust the
net loss on a pro forma basis.
2. On December 31, 2003, the Company entered into the Third Addendum to the
Second Amended and Restated Credit Agreement with Well Fargo Bank Iowa,
N.A., which extended the term of the $3,000,000 credit facility to July 31,
2005. Dr. Schaffer and Mr. Pappajohn, directors of the Company, guaranteed
this extension. In consideration of their guarantees, in February 2004 the
Company granted to Dr. Schaffer and Mr. Pappajohn warrants to purchase an
aggregate of 47,500 shares of Series D Convertible Preferred Stock,
convertible into 475,000 shares of the Company's common Stock for $10.00
per preferred share. The Company valued these warrants at $1,085,375 using
the Black-Scholes method. The value of these warrants was recorded as
unearned debt issuance costs and will be amortized as financing costs over
the nineteen month period of the loan guarantee. During the 3 months ended
March 31, 2004, the company recorded a financing cost of $171,375.
3. On March 28, 2004, Mr. Pappajohn and Dr. Schaffer signed a letter to the
Company in which they made a commitment to obtain the operating funds that
the Company believes would be sufficient to fund its operations through
January 1, 2005. There can be no assurances given that Mr. Pappajohn or Dr.
Schaffer can raise either the required working capital through the sale of
the Company's securities or that the Company can borrow the additional
amounts needed.
4. During the three month period ended March 31, 2004, the Company issued
814,625 shares of its Common Stock and 4,700 shares of its Series D
Convertible Preferred Stock to certain investors in exchange for $1,663,180
which consisted of $1,610,000 of working capital, $53,180 of accrued
interest payable and $44,250 of services. The Company incurred $205,875 of
costs directly attributable to the sale of its common stock.
During the three month period ended March 31, 2003, the Company paid
$113,625 of expenses by issuing shares of its Common Stock and warrants to
purchase shares of its Common Stock. The Company issued 22,125 shares of
its Common Stock as payment of $44,250 in consulting expenses and issued
warrants to purchase 25,000 shares of its Common Stock at $2.75 per share
that were assigned a fair market value of $69,375 using a Black-Scholes
valuation method.
91
Of the warrants to purchase 25,000 shares of the Company's Common Stock,
warrants to purchase 12,500 shares assigned a value of $22,750 were an
additional expense related to the purchase of substantially all the assets
of and assumption of liabilities from American Caresource Corporation on
December 31, 2003. Accordingly, goodwill related to this acquisition was
increased by $22,750.
5. During the three months ended March 31, 2004 the Company operated in two
segments: (i) Patient Infoystems, which includes disease management, demand
management and provider improvement services; and (ii) American Caresource,
which includes ancillary benefits management services. Selected financial
information on the Company's segments for the three month periods ended
March 31, 2004 and 2003 and pro forma combined as if the acquisition had
occurred as of January 1, 2003 are presented as follows:
March 31,
2004 2003 2003
Pro Forma
Revenues
Patient Infosystems, Inc. $ 2,344,427 $ 947,679 $ 947,679
American Caresource Holdings, Inc. 1,676,510 - 2,581,617
------------------- ---------------- ----------------
Total revenue 4,020,937 947,679 3,529,296
Cost of goods
Patient Infosystems, Inc. 1,526,595 761,602 761,602
American Caresource Holdings, Inc. 1,644,110 - 2,999,403
Selling, General and Administrative
Patient Infosystems, Inc. 601,792 549,830 549,830
American Caresource Holdings, Inc. 818.798 - 657,391
Other
Patient Infosystems, Inc. 196,772 141,453 141,453
American Caresource Holdings, Inc. 4,569 - 5,458
------------------- ---------------- ----------------
Net profit (loss)
Patient Infosystems, Inc. 19,268 (505,206) (505,206)
American Caresource Holdings, Inc. (790,967) - (1,080,635)
------------------- ---------------- ----------------
Total net loss (771,699) (505,206) (1,585,841)
Dividends (287,214) (22,500) (170,958)
------------------- ---------------- ----------------
Net loss attributable to
common shareholders (1,058,913) (527,706) (1,756,799)
=================== ================ ================
Net loss per share basic and diluted $ (0.20) $ (0.58) $ (1.92)
=================== ================ ================
Weighted average common shares 5,348,800 913,002 913,002
=================== ================ ================
92
6. The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As shown in the accompanying unaudited consolidated financial
statements, the Company incurred a net loss for the three month period
ended March 31, 2004 of $771,699 and had negative working capital of
$1,785,484 at March 31, 2004. These factors, among others, may indicate
that the Company will be unable to continue as a going concern for a
reasonable period of time.
The unaudited consolidated financial statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company's ability to continue as a going
concern is dependant upon its ability to generate sufficient cash flow to
meet its obligations. Management is currently assessing the Company's
operating structure for the purpose of reducing ongoing expenses,
increasing sources of revenue and is negotiating the terms of additional
debt or equity financing.
93
AUDITOR'S REPORT
To the Board of Directors
American CareSource Corporation
Irving, Texas
We have audited the accompanying pre-acquisition balance sheet of American
CareSource Corporation as of December 31, 2003, and the related statements of
operations, stockholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amount and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the pre-acquisition financial position of American
CareSource Corporation as of December 31, 2003, and the results of its
operations and its cash flows for the year then ended in conformity with
U.S. generally accepted accounting principles.
/s/McGladrey & Pullen LLP
McGladrey & Pullen LLP
Des Moines, Iowa
94
Independent Auditors' Report
To the Board of Directors and Stockholders
of American CareSource Corporation
Irving, Texas
We have audited the accompanying balance sheet of American CareSource
Corporation (the Company) as of December 31, 2002 and the related statements of
operations, stockholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American CareSource Corporation
as of December 31, 2002 and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
May 2, 2003, except for Note 2, as to
which the date is December 31, 2003
95
American CareSource Corporation
Balance Sheets
December 31, 2003 2002
------------------------------------------------------------------------------------------------------
(pre-acquisition -
See Note 1)
Assets
Current assets
Cash and cash equivalents $ 1,710 $ 158,968
Accounts receivable 486,435 958,334
Prepaid and other 15,942 17,352
------------------------------------------------------------------------------------------------------
Total current assets 504,087 1,134,654
------------------------------------------------------------------------------------------------------
Property and equipment, net 152,480 207,926
------------------------------------------------------------------------------------------------------
Total assets $ 656,567 $ 1,342,580
------------------------------------------------------------------------------------------------------
96
Liabilities and Stockholders' Deficit
Current liabilities
Excess of outstanding checks over bank balance $ 189,608 $ -
Due to service providers 709,982 1,519,757
Accounts payable and accrued liabilities 1,263,824 1,190,764
Current maturities of long-term debt 3,844,117 460,823
-----------------------------------------------------------------------------------------------------
Total current liabilities 6,007,531 3,171,344
Long-term debt, less current maturities 40,295 2,382,406
-----------------------------------------------------------------------------------------------------
Total liabilities 6,047,826 5,553,750
-----------------------------------------------------------------------------------------------------
Stockholders' Deficit
Common stock: no par value, 100,000 shares
authorized; 28,500 shares issued and outstanding as of
December 31, 2003 and 2002 4,500,100 4,500,100
Additional paid in capital 2,422,703 -
Accumulated deficit (12,314,062) (8,711,270)
-----------------------------------------------------------------------------------------------------
Total stockholders' deficit (5,391,259) (4,211,170)
-----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 656,567 $ 1,342,580
-----------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
97
American CareSource Corporation
Statements of Operations
Years ended December 31, 2003 2002
-----------------------------------------------------------------------------------------
Revenues
Ancillary health $ 8,706,471 $ 9,161,386
Patient claims 457,918 479,754
-----------------------------------------------------------------------------------------
9,164,389 9,641,140
Costs of revenues 10,196,728 11,175,947
-----------------------------------------------------------------------------------------
Contribution Deficit (1,032,339) (1,534,807)
-----------------------------------------------------------------------------------------
Operating Expenses:
Selling, general and administrative expenses 2,193,780 2,533,123
Depreciation and amortization 85,314 85,906
-----------------------------------------------------------------------------------------
Total Operating Expenses 2,279,094 2,619,029
-----------------------------------------------------------------------------------------
Operating Loss (3,311,433) (4,153,836)
Other Expense:
Interest expense 282,204 362,804
Other 9,155 3,470
-----------------------------------------------------------------------------------------
Net Loss $ (3,602,792) $ (4,520,110)
-----------------------------------------------------------------------------------------
Net Loss Per Share - Basic and Diluted $ (126.41) $ (212.17)
-----------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding 28,500 21,304
-----------------------------------------------------------------------------------------
See Notes to Financial Statements.
98
American CareSource Corporation
Statements of Stockholders' Deficit
Common Stock Accumulated Additional Stockholder
Shares Amount Deficit Paid in Capital Receivable Total
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 20,000 $ 100 $ (4,191,160) $ - $ (72,155) $ (4,263,215)
Change in stockholder receivable - - - - 72,155 72,155
Net loss - - (4,520,110) - - (4,520,110)
Stock issuance 8,500 4,500,000 - - - 4,500,000
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 28,500 4,500,100 (8,711,270) - - (4,211,170)
Net loss - - (3,602,792) - - (3,602,792)
Forgiveness of shareholder debt - - - 2,422,703 - 2,422,703
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 28,500 $ 4,500,100 $ (12,314,062) $ 2,422,703 $ - $ (5,391,259)
See Notes to Financial Statements.
99
American CareSource Corporation
Statements of Cash Flows
Increase (Decrease) in Cash
Years ended December 31, 2003 2002
--------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net loss $ (3,602,792) $ (4,520,110)
Adjustments to reconcile net loss to net cash (used in) operating
activities:
Depreciation and amortization 85,314 85,906
Forgiveness of stockholder receivable - 72,155
Changes in operating assets and liabilities:
Accounts receivable 471,899 (639,294)
Prepaid and other current assets 1,410 (1,775)
Due to service providers (809,775) 1,147,568
Accounts payable and accrued liabilities 73,060 550,652
--------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (3,780,884) (3,304,898)
--------------------------------------------------------------------------------------------------------------------
Cash (Used in) Investing Activities, purchase of
property and equipment (29,868) (96,272)
--------------------------------------------------------------------------------------------------------------------
Cash Provided By Financing Activities:
Proceeds from long-term debt 3,702,332 3,634,334
Principal payments on long-term debt (238,446) (4,592,023)
Stock issuance - 4,500,000
Increase in excess of outstanding checks over bank balance 189,608 -
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,653,494 3,542,311
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (157,258) 141,141
Cash and cash equivalents, beginning of year 158,968 17,827
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,710 $ 158,968
--------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid for interest $ 147,727 $ 349,153
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Equipment purchased with long-term debt $ - $ 96,101
Long-term debt forgiven by shareholder 2,422,703 -
--------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
100
American CareSource Corporation
Notes to Financial Statements
1. Summary of Significant Description of business
American CareSource Corporation (ACS) (formerly Health Accounting Policies
Data Solutions, Inc.), an Indiana C Corporation, was formed in October
1997. It is in the business of providing national administration,
coordination and case management of ancillary healthcare services for
employment groups through separate contracts with a national network of
providers and it provides administration of patient claims for health care
organizations.
Basis of Presentation - The Company's December 31, 2003 balance sheet is
presented just prior to a sale of substantially all of the Company's assets
and the assumption of the Company's operating and business related
liabilities (See Note 2) which occurred after the close of business on
December 31, 2003 in exchange for 1,100,000 shares of common stock of
Patient Infosystems, Inc. (PATI). After the transaction, the Company's only
recorded assets were the shares of PATI, which will be subsequently
distributed to Company shareholders. The Company plans to wind up its
affairs and liquidate in 2004.
Revenue recognition - Ancillary health revenues are reported when services
by providers have been authorized and performed and collections from third
party payors are reasonably assured. These revenues are recognized on a
gross basis, i.e. the revenue recorded is the amount of claims received or
expected to be received from third party payors for the performance of
services by providers and costs of revenues are recorded for the amount
paid or expected to be paid to medical service providers. Patient claims
revenues are recognized by the Company as the services are provided at the
fee to be received for services rendered.
Costs of revenues - Costs of ancillary health revenues consist of expenses
due to providers for providing employee (patient) services and the related
direct labor and overhead of providing such services. The Company is not
liable for costs incurred by independent contract service providers until
payment is received by the Company from the payors. The Company recognizes
actual or estimated liabilities to independent contract service providers
as related revenues are recognized.
101
Costs of patient claims revenues consist of direct labor and overhead to
administer the patient claims.
Concentration of revenues - The Company has five customers which comprise
the following approximate amounts of Company revenues and accounts
receivable:
2003 2002
------------------------------------ ---------------------------------
% of % of
Accounts Total Accounts Total
Receivable Revenue Revenue Receivable Revenue Revenue
----------------------------------------------------------------------
Customer A $102,000 $4,133,000 45% $ 31,000 $ 2,786,000 29%
Customer B 90,000 1,066,000 12 140,000 1,499,000 16
Customer C 110,000 1,032,000 11 294,000 1,797,000 19
Customer D 69,000 984,000 11 171,000 912,000 9
Customer E 2,000 557,000 6 128,000 1,063,000 11
----------------------------------------------------------------------
$373,000 $7,772,000 85% $764,000 $ 8,057,000 84%
======================================================================
Effective December 19, 2003, Customer A notified the Company that they are
terminating their contract for services.
Cash and cash equivalents - All highly liquid investments with original
maturities of twelve months or less are considered to be cash equivalents.
Accounts receivable - Accounts receivable are reported at amounts expected
to be received from third party payors and other customers.
Because of the nature of the Company's business, all receivable amounts are
expected to be colleted, hence, the Company does not have an allowance for
doubtful accounts.
Fair value of financial instruments - The Company's financial instruments
include cash, accounts receivable and accounts payable that are carried at
cost, which approximates fair value. Notes payable are carried at cost
which approximates fair value as these notes were assumed as part of the
business combination as discussed in Note 2.
Property and equipment - Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
computed over the estimated useful lives of the assets using the
straight-line method for financial reporting purposes and on the
straight-line and accelerated methods for tax purposes. Leasehold
improvements are amortized using the straight-line method over their
estimated useful lives or the lease term, whichever is shorter. Ordinary
maintenance and repairs are charged to operations. Expenditures that extend
the physical or economic life of property and equipment are capitalized.
102
The estimated useful lives of property and equipment are as follows:
Leasehold Improvements 5 years
Computer Equipment 3-5 years
Furniture and Fixtures 7 years
Software 3-5 years
The Company periodically reviews the carrying value of its long-lived
assets for possible impairment. In management's opinion, there is no
impairment of such assets at December 31, 2003.
Stock splits - Effective April 8, 2002, the Company's outstanding shares of
common stock increased as a result of a 100:1 stock split. The effect of
this increase has been retroactively reflected throughout the accompanying
financial statements.
Earnings Per Common Share - Basic earnings per share is computed by
dividing net loss by the weighted average number of shares outstanding
during each of the periods. Since there are no dilutive securities, diluted
earnings per share is the same amount.
Income taxes - Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between
the basis of assets and liabilities for financial and income tax reporting.
The net deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets or liabilities are recovered or settled.
Deferred tax assets are reduced by a valuation allowance when in the
opinion of management it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
103
Management's estimates and assumptions - The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the balance sheet dates
and the reported amounts of revenues and expenses during the period. Actual
results may differ from such estimates. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and
records the effect of any necessary adjustments prior to their issuance.
New accounting pronouncements - In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. FIN 46 and related interpretations explain how
to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity, to decide whether to consolidate
that entity. The Interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. FIN No.
46 is effective immediately for variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. The Interpretation will apply to the
Company for its year ending December 31, 2005. Adoption of this standard
will not have any immediate effect on the financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149), which amends SFAS
133, Accounting for Derivative Instrument and Hedging Activities, to amend
and clarify financial accounting and reporting for derivative instruments
embedded in other contracts (collectively referred to as derivatives) and
hedging activities. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. Adoption of this standard did not have any
immediate effect on the Company's financial statements.
104
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS 150),
which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both debt and equity.
It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation to the issuer. Adoption of this
standard did not have any immediate effect on the Company's financial
statements.
2. Agreement for Sale of Assets
Effective after the close of business on December 31, 2003, the Company and
PATI executed an Asset Purchase Agreement (the Agreement) dated September
23, 2002 (as further amended on April 10, 2003, July 30, 2003, October 8,
2003 and December 23, 2003). Under the Agreement, the Company exchanged
substantially all of its assets and liabilities in exchange for 1,100,000
shares of PATI stock in a tax-free reorganization. PATI is a public
company, listed under the symbol of PATY. The 1,100,000 shares of PATI
common stock represent approximately 12% of PATI's outstanding common stock
on a fully diluted basis.
The Purchase Agreement includes all of the Company assets used in its
business and all of the operating and business related liabilities, as
defined in the Agreement. The liabilities retained by the Company include
liabilities known to the Company or its shareholders and not disclosed to
PATI, obligations to pay taxes, and claims or liabilities based upon or
arising out of the purchase or sale of newly issued PATI securities. The
Company believes there are no such liabilities. The Company has previously
issued warrants for the purchase of Company stock to PATI, exercisable only
if the Agreement was terminated. The execution of the Agreement caused
immediate expiration of these warrants.
105
3. Property and Equipment
Property and equipment consist of the following:
December 31, 2003 2002
----------------------------------------------------------------------
Computer equipment $ 327,489 $ 213,330
Software 20,056 18,326
Furniture and fixtures 40,666 120,693
Leasehold improvements 12,313 12,313
----------------------------------------------------------------------
400,524 364,662
Less accumulated depreciation
and amortization (248,044) (156,736)
----------------------------------------------------------------------
$ 152,480 $ 207,926
----------------------------------------------------------------------
106
Included in property and equipment are capitalized leases as follows:
December 31, 2003 2002
----------------------------------------------------------------------
Computer equipment $ 99,182 $ 99,182
Less accumulated amortization (41,541) (17,337)
----------------------------------------------------------------------
$ 57,641 $ 81,845
----------------------------------------------------------------------
4. Letter of Credit
The Company had outstanding irrevocable standby letters of credit (LOC's)
of $1,000,000 and $500,000 at December 31, 2003 and 2002, respectively.
These LOC's act as a guarantee of payment to a certain third party in
accordance with specified terms and conditions. As of December 31, 2003,
there have been no draws on these LOC's. The LOC's are unconditionally
guaranteed by certain stockholders of the Company and expire in April and
May 2004.
5. Line of Credit
On July 7, 2000, the Company entered into two separate line of credit
agreements each totaling $400,000 with a scheduled expiration date of
January 31, 2002. Both lines of credit bore interest at the bank's index
rate (4.75% at December 31, 2001). Both lines of credit were
unconditionally guaranteed by an officer/stockholder of the Company.
On February 12, 2002, the Company was notified of a default and
acceleration of the drawn amount owed from both of the lenders. Effective
May 9, 2002, a stockholder of the Company purchased the lines of credit
from the financial institutions for the outstanding amount owed by the
Company in the principal of $383,913 plus accrued interest and late fees.
As of December 31, 2002, this debt is included in the balance of the 10%
subordinated note payable to a stockholder.
On October 8, 2003 the stockholder forgave the entire amount of the debt
totaling $2,422,703 as part of the PATI Sale of Assets Agreement. Such
amount was added to the additional paid in capital.
107
6. Long-Term Debt Long-term debt consists of the following:
December 31, 2003 2002
------------------------------------------------------------------------------------
Index rate plus 3.0% (7.0%) note payable
to PATI, due on demand and collateralized
by all intangible and tangible assets
$ 3,550,000 $ 200,000
10% subordinated note payable to a
stockholder, with principal and interest
due at maturity, maturing in March 2007. - 2,302,675
On October 8, 2003 shareholder forgave
$2,422,703 note as part of PATI merger
Unsecured non-interest bearing note to a
stockholder, payable in monthly
installments of $10,127, maturing in
December 2003 40,507 121,520
Unsecured non-interest bearing obligation
to a stockholder, payable in monthly
installments of $5,000, maturing in April
2004 15,732 75,732
Unsecured loan at index rate plus 2.5%
(6.5%) to a stockholder, due on demand 30,478 33,540
19% obligation assumed and due an individual in
connection with the purchase of certain assets,
payable in monthly installments of $2,000,
maturing
in December 2003 11,577 24,057
5% unsecured note payable to a client,
with principal and interest maturing in
March 2004 165,000 -
Other 7,610 -
Capital lease obligations (Note 8) 63,508 85,705
------------------------------------------------------------------------------------
3,884,412 2,843,229
Less current maturities (3,844,117) (460,823)
------------------------------------------------------------------------------------
Long-term debt, less current maturities $ 40,295 $ 2,382,406
------------------------------------------------------------------------------------
108
Scheduled payments in each of the next five years and thereafter on the
debt and capital lease obligations are as follows:
Related Unrelated
Party Party Total
Year ended December 31, Debt Debt Debt
-------------------------------------------------------------------------
2004 $ 3,606,239 $ 237,878 $ 3,844,117
2005 - 21,360 21,360
2006 - 12,748 12,748
2007 - 6,187 6,187
-------------------------------------------------------------------------
$ 3,606,239 $ 278,173 $ 3,884,412
-------------------------------------------------------------------------
7. Income Taxes
Differences between financial accounting principles and tax laws cause
differences between the bases of certain assets and liabilities for
financial reporting purposes and tax purposes.
The tax effects of these differences, to the extent they are temporary, are
recorded as deferred tax assets and liabilities under SFAS 109 and
consisted of the following components:
December 31 2003 2002
Deferred tax assets:
Operating loss carryforward $ 2,316,000 $ 1,904,000
Goodwill 378,000 408,000
Accrued vacation 26,000 27,000
Other 16,000 8,000
--------------------------------------------------------------------
2,736,000 2,347,000
Valuation allowance (2,736,000) (2,347,000)
--------------------------------------------------------------------
$ - $ -
--------------------------------------------------------------------
The valuation allowance increased $389,000 and $1,525,000 during the years
ended December 31, 2003 and 2002, respectively.
The Company has a net operating loss carryforward of approximately
$6,812,000 which begins to expire in 2021. Upon consummation of the
transaction referred to in Note 2, the future utilization of the net
operating loss carryforward may be limited.
109
8. Commitments and Contingencies
Operating leases
The Company leases office space from a related party under a non-cancelable
lease agreement that expires in April 2008. The Company leases an
automobile, certain equipment and other office space under non-cancelable
lease agreements, which expire at various dates through April 2008.
At December 31, 2003 minimum annual lease payments for operating and
capital leases are as follows:
Operating Leases
---------------------------------------
Capital Related Unrelated
Years Ending December 31, Leases Party Party Total
----------------------------------------------------------------------------------
2004 $ 28,467 $ 252,301 $ 61,450 $ 338,402
2005 24,362 252,301 54,980 324,993
2006 14,036 252,301 45,922 308,783
2007 7,040 252,301 45,922 304,951
2008 - 84,100 26,788 110,888
----------------------------------------------------------------------------------
Total minimum lease payments
73,905 $ 1,093,304 $ 235,062 $ 1,388,017
------------------------------------------
Less- amount representing
interest (10,397)
----------------------------------------
Net present value of future
minimum lease payments $ 63,508
----------------------------------------
Rent expense related to operating leases was approximately $270,000 and
$298,000 for the years ended December 31, 2003 and 2002, respectively. The
Company incurred related party rent expense for its corporate offices
totaling approximately $258,000 and $235,000 for the years ended December
31, 2003 and 2002, respectively.
110
Employment Agreements
The Company has executed employment agreements with three officers and one
employee effective through various dates from December 2004 to September
2005, providing for minimum annual salaries and incentives.
Contingencies
The Company is party to certain complaints arising from certain former
employees. Management believes that the ultimate resolution of these
complaints will not have a material adverse effect on the financial
condition, results of operations or liquidity of the Company.
9. Related Party Transactions
See Notes 4, 5 and 6 for information regarding related party debt. See Note
8 for information regarding related party leases and commitments.
A stockholder was paid independent contractor fees in the amount of
$120,000, debt payments in the amount of $60,000 as well as other
out-of-pocket expenses in each of the years ended December 31, 2003 and
2002.
The stockholder receivable in the amount of $72,155 at December 31, 2001
was written-off to salary expense during 2002.
10. Basic and Diluted Loss per Share
The calculations for the basic and diluted loss per share were based upon
loss attributable to common shareholders of $3,602,792 and $4,520,110 and a
weighted average number of common shares outstanding of 28,500 and 21,304
for the years ended December 31, 2003 and 2002, respectively. No options or
warrants were outstanding for the years ended December 31, 2003 and 2002.
111
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Patient Infosystems has closed an agreement to acquire substantially all of
the assets and substantially all of the liabilities of ACS (the "Acquisition")
in exchange for 1,100,000 shares of Patient Infosystems common stock, after
giving effect to the 1 for 12 reverse stock split. The following unaudited pro
forma combined condensed financial statements give effect to the Acquisition to
be accounted for by the purchase method of accounting.
The consolidated balance sheet for the year ended December 31, 2003
presented in the audited financial statements of Patient Infosystems gives
effect to the business combination.
The unaudited pro forma combined statement of operations for the year ended
December 31, 2003 combines the audited historical statements of operations of
Patient Infosystems and ACS for the year ended December 31, 2003 giving effect
to the Acquisition as though it had occurred on January 1, 2003.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the Acquisition had been consummated at the
beginning of 2003, nor is it necessarily indicative of future operating results
or financial position. The unaudited pro forma adjustments are based upon
information and assumptions available at the time of the filing of this Form
SB-2. The unaudited pro forma information should be read in conjunction with the
accompanying notes thereto, Patient Infosystems' historical financial statements
and ACS' historical financial statements and related notes included elsewhere.
In accordance with Statement of Financial Accounting Standards No. 141
"Business Combinations," a portion of the purchase consideration has been
attributed to the intangible assets of ACS and will be amortized over the life
of those assets, estimated at five years for the purposes of the pro forma
presentation. The actual value of these intangible assets may change
significantly based upon the final determination of valuation. Any change in the
valuation will be offset by a change in goodwill.
The pro forma presentation contemplates a purchase consideration of
1,100,000 shares of Patient Infosystems common stock with an assumed value of
$1,848,000. In addition, the pro forma presentation gives effect to a private
placement of $3.675 million of Series D Preferred Stock which was a condition of
the Asset Purchase Agreement.
112
Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 2003
Patient
Infosystems ACS Adjustments Pro Forma
REVENUES $ 5,687,293 $9,164,389 $14,851,682
---------------- -------------- ---------------
COSTS AND EXPENSES:
Cost of revenue 4,162,759 10,196,728 92,400 a 14,451,887
Selling, general and administrative 2,019,759 2,279,094 4,298,853
Research and development 131,782 - 131,782
---------------- -------------- ---------------
Total costs and expenses 6,314,300 12,475,822 18,882,522
---------------- -------------- ---------------
OPERATING LOSS (627,007) (3,311,433) (4,030,840)
Other expense (2,750,954) (291,359) 120,028 b (2,922,285)
Provision for taxes - - -
---------------- -------------- ---------------
NET LOSS $(3,377,961) $(3,602,792) $(6,953,125)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (7,671,557) - (593,833) c (8,265,390)
---------------- -------------- ---------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (11,049,518) $(3,602,792) $(15,218,515)
================ ============== ===============
NET LOSS PER SHARE - BASIC
AND DILUTED $(3.25) $(4.48)
---------------- -------------- ---------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,399,616 3,399,616
---------------- -------------- ---------------
113
Notes to the
Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 2003
NOTES
a Pro forma amortization of identifiable intangible assets that results
from the acquisition based upon an estimated life of the ACS
intangible assets of five years.
b Pursuant to Amendment No. 2 to the Amended and Restated Agreement for
Purchase and Sale of Assets, $2,419,064 consisting of ACS notes
payable and all interest due on such notes, are liabilities that will
not be acquired. Accordingly, $120,028 of interest expense recognized
for this debt for the year ended December 31, 2003 has been eliminated
for pro forma purposes.
c The Company declared $153,257 of dividends for the outstanding Series
D Preferred Stock during the year ended December 31, 2003. If the
830,100 shares had been outstanding for all of 2003, the Company would
have declared annual dividends of $747,090 to these shareholders.
114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Our Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware. In
addition, our Certificate of Incorporation includes provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against those persons by reason of serving or having served
as officers, directors or in other capacities to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware.
Our bylaws provide the power to indemnify our officers, directors,
employees and agents or any person serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the fullest extent permitted by Delaware law.
Item 25. Other Expenses of Issuance and Distribution
Expenses payable in connection with the issuance and distribution of the
securities being registered (estimated except in the case of the registration
fee) are as follows:
Amount
Registration Fee $ 1,416
Legal Fees and Expenses $ 25,000
Accounting Fees and Expenses $ 25,000
Underwriting Costs $ 360,158
Consulting Fees $ 8,500
-----------
TOTAL $ 420,074
The above fees will be paid by us and not by the selling stockholders.
115
Item 26. Recent Sales of Unregistered Securities
On June 17, 2004, Patient Infosystems Inc. sold 3,365,000 shares of common
stock to institutional and other accredited investors for an aggregate purchase
price of $5,653,200 in gross proceeds. C.E. Unterberg, Towbin acted as placement
agent in the transaction. C.E. Unterberg, Towbin was paid $360,158 in fees and
expenses and received a warrant to purchase 93,450 shares of the Company's
common stock. In addition, Lipman Capital Group received 50,000 shares of the
Company's common stock in connection with consulting services relating to the
transaction. Derace Shaffer, our Chairman of the Board, purchased 100,000 shares
of common stock in the private placement. Patient Infosystems has agreed to file
a registration statement on Form SB-2 for these shares by July 19, 2004.
On February 24, 2004, Patient Infosystems sold 592,500 shares of common
stock, for $1,185,000 to six accredited investors, under an exemption from
registration pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933. There was $68,250 of fees paid and a warrant to purchase 12,500 shares of
Patient Infosystems common stock for $2.00 per share issued in connection with
these funds. Patient Infosystems has agreed to file a registration statement on
Form SB-2 for these shares by April 23, 2004.
Between April 2003 and January 2004, Patient Infosystems issued 840,118
shares of Series D 9% Cumulative Convertible Preferred Stock ("Series D
Preferred Stock") under the terms of the Note and Stock Purchase Agreement dated
April 11, 2003 and amended on September 10, 2003. There was no placement agent
and no commissions were paid to any party. These shares can be converted into
common stock at a rate of 10 shares of common stock to 1 share of Series D
Preferred Stock. Each share of Series D Preferred Stock has voting rights
equivalent to 10 shares of common stock. John Pappajohn and Derace Schaffer,
members of the Board of Directors of Patient Infosystems, held 424,233 and 5,318
shares of Series D Preferred Stock respectively. There was no placement agent
and no commissions were paid to any party. The proceeds from this issuance have
been used to repay debt and support the operations of Patient Infosystems'
subsidiary, American Caresource Holdings, Inc.
On December 31, 2003, $4,482,500 in debt and $438,099 of accrued interest
owed to Mr. Pappajohn and Dr. Schaffer was converted into 2,928,986 shares of
Patient Infosystems' common stock, adjusted for the 1 for 12 reverse stock split
that was approved by the shareholders on December 31, 2003. This debt conversion
transaction could not occur until the stockholders of Patient Infosystems
approved the amendment to the Certificate of Incorporation authorizing
sufficient capital stock on December 31, 2003. The shares were issued to
accredited investors under an exemption from registration pursuant to Section
4(2) and Rule 506 of the Securities Act of 1933. There was no placement agent
and no commissions were paid to any party. A date for a meeting of the
stockholders of Patient Infosystems has not yet been established.
On March 31, 2000, Patient Infosystems completed a private placement of
100,000 shares of newly issued Series C 9% Cumulative Convertible Preferred
Stock ("Series C Preferred Stock"), raising $1,000,000 in total proceeds. The
shares were sold to four accredited investors, under an exemption from
registration pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933. There was no placement agent and no commissions were paid to any party.
Due to the effect of the anti-dilution provisions of the Series C Preferred
Stock and as a result of the issuance of the Series D Preferred Stock, these
shares can be converted into common stock at a rate of ten shares of common
stock to one share of Series C Preferred Stock. Each share of Series C Preferred
Stock has voting rights equivalent to 10 shares of common stock. John Pappajohn
and Derace Schaffer, members of the Board of Directors of Patient Infosystems,
purchased 50,000 and 25,000 shares of Series C Preferred Stock respectively. The
proceeds from this issuance have been used to support Patient Infosystems'
operations. In February 2004, certain holders of 25,000 shares of these Series C
Preferred Stock converted their shares into 250,000 shares of common stock.
116
On June 6, 2001, Patient Infosystems issued a total of 2,319,156 shares of
unregistered common stock to Mr. Pappajohn and Dr. Schaffer as consideration for
their continued financial support of Patient Infosystems. Based upon recent
trading of Patient Infosystems' common stock at the time of issuance, Patient
Infosystems assigned a fair market value of $0.15 per share or a total of
$347,873 to these unregistered shares and realized this amount as an operating
expense in June of 2001. The shares were issued to accredited investors under an
exemption from registration pursuant to Section 4(2) and Rule 506 of the
Securities Act of 1933. There was no placement agent and no commissions were
paid to any party.
Item 27. Exhibits
Exhibit # Description of Exhibits
3.1-- Certificate of Amendment to the Certificate of Incorporation
3.2 * By-Laws
4.1-- Patient Infosystems, Inc. Amended and Restated Stock Option Plan
4.2 *** Certificate of Designations, Powers, Preferences and Relative,
Participating, Optional or Other Special Rights, and the
Qualifications, Limitations Thereof of the Series C Preferred
Stock of Patient InfoSystems, Inc.
5.1 Opinion of McCarter & English, LLP (to be filed by amendment)
10.20 + Lease Agreement dated as of February 22, 1995 between Patient
Infosystems and Conifer Prince Street Associates.
10.21 + First Addendum to Lease Agreement dated as of August 22, 1995
between Patient Infosystems and Conifer Prince Street Associates.
10.22 + Second Addendum to Lease Agreement dated as of November 17, 1995
between Patient Infosystems andConifer Prince Street Associates.
10.23 + Third Addendum to Lease Agreement dated as of March 28, 1996
between Patient Infosystems and Conifer Prince Street Associates.
10.24 + Fourth Addendum to Lease Agreement dated as of October 29, 1996
between Patient Infosystems and Conifer Prince Street Associates.
10.25 + Fifth Addendum to Lease Agreement dated as of November 30, 1996
between Patient Infosystems and Conifer Prince Street Associates.
117
10.26 + Sixth Addendum to Lease Agreement dated as of November 24, 1997
between Patient Infosystems and Conifer Prince Street Associates.
10.30 ++ Seventh Addendum to Lease Agreement dated as of June 16, 1999
between Patient Infosystems and Conifer Prince Street Associates.
10.33 ++ Revolving Note dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.34 ++ Credit Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.35 ++ Security Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.36 ++ Arbitration Agreement dated as of December 23, 1999 between
Patient Infosystems and Norwest Bank Iowa, National Association.
10.37 ++ Financing Statement executed by Patient Infosystems and Norwest
Bank Iowa, National Association.
10.38 ++ First Amendment to Credit Agreement dated as of March 21, 2000
between Patient Infosystems and Norwest Bank Iowa, National
Association.
10.39 ++ Note Modification Agreement dated as of March 21, 2000 between
Patient Infosystems and Norwest Bank Iowa, National Association.
10.41 *** Form of Subscription Agreement dated on or about March 31, 2000
between Patient Infosystems and John Pappajohn, Derace Schaffer,
Gerald Kirke and Michael Richards for Series C 9% Cumulative
Convertible Preferred Stock.
10.42 *** Form of Registration Rights Agreement dated on or about March 31,
2000 between Patient Infosystems and John Pappajohn, Derace
Schaffer, Gerald Kirke and Michael Richards for Series C 9%
Cumulative Convertible Preferred Stock.
10.43 *** Eighth Addendum to Lease Agreement dated as of December 8, 2000
between Patient Infosystems and Conifer Prince Street Associates.
10.45 *** Amended and Restated Credit Agreement dated as of March 28, 2001
between Patient Infosystems and Wells Fargo Bank Iowa, National
Association.
10.46 *** Revolving Note dated as of March 28, 2001 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.47 *** Form of Promissory Notes payable to Dr. Schaffer and Mr.
Pappajohn.
118
10.48 *** Form of Security Agreements with Dr. Schaffer and Mr. Pappajohn.
10.49 *** Ninth Addendum to Lease Agreement dated as of January 7, 2002
between Patient Infosystems and Conifer Prince Street Associates.
10.50 # Letter of Agreement dated as of March 25, 2002 between Patient
Infosystems, John Pappajohn and Derace Schaffer.
10.51 # Second Amended and Restated Credit Agreement dated as of March
28, 2002 between Patient Infosystems and Wells Fargo Bank Iowa,
National Association.
10.52 # Revolving Note dated as of March 28, 2002 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.53 # Security Agreement dated as of March 28, 2002 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.54 ## Addendum to Amended and Restated Credit Agreement dated as of
June 28, 2002 between Patient Infosystems and Wells Fargo Bank
Iowa, National Association.
10.55 ## Agreement for Purchase and Sale of Assets dated as of September
23, 2002 between Patient Infosystems and American CareSource
Corporation.
10.56 ### Tenth Addendum to Lease Agreement dated as of June 24, 2002
between Patient Infosystems and Conifer Prince Street Associates.
10.57 ### Eleventh Addendum to Lease Agreement dated as of December 30,
2002between Patient Infosystems and Conifer Prince Street
Associates.
10.58 ### Letter of Agreement dated as of March 28, 2003 between Patient
Infosystems, John Pappajohn and Derace Schaffer.
10.59 ### Second Addendum to Second Amended and Restated Credit Agreement
dated as of March 28, 2003 between Patient Infosystems and Wells
Fargo Bank, National Association.
10.60 ### Modification Agreement dated as of March 28, 2003 between Patient
Infosystems and Wells Fargo Bank, National Association.
10.61 ^ Amended and Restated Agreement for the Purchase and Sale of
Assets among Patient Infosystems, Inc., American Caresource
Corporation, formerly known as Health Data Solutions, and the
Stockholders Signatory hereto, dated April 10, 2003.
119
10.62 ^ Note and Stock Purchase Agreement between Patient Infosystems,
Inc. and a group of investors, dated April 10, 2003.
10.63 ^ Patient Infosystems, Inc. Series D Convertible Preferred Stock
Registration Right Agreement dated April 10, 2003.
10.64 ^ Credit Agreement between American Caresource Corporation and
Patient Infosystems, Inc. dated April 10, 2003.
10.65 ^^ Twelfth Addendum to Lease Agreement dated as of April 28, 2003
between Patient Infosystems and Conifer Prince Street Associates.
10.66 ^^ Thirteenth Addendum to Lease Agreement dated as of June 27, 2003
between Patient Infosystems and Conifer Prince Street Associates.
10.67 ^^^ Amendment No. 1 to the Amended and Restated Agreement for the
Purchase and Sale of Assets dated as of July 30, 2003 between
Patient Infosystems and American Caresource Corporation.
10.68 ^^^ Amendment No. 1 to the Note and Stock Purchase Agreement dated as
of September 11, 2003 between Patient Infosystems and a group of
investors.
10.69 ^^^ Amendment No. 1 to the Credit Agreement dated as of July 30, 2003
between Patient Infosystems and American Caresource Corporation.
10.70 ^^^ Amendment No. 2 to the Amended and Restated Agreement for the
Purchase and Sale of Assets dated as of October 8, 2003 between
Patient Infosystems and American Caresource Corporation.
10.71 -- Third Addendum to Second Amended and Restated Credit Agreement
dated as of December 31, 2003 between Patient Infosystems and
Wells Fargo Bank, National Association.
10.72 -- Form of Securities Purchase Agreement.
23.1 Consent of McCarter & English, LLP (included in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of McGladrey & Pullen LLP
23.4 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
-- Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on March 30, 2004 and incorporated
herein by reference.
* Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form S-1 filed on July 3, 1996 and
incorporated herein by reference.
** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form S-8 filed on May 3, 2000 and
incorporated herein by reference.
120
*** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on April 2, 2001 and incorporated
herein by reference.
+ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on April 13, 1999 and incorporated
herein by reference.
++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on March 30, 2000 and incorporated
herein by reference.
# Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on April 10, 2002 and incorporated
herein by reference.
## Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on November 14, 2002 and
incorporated herein by reference.
### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on March 31, 2003 and incorporated
herein by reference.
^ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-QSB filed on May 15, 2003 and
incorporated herein by reference.
^^ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-QSB filed on August 15, 2003 and
incorporated herein by reference.
^^^ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-QSB filed on November 14, 2003 and
incorporated herein by reference.
121
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
(iii)Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities which remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
122
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Rochester, State of New York, on July 16, 2004.
PATIENT INFOSYSTEMS, INC.
By: /s/Roger L. Chaufournier
-----------------------------
Roger L. Chaufournier
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, each of the undersigned constitutes and
appoints Roger Chaufournier and Kent Tapper, and each of them, as
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement or any registration statement for
this offering that is to be effective upon the filing pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and all other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that each of
said attorney-in-fact or substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
/s/Derace L. Schaffer Chairman of the Board July 16, 2004
-----------------------
Dr. Derace L. Schaffer
/s/Roger L. Chaufournier Chief Executive Officer and July 16, 2004
------------------------ Director
Roger L. Chaufournier (principal executive officer)
/s/Kent Tapper Acting Chief Financial Officer July 16, 2004
----------------------- and Vice President, Financial
Kent Tapper Planning (principal financial and
accounting officer)
/s/John Pappajohn Director July 16, 2004
-----------------------
John Pappajohn
123