UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-24768
RAMP CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-1123311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
33 Maiden Lane, New York, NY 10038
(Address of principal executive offices) (Zip Code)
(212) 440-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act:
Common Stock - $.001 par value American Stock Exchange
Title of Each Class Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act:
None
Title of Each Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of June 30, 2004, the aggregate market value of the registrant's common
stock held by non-affiliates was approximately $34,002,631 (based upon the
closing price of the registrant's common stock on the American Stock Exchange,
as of the last business day of the most recently completed second fiscal quarter
(June 30, 2004). For purposes of this computation, all of the registrant's
directors and executive officers are deemed to be affiliates).
As of March 21, 2005, 12,959,074 shares of the registrant's common stock were
outstanding.
RAMP CORPORATION
Form 10-K
For the Fiscal Year Ended December 31, 2004
Page
----
PART I
Item 1. Business 1
Item 2. Properties 27
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 29
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters 30
and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition and 33
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on Accounting and 42
Financial Disclosure
Item 9A. Controls and Procedures 42
Item 9B. Other Information 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management and 53
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 56
Item 14. Principal Accountant Fees and Services 60
PART IV
Item 15. Exhibits, Financial Statement Schedules 61
Financial Statements F-1
Signatures
Index to Exhibits
1
FORWARD-LOOKING STATEMENTS
To the extent that any statements made in this Form 10-K contain
information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the use of
words such as "expects," "plans," "will," "may," "anticipates," "believes,"
"should," "intends," "estimates," and other words of similar meaning. These
statements are subject to risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, without limitation, our ability to raise capital to
finance the development of our business, including our Internet services and
related software, the effectiveness, profitability and the marketability of
those services, our ability to protect our proprietary information and to retain
and expand our user base, the establishment of an efficient corporate operating
structure as we grow, the risk factors set forth in this Form 10-K beginning on
page 12, and other risks detailed from time-to-time in our public filings with
the Securities and Exchange Commission ("SEC"). We do not undertake any
obligation to publicly update any forward-looking statements.
PART I
Item 1. Business
We originally incorporated in Colorado in 1988 as Nur-Staff West, Inc. and
began as a temporary healthcare staffing company with offices at various times
in Colorado, New York, Texas and California. In 1998, Nur-Staff West was changed
its name to Medix Resources, Inc. Medix subsequently acquired Cymedix
Corporation and the two companies were merged into a new wholly-owned healthcare
technology subsidiary of Medix called Cymedix-Lynx. In 2002, we organized a
wholly-owned subsidiary, PS Purchase Corp., in Delaware, and in 2003 changed its
name to HealthRamp, Inc. ("HealthRamp") to continue our healthcare technology
business. In 2003, we reincorporated as Ramp Corporation in Delaware ("Ramp"),
and positioned HealthRamp as our wholly-owned healthcare technology subsidiary.
References to the "Company", "we", "us" or words of similar import in this Form
10-K include Ramp, HealthRamp and their subsidiaries.
In 2000, we divested our healthcare staffing operations service to focus
exclusively on the development of innovative healthcare information technology
solutions, positioning the Company as a pioneer in the emerging electronic
healthcare industry. In 2003, we continued to refine the company's strategic
direction based upon the vision of enhancing the efficiency and quality of
healthcare by developing and marketing a range of integrated healthcare
technology solutions built on our expertise in computerized physician order
entry ("CPOE") and electronic prescribing ("ePrescribing").
In March 2003, HealthRamp purchased key technical assets of a healthcare
technology firm called "ePhysician" from Comdisco Ventures, Inc., and integrated
the ePhysician technologies with our core Cymedix application to create the
HealthRamp CarePoint(TM) ("CarePoint") electronic healthcare technology suite.
HealthRamp markets CarePoint to physicians and other healthcare professionals,
and has incorporated key components of its foundational ePrescribing technology
into the HealthRamp CareGiver(TM) ("CareGiver") application for the long term
care industry.
In November 2003, we acquired the businesses and assets of Frontline
Physicians Exchange and Frontline Communications ("Frontline"), a provider of
premium-quality 24-hour telephone answering and messaging services to
physicians, clinicians, and other healthcare-centric businesses. We renamed
Frontline OnRamp ("OnRamp") for the purpose of corporate brand consistency. On
September 30, 2004 we resold OnRamp to the former owners of Frontline in order
to fully devote all of our financial and managerial resources to our core
HealthRamp products and operations.
2
In 2003, the Company formed a wholly-owned subsidiary, LifeRamp Family
Financial, Inc. ("LifeRamp"), in Utah that has not yet commenced business
operations. LifeRamp's business purpose is the making of non-recourse loans to
terminally ill cancer patients secured by their life insurance policies. In July
2004, the Company decided to delay the commencement of business operations of
LifeRamp indefinitely while exploring financing and other possible alternatives.
Subsequently in October 2004, the Company ceased all operations at LifeRamp and
began actively pursuing alternatives for its LifeRamp investment. In January
2005, the Company began exploring options for capitalizing the assets of
LifeRamp as a separate business from the Company including a potential spin off
of all or a portion of LifeRamp. In February 2005, LifeRamp received $300,000 in
bridge financing from investors in contemplation of such a strategic
transaction. LifeRamp is using the proceeds from the bridge financing to pursue
a strategic recapitalization. There can be no assurance that the Company will
complete a transaction that will recoup its initial investment or any portion
thereof.
In October 2004, we acquired all of the tangible and intangible assets of
Berdy Medical Systems, Inc., a provider of comprehensive electronic medical
record systems for physician practices. The acquisition of the Berdy systems
enabled us to expand our practice-centric healthcare technology product line to
encompass a spectrum from affordable, high-utility, readily adoptable, wireless
ePrescribing solutions to fully-featured electronic medical record systems
(EMR), and provided us with clinical and technical expertise germane to our new
product development efforts.
In August 2004, HealthRamp released the initial version of a new
application designed to meet the information technology needs of the long term
care industry. This application is called HealthRamp CareGiver(TM)
("CareGiver"). CareGiver v1.0, based upon our core ePrescribing technologies,
allows skilled nursing facilities to manage the admissions, discharge and
transfer process; to submit secure electronic orders for drugs, treatments and
supplies to institutional pharmacies and other vendors; to maintain
comprehensive resident medical records, and to easily manage recurring monthly
clinical and business process.
Company Overview
HealthRamp is a leading provider of internet-based, point-of-care
healthcare applications and services that increase patient safety, improve
medical practice efficiency, and reduce costs. Our proprietary application
service provider ("ASP") based technologies provide secure Internet
communication, data integration and transaction processing, enable electronic
prescribing of drugs and the delivery of critical information between patient
point-of-care providers ("POCs"; i.e., physician or caretaker) and specific
healthcare value chain intermediaries ("HVCIs" - such as retail pharmacies,
laboratories, and pharmacy benefit managers, or "PBMs", and pharmaceutical
companies). Our applications support clinical decision making, improve treatment
outcomes, and create significant operational efficiencies. In addition, our
CareGiver application provides long term care facilities with a comprehensive
solution for wireless order entry and fulfillment of medications, treatments,
equipment and supplies; resident and facility administration; electronic
charting; administrative process automation; and electronic integration with
institutional pharmacies, billing systems, pharmacists, and other vendors.
Previous management had planned to initially deploy our practice-centric
point-of-care technologies in a single market, and began to test this approach
in April 2002. A small, local sales and installation team was deployed in
Georgia that endeavored to deploy our technology to regional physician
practices. By August 2002 it was clear that while our technology had proven to
work extremely well in practice, this specific marketing approach was not
commercially viable due to limited support by major HVCIs in the Georgia market,
and the high costs associated with physically locating sales, deployment, and
support personnel in a given regional marketplace. Based on this evaluation, we
terminated the Georgia deployment in August, 2002.
3
At that time, we began to evaluate the prospect of remotely automating the
deployment and support of our technology, and concluded that a viable business
could be built by an alternate method than the approach initially tested in
Georgia. Based on this conclusion, our Board recruited a new senior management
team in September 2002, including a new chief executive officer, to pursue this
new, more efficient approach to deploying and supporting our technology.
Our current plan for the commercialization of our technology shifts from
the exclusive focus on individual doctors and small practices in specific
geographic areas, and instead targets physician practices and other POC centers
that have the following characteristics: high patient volume; clear economic
incentives - such as the need for administrative and time savings; a clear
commitment to electronic transfer of POC information; and HVCI or other
healthcare participant support for the rollout of the technology. Our goal is to
create connectivity from the point of care to the various segments of the
healthcare industry that meet these criteria, such as health plans, insurers,
skilled nursing facilities, PBMs, pharmacies, pharmaceutical companies, and
other electronic healthcare value chain stakeholders.
While we will, as required, occasionally send personnel into the offices
of physicians, the primary deployment of our CarePoint technologies is now done
on a virtual basis, utilizing the web and related remote technologies. This new
approach, wherein we do not typically physically visit a physician's office
during the deployment process, is fundamentally different - and far more cost
efficient - than the earlier efforts in Georgia. Our ability to successfully
deploy our product on a virtual basis is a key to our intention to
systematically reach physicians in a cost-effective manner.
We believe that it is important to deploy technologies that are readily
adoptable and have established markets. As noted above, in 2003 we acquired
ePhysician healthcare information technologies and other assets from Comdisco
Ventures, Inc. prior to its cessation of operations in 2002. ePhysician's POC
technologies enable physicians to securely access and send information to
pharmacies, billing service companies, and practice management systems via the
Palm OS(R)-based handheld device and the Internet, meeting our criteria of
deploying effective, recognized technologies. We integrated the Cymedix and
e-Physician technologies into our CarePoint suite of technologies and, in 2003,
formed HealthRamp to further develop and commercialize the CarePoint suite.
During October 2003, HealthRamp began its initial roll-out of CarePoint, with
one focus on the conversion of existing ePhysician clients to CarePoint.
Since we do not yet have substantial revenues, we have continued to
address our working capital needs and to finance the development of our software
technology by the sale of our securities in private placements generally at a
discount to market value.
Our principal executive offices are located at 33 Maiden Lane, New York,
New York 10038. Our telephone number is (212) 440-1500. We also have office
space in Utah, Florida and Texas.
Industry Background
Growth of the medical information management marketplace is driven by the
need to share accurate clinical and patient information among qualified
stakeholders in the healthcare system. The U.S. Centers for Medicare and
Medicaid Services ("CMS") estimates that approximately $1.3 trillion dollars,
about 15% of the U.S. gross domestic product, was spent on healthcare in 2002.
The CMS also estimates that U.S. healthcare expenditures are expected to grow to
approximately $2.8 trillion by 2011 due to the growing use of increasingly
expensive and sophisticated clinical technologies, an aging population base, and
the increasing demands of newly-empowered and health conscious consumers.
4
Leading health economists estimate that 26% or more of the nation's total
healthcare expenditures are spent on back office administrative burdens. These
economists have determined that up to 10% or more of these expenditures are
directly attributable to the consequences of adverse health events related to
inaccurate prescriptions, illegible physician handwriting, and the lack of
availability of relevant patient information and clinical data. Our CarePoint
product targets this 36% of the nation's total healthcare expenditures by
offering an effective means of reducing these costs by increasing the efficiency
and accuracy of point of care transactions.
Our target markets include the approximately 645,000 practicing
physicians, 5,800 hospitals, 16,400 Medicare/Medicaid-certified nursing homes,
1,000 private long-term care facilities, 2,000 nursing facilities servicing the
mentally handicapped, 40,000 assisted-living/residential care homes, 8,000 home
healthcare agencies, 4,500 independent laboratories and thousands of managed
care organizations and other ancillary healthcare providers in the United
States. Many large healthcare organizations have installed automated systems to
structure and share healthcare information. Physician practices, which are
generally comprised of five or fewer physicians, have systems to support
billing, scheduling and some clinical activity, and the same is true of
hospitals. However, very few healthcare provider organizations have automated at
the origin of a transaction, which occurs at the clinical point-of-care.
Healthcare providers record, manage and share clinical patient data,
including patient demographics, treatment histories, examination notes, lab test
results and medication orders histories. Currently, most of this data is
captured at the point-of-care in handwritten or printed paper forms that must be
manually converted to an electronic format for easier management, analysis and
exchange. Historically, little transactional automation has been implemented at
the point-of-care due to economic constraints, lack of awareness or expertise in
information technologies on the part of the practicing physician, and the lack
of compelling, affordable solutions. Due to a recent convergence of regulatory,
economic, technological, social and demographic trends, healthcare providers are
becoming increasingly aware of the benefits of using wireless information
technology in the clinical setting.
The healthcare industry is highly regulated by both federal and state
agencies. The Health Insurance Portability and Accountability Act of 1996
("HIPAA"), a set of federal regulations, establishes standards and requirements
for the management, storage and electronic transmission of patient information.
Under HIPAA, POC's and HVCI's that transmit patient medical information
electronically are required to use technology that meets HIPAA standards for
electronic transactions and code sets, data security, unique identifiers, and
patient privacy. All HealthRamp products are fully HIPAA-compliant.
HealthRamp Technology
HealthRamp's proprietary healthcare technology products, including
HealthRamp CarePoint, CarePoint Companion(TM) and CareGiver(TM) ("HealthRamp
Technology"), enable POC electronic prescribing, laboratory orders and test
results, treatment and dietary orders, Internet-based communication, data
integration and transaction processing - all through wireless handheld devices
or standard Internet browsers.
HealthRamp develops and markets point-of-care productivity tools,
applications, and services that enable medical professionals to enhance the
level of patient care, improve safety and increase the clinical and
administrative efficiency of the medical practice, hospitals, long-term care
facility, and within other patient care settings.
5
HealthRamp CarePoint
CarePoint provides medical professionals with various functionalities -
including secure electronic access to patient information stored in their
practice management systems ("PMS"), patient-specific formularies, the ability
to send and receive laboratory orders, and electronic prescribing. Automated
real-time transactions determine patient eligibility for drug benefit coverage
and medication history and formulary compliance at the point of care. CarePoint
operates on wireless devices such as Microsoft(R) Windows Mobile(TM)- Pocket PCs
and SmartPhones, Palm OS(R)-based personal digital devices ("PDAs") and
SmartPhones, and through Web browsers, and integrates with many PMS's, through
its Patient Data Exchange ("PDX") technology. CarePoint is HIPAA compliant and
utilizes strong encryption to ensure data security.
CarePoint Features and Functionality
Electronic Prescribing
Electronic prescribing is designed to reduce patient data verification
requests, avoid complications due to illegible handwriting, avert adverse drug
interactions and provide access to a current drug reference guide and
patient-specific formulary information. Prescriptions are automatically sent to
a patient's pharmacy through secure fax lines or through encrypted electronic
data interchange ("EDI"). Prescriptions can also be printed out locally at the
practice. The prescribers' signature is electronically captured and appears on
all scripts. Renewal requests can be placed on an electronic queue for remote
approval by qualified medical personnel. Queued prescriptions can be edited, and
notes and comments may be added as needed prior to approval.
Approved prescriptions can be conveniently delivered to any retail or mail
service pharmacy. The prescribers' list of commonly prescribed medications can
be customized, and common SIG (directions) can be included in the prescriptions
allowing a physician to complete a script within seconds. Prescriptions are
transmitted to the retail pharmacy before the patient has left the practice,
reducing wait time at the pharmacy.
Drug Reference Guide
CarePoint enables secure, real-time access to an up-to-date, comprehensive
drug database that includes information about adverse drug reactions,
alternative medications, indications, contraindications, brand name or generic
medications, dosage and administration, and patient monographs on every FDA
approved drug as well as over-the-counter medications.
Drug Interactions Checker
This function enables physicians to check for potential interactions in
multiple drug combinations with a patient's medication history. Automatic Drug
Utilization Reviews and alerts for adverse interactions are displayed based on
the patient's medication history - including drug-to-drug, drug-to-allergy,
drug-to-demographics, drug-to-condition, and duplicate therapy checks.
Pediatric, geriatric, pregnancy and lactation advisories are displayed where
appropriate. Prescribers can select alternative medications where such drug
interactions are indicated.
Real-Time Formulary Referencing
Through real-time access to the nation's largest pharmacy benefit managers
and patient-specific formularies - both directly, and via RxHub - physicians
have easy access to the information required to write formulary-compliant
prescriptions. Where appropriate, alternative "on formulary" medications are
viewable when an off-formulary drug is selected.
6
CarePoint STAT
CarePoint STAT is our Web browser-only product that enables e-prescribing
and all of the other functionality of CarePoint on a desktop computer.
Patient Data Exchange
HealthRamp's PDX technology allows for the secure, remote extraction of
patient demographics, insurance and scheduling information from an existing PMS
within a medical practice. We currently integrate with over 125 practice
management systems.
HealthRamp CarePoint Companion
Messaging Via CarePoint Companion
CarePoint Companion allows partner organizations to place targeted
messages via CarePoint, to medical professionals in their work environments. The
POP (point-of-prescribing) messaging system provides partner marketers with the
ability to assign specific conditions under which their messages will be
displayed.
Message Categories
Targeted messaging may be used for alternative medication information at
the POP, medical news, billboard, subscriptions, general messages from partner
marketers, surveys, samples, order forms and event announcements/invitations and
may be programmed to appear under specific conditions. Message triggers may
include type of medication, region, gender and age. HealthRamp will provide
message tracking services and response analysis to analyze the effectiveness of
partner marketing features.
CarePoint Companion is designed to allow partner companies to detail and
monitor feedback from physicians in real-time. The program provides electronic
detailing, intelligent messaging, electronic prescribing and marketing content
control, real time prescription data analysis at the point of care with wireless
and Internet connectivity to sales and marketing force, patient-specific
messaging when the physician prescribes in a specific drug category,
diagnosis-specific journal articles from a sponsored medical journal,
patient-specific samples in real-time with inventory tracking, and electronic
invitations, confirmations and directions to the event.
CarePoint Companion offers means of strategically delivering messages to
physicians at the point-of-care. Context-specific, intelligent messages can be
displayed in a number of formats. POP message spots can be purchased in specific
categories and can be delivered either nationally or by region.
The feature set of our HealthRamp Technology includes the functionality
described below, which may be modified from time to time based on the needs of
our end-users.
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HVCI TARGETED FUNCTIONALITY
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Pharmacy o PBM identification (eligibility verification and an
automatic link to formulary / benefits information).
o Medication history
o Treatment electronic prescribing (retail and mail
order)
o Patient-specific formulary at the POC
o Drug utilization review (drug-to-drug interaction,
drug-to-allergy, drug-to-condition checking,
duplicate therapy and other clinical checks)
o Messaging and prompts
o Compliance analysis
Laboratory o Complete laboratory order entry
o Medical necessity verification
o 24/7 results reporting (partial and full)
o Specimen tracking
o Messaging and prompts
HealthRamp CareGiver
HealthRamp CareGiver is a comprehensive electronic order-entry, electronic
medical records system, and facility management solution designed for the long
term care industry. By delivering real-time clinical information and
transactional functionality to the skilled nursing facility staff and attending
physicians at both at the point-of-care and to remote locations, CareGiver
significantly improves facility productivity and enhances the quality of care
for long term care facility residents.
The CareGiver solution is designed to dramatically improve the efficiency
of the entire clinical ordering and fulfillment process. CareGiver enables
point-of-care medication and treatment order entry by onsite clinicians,
real-time access to a comprehensive medication library, remote physician order
approval capability, automated renewal of standing orders (a feature that
greatly reduces the cost associated with the complex monthly reconciliation
process), and secure integration with the institutional pharmacy information
technology infrastructure.
CareGiver Features and Functionality
Wireless Electronic Ordering
CareGiver allows caregivers at long term care facilities to electronically
place orders for prescription and non-prescription drugs, treatments and
rehabilitation orders, dietary orders, medical/surgical supplies, and laboratory
tests from a rugged, mobile WiFi-enabled wireless device or Internet-connected
Web browser.
Drug Reference Guide
CareGiver enables secure, real-time access to an up-to-date, comprehensive
drug database that includes information about adverse drug reactions,
alternative medications, indications, contraindications, brand name or generic
medications, dosage and administration, and patient monographs on every FDA
approved drug as well as over-the-counter medications.
8
Drug Interactions Checker
This function enables physicians to check for potential interactions in
multiple drug combinations based upon the resident's medication history.
Automatic Drug Utilization Reviews are performed, and alerts for adverse
interactions are displayed - including drug-to-drug, drug-to-allergy,
drug-to-demographics, drug-to-condition, and duplicate therapy checks.
Prescribers can select alternative medications when adverse interactions are
indicated.
Real-Time Formulary Verification
CareGiver provides automated, real-time point-of-care patient eligibility
checking and patient-specific formulary information provided by private
insurers, Medicare and Institutional Pharmacies. In addition, CareGiver provides
state-specific Medicaid prior-authorization status and approved therapeutic
alternatives for off-formulary selections.
Treatment Queuing for Approval
With CareGiver, nurses and other caregivers can enter pending medications
and treatments into a queue that enables remote asynchronous approval by
physicians and other qualified medical personnel.
Automated Ordering and Reconciliation of Recurring Drugs and Treatments
CareGiver automates the integration and renewal of standing orders and
interim orders - a feature that greatly reduces the high administrative costs
associated with the complex monthly reconciliation process.
Secure Electronic Integration with Institutional Pharmacies and Other Vendors
All CareGiver orders are securely routed to institutional pharmacies and
other vendors, including durable medical equipment suppliers, oxygen suppliers,
medical test labs, diagnostic radiology facilities and wound care specialists
via HIPAA-compliant electronic fax or electronic data interchange. In addition,
CareGiver securely integrates with existing resident management software and
billing systems.
Resident Administration
CareGiver is also designed to manage pre-admission screening, admissions,
discharges and transfers, patient demographics, and facility logistics.
Quality Indicators Reporting
CareGiver currently enables real-time monitoring of state-required
quality-of-care indictors ("QI"), based upon the resident medication history.
Comprehensive QI monitoring based upon Minimum Data Set ("MDS"), and Activities
of Daily Living ("ADL") statistics plans to be introduced in mid-2005.
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CareGiver's Application Service Provider (ASP) Model
CareGiver technology is based upon an ASP model rather than a local data
synchronization approach. All data is housed at a physically and virtually
secure off-site location; no patient data is stored on local client devices.
Data transmission between client devices and the HealthRamp data center is
128-bit encrypted, ensuring that protected health information (PHI) remains
secure and private. The ASP model enables CareGiver to be a mobile, secure
solution.
Intellectual Property and Proprietary Rights
We use and benefit from an intellectual technology portfolio in our
healthcare information and technology solutions. We currently hold United States
patents on some of the technologies included in our products and we intend to
continue to file patent applications. We believe that due to the rapid pace of
technological change in the eHealth and computer software industry, factors such
as the knowledge, ability and experience of our employees, frequent software
product enhancements and the timeliness and quality of support services are keys
to our success. This success is also dependent, in part, upon our proprietary
technology and other intellectual property rights.
We use the trademarks HealthRamp CarePoint(TM), and HealthRamp
CareGiver(TM) and CarePoint Companion(TM) in our healthcare technology solutions
and the registered trademarks. In addition, we have pending trademark
applications for registration of HealthRamp, HealthRamp CarePoint and LifeRamp
LivingChoice.
Cymedix obtained seven copyright registrations for two versions of each of
three modular software components of the Cymedix suite of products, as well as a
technical evaluation document that describes the software products. Cymedix has
assigned such patent and copyright registrations to us and we are utilizing
these modular software components in the HealthRamp technology.
We license software and data from third parties, which we incorporate into
our own products, some of which are critical to the operation of our software.
These third party licenses may not continue to be available to us on
commercially reasonable terms. Our loss of or inability to maintain or obtain
upgrades to any of these licenses could have a material adverse effect on our
business.
No assurance can be given that any of our software products will receive
additional patent or other intellectual property protection. It is unclear
whether any of the existing copyrights or patents will contribute any
significant value to our business in the future.
There can be no assurance that any of our current or future patent
applications or trademark or service mark applications will be approved. Our
inability to protect our marks adequately could have a material adverse effect
on our business and hurt us in establishing and maintaining our brands.
We seek to protect our proprietary technology and our other intellectual
property primarily through a combination of patent, trade secret, trademark and
copyright law, confidentiality procedures, employee and client non-disclosure
agreements and other contractual provisions and technical measures. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or obtain and use information, products,
technologies or intellectual property that we regard as proprietary. Policing
unauthorized use of our products is difficult and expensive. While we are unable
to determine the extent to which piracy of our products exists, software piracy
can be expected to be a persistent problem, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. In addition, there can be no assurance that we will be able to
adequately enforce the contractual arrangements that we have entered into to
protect our proprietary rights.
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From time to time, we may be involved in intellectual property disputes.
We may notify others that we believe their products infringe upon our
intellectual property rights, and others may notify us that they believe that
our products infringe on their intellectual property rights. We expect that
providers of eHealth solutions will increasingly be subject to infringement
claims as the number of products and competitors in our industry grows and
traditional suppliers of healthcare data and transaction solutions begin to
offer Internet-based products. If our proprietary technology is subjected to
infringement claims, we may have to expend substantial amounts to defend
ourselves, and, if we lose, we may be required to pay damages or seek a license
from third parties, which could delay the commercialization of our products. If
such a license is not available to us on commercially reasonable terms, or at
all, we could be forced either to redesign or to stop production of products
incorporating the intellectual property of others, and our operating results
could be materially and adversely affected. If our proprietary technology is
infringed upon, we may have to expend substantial amounts to prosecute the
infringing parties, and we may experience losses, including the invalidation of
our registered intellectual property, if we cannot support our claim of
infringement.
Business Strategy
Ramp Corporation, through its HealthRamp subsidiary, is dedicated to
developing electronic healthcare solutions that enable medical professionals and
institutions to significantly improve practice efficiency and increase the
quality of patient care. Ramp's technologies enable medical professionals and
institutions to easily access, capture, and share critical medical information
directly at the point-of-care.
Our business strategy is focused on providing physicians and other
healthcare providers with a low-cost, easily adopted, narrowly defined set of
technologies, whose primary functionality is currently centered on electronic
prescribing. We plan to integrate lab test results reporting into CarePoint by
the end of the second half of 2005 and are exploring the development and
acquisition of other ancillary products and services which would be useful to
physicians and other healthcare providers in their daily practice.
The implementation of a full electronic medical records system ("EMR") is
an expensive commitment for a physician's office, and involves significant
disruption of current operations to accommodate the EMR's implementation.
According to a 2004 Healthcare Informatics study, EHR systems often cost from
$10,000 to over $30,000 per physician - not including initial data entry and
ongoing system maintenance. Faced with high costs, a confusing array of system
options, and the "culture shock" inherent in the implementation of a
comprehensive EMR, physicians fear making the wrong choice - particularly with
premises-based solutions that require onsite hardware that may become obsolete.
Conversely, HealthRamp's CarePoint technology - a user-friendly, low-cost
wireless ePrescribing system that provides physicians with easily-adopted core
EHR functionality, and establishes a platform upon which additional EHR
functionality - such as lab tests results reporting and notes - can be
introduced in an incremental fashion that adapts to individual practice workflow
and budgetary requirements. By integrating with the existing PMS, the impact on
the practice workflow is minimized, and CarePoint's elegant user-interface
mechanics ensure rapid adoption and high utilization.
Some PBMs have been willing to pay transaction fees to electronic
prescribers for prescriptions delivered electronically for their covered lives.
These transaction fees may not justify the cost of deploying our CarePoint Suite
to POC healthcare providers. Our existing contracts with Medco Health Solutions
and Express Scripts pay us transaction fees on their covered lives. We regularly
explore the possibilities of PBMs, health plans and other interested parties
providing us with additional financial assistance to justify deploying our
HealthRamp Technology to a targeted POC audience of their choosing.
11
From October 2004 to date we have entered into six contracts with
long-term nursing home facilities for the deployment of our HealthRamp CareGiver
technology that are in various states of implementation. The licensing
agreements for CareGiver contain a monthly licensing fee, three to five year
terms, and are based on a per-bed, per-day charge.
12
CareGiver Business
Since most skilled nursing facility residents are covered by a combination
of Medicare and Medicaid, regulatory compliance is a significant concern in the
marketing of CareGiver. Medicare is federally mandated, but regulated and
administered at the state level through Medicaid. Therefore to implement a
national strategy requires developing knowledge of each state's regulatory
environment.
A substantial number of skilled nursing facilities are owned and operated
by regional firms. By using local sales resources we not only are able to market
these firms on a more personal basis, but also to partner with them to more
effectively navigate the specific local Medicare regulatory environment.
Regional institutional pharmacies also offer an exciting opportunity to
market the CareGiver technology. Institutional pharmacies own and operate
pharmacies in hospitals, skilled nursing facilities and other healthcare
institutions. Partnering with these entities will enable them to greatly enhance
their traditional service offerings to their facility clients, while giving
CareGiver access to vast numbers potential new users.
RISK FACTORS
In addition to the other information contained in this report, the
following risk factors should be considered carefully in evaluating an
investment in our company and in analyzing our forward-looking statements.
Risks Related to Our Company
We have incurred and reported significant recurring net losses which
endangers our viability as a going-concern and caused our independent registered
public accounting firms to include a "going concern" explanatory paragraph in
their reports in connection with their audits of our financial statements for
the years ended December 31, 2004, 2003 and 2002. We have reported net losses
applicable to common stockholders of $(50,765,000), $(31,321,000) and
$(9,014,000) for the years ended December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004, we had an accumulated deficit of $(122,099,000) and a
working capital deficit of ($6,306,000).
We rely on investments and financings to provide working capital which may
not be available to us in the future and may result in increased net losses and
accumulated deficit. While we believe that we can continue to sell our
securities to raise the cash needed to continue operating until cash flow from
operations can support our business, there can be no assurance that this will
occur. There can be no assurance that additional investments in our securities
or other debt or equity financings will be available to us on favorable terms,
or at all, to adequately support the development and deployment of our
technology. Moreover, failure to obtain such capital on a timely basis could
result in lost business opportunities. In addition, the terms of our debt or
equity financings have included, and in the future may include, contingent
anti-dilution provisions and the issuance of warrants, the accounting for which
have resulted, and for future financings may result, in significant non-cash
increases in our net losses and accumulated deficit. Such non-cash expenses
totaled $18.4 million and $9.9 million for the years ended December 31, 2004 and
2003, respectively.
While we believe that we have the ability to successfully attract new
customers, the ultimate deployment of these new customers frequently requires up
front capital. There can be no assurance that we will obtain that capital. In
recent months we have not obtained sufficient capital to meet our obligations
and as a result have not been able to pay our vendors on a timely basis and are
significantly in arrears in making such payments. While we have been working
with our creditors to make arrangements to satisfy our obligations in cash or
through the issuance of our securities, there can be no assurance that we will
be able to do so and as a result we may be subject to litigation or disruption
in our business operations.
13
Our independent registered public accounting firm has advised our
management and our Audit Committee that there were material weaknesses in our
internal controls and procedures during fiscal years 2003 and 2004. The Company
has taken steps and has a plan to correct the material weaknesses. Progress was
made during 2004; however, management believes that if these material weaknesses
are not corrected, a potential misapplication of generally accepted accounting
principles or potential accounting error in our consolidated financial
statements could occur. Enhancing our internal controls to correct the material
weaknesses has and will result in increased costs to us. While the company has
taken several steps to improve internal controls in 2004, BDO Seidman, LLP has
advised our management and our Audit Committee that, in BDO Seidman, LLP's
opinion, there were reportable conditions during 2004, which constituted
material weaknesses in internal control. The identified material weakness stems
from the company's numerous equity transactions involving complex and judgmental
accounting issues. While all of these transactions were recorded, BDO Seidman in
their audit work noted instances where Generally Accepted Accounting Principals
were not correctly applied and adjustments to the company's financial statements
were required.
As part of the remedial steps taken in 2004, the company added the
position of Vice President of Finance to oversee technical accounting, financial
reporting and internal control issues. The individual hired in August 2004 for
this position notified the company of his intent to leave at the end of the 1st
quarter in 2005. The company is actively searching for a replacement.
The company is also searching for an additional staff accounting resource
to assist the controller in accounting and reporting transactions. Additionally,
in order to better determine the appropriate accounting for complex equity
transactions, the company intends to engage outside expertise to formulate the
proper accounting treatment for such transactions.
The success of the development, distribution and deployment of our
technology is dependent to a significant degree on our key management and
technical personnel. We believe that our success will also depend upon our
ability to attract, motivate and retain highly skilled, managerial, sales and
marketing, and technical personnel, including software programmers and systems
architects skilled in the computer languages in which our technology operates.
Competition for such personnel in the software and information services
industries is intense. The loss of key personnel, or the inability to hire or
retain qualified personnel, could have a material adverse effect on our results
of operations, financial condition or business. On March 18, 2005 we distributed
a proxy to our shareholders requesting approval to increase the number of shares
of common stock issuable under our 2005 Stock Incentive Plan to 15,500,000 from
5,500,000. If approved, we can give incentive to our employees with the grant of
options or restricted stock awards. Should the increase not be approved it could
have a detrimental effect on employee retention. The loss of key personnel, or
the inability to hire or retain qualified personnel, could have a material
adverse effect on our results of operations, financial condition or business.
We expect to continue to experience significant losses until such time as
our technology can be successfully deployed and produce revenues. The continuing
development, marketing and deployment of our technology will depend upon our
ability to obtain additional financing. Our technology has generated limited
recurring revenues to date. We are funding our operations principally through
the sale of our securities to third party investors.
14
We may not be able to retain our listing on the American Stock Exchange.
On September 13, 2004, we received a written notice (the "Notice") from the
American Stock Exchange (the "AMEX") informing us, in relevant part, that we are
not in compliance with (i) Section 1003(a)(i) of the AMEX rules as a result of
our stockholder's equity less than $2,000,000 and losses from continuing
operations and/or net losses in two out of three of its three most recent fiscal
years, (ii) Section 1003(a)(ii) of the AMEX rules as a result of our
stockholder's equity of less than $4,000,000 and losses from continuing
operations and/or net losses in three out of its four most recent fiscal years,
(iii) Section 1003(a)(iv) of the AMEX rules whereby, as a result of our
substantial sustained losses in relation to our overall operations or our
existing financial resources, or our impaired financial condition, it appears
questionable, in the opinion of AMEX, as to whether we will be able to continue
operations and/or meet our obligations as they mature, and (iv) Section
1003(f)(v) of the AMEX rules as a result of our common stock selling for a
substantial period at a low price per share. The Notice is not a notice of
delisting from the AMEX or a notice by AMEX to initiate delisting proceedings.
Specifically, the Notice provides that, in order to maintain the listing
of our common stock, we must submit a plan to the AMEX by October 14, 2004
(extended by the AMEX to October 21, 2004), advising AMEX of the action we have
taken, or the action we will take, to bring us into compliance with the
continued listing standards of the AMEX within a maximum of eighteen months from
the date the Notice was received. On October 20, 2004, we timely submitted our
plan to the AMEX. On December 16, 2004 the AMEX notified the Company that it
accepted the Company's plan of compliance and granted the Company an extension
of time until March 13, 2006 to regain compliance with the AMEX's continued
listing standards. The Company will be subject to periodic review by AMEX staff
during the extension period. Failure to make progress consistent with the plan
or to regain compliance with the continued listing standards by the end of the
plan period on March 13, 2006 could result in the AMEX commencing delisting
proceedings. Subject to our right of appeal of any AMEX staff determination,
AMEX may initiate delisting proceedings if we do not make progress consistent
with the plan during the plan period, or we are not in compliance with the
continued listing standards at the conclusion of the plan period.
Trading in our common stock after a delisting, if any, would likely be
conducted in the over-the-counter markets in the so-called "pink sheets" or on
the National Association of Securities Dealers' Electronic Bulletin Board. As a
consequence of a delisting our shareholders would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, our
common stock, and our common stock would become substantially less attractive as
collateral for margin and purpose loans, for investment by financial
institutions under their internal policies or state investment laws or as
consideration in future capital raising transactions.
Although we have had operations since 1988, because of our move away from
temporary healthcare staffing to provide healthcare connectivity solutions at
the point of care, we have a relatively short operating history in the
healthcare connectivity solutions business and limited financial data to
evaluate our business and prospects. In addition, our business model is likely
to continue to evolve as we attempt to develop our product offerings and enter
new markets. As a result, our potential for future profitability must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies that are attempting to move into new markets
and continuing to innovate with new and unproven technologies. We are still in
the process of gaining experience in marketing physician connectivity products,
providing support services, evaluating demand for products, financing a
technology business and dealing with government regulation of health information
technology products. While we are putting together a team of experienced
executives, they have come from different backgrounds and may require some time
to develop an efficient operating structure and corporate culture for our
company. Furthermore, our executive management and Board of Directors have been
subject to change as executives have resigned or have been terminated and new
executives have been hired and directors have resigned and new directors have
been elected or appointed to fill any vacancies. Such changes can cause
disruption and distraction.
15
Although we have focused our business on healthcare connectivity, we may
decide to explore new business opportunities which compliment our core
technology business. These new ventures may come in the form of an acquisition,
joint venture, start-up or other structure. Any such venture will entail any
number of risk factors including (without limitation) general business risk,
integration risk, technology risk and market acceptance risk. Additionally, any
new venture will require utilization of scarce capital resources which may never
create value for the Company or its stockholders.
The success of our products and services in generating revenue may be
subject to the quality and completeness of the data that is generated and stored
by the physician or other healthcare professionals and the data that is entered
into our interconnectivity systems, and the failure to input appropriate or
accurate information could disrupt our business. Failure of the Company and its
vendors to maintain the quality and completeness of the data or unwillingness by
the healthcare professional to generate the required information may result in
our losing revenue or claims being made against us by our users.
As a developer of connectivity technology products, we will be required to
anticipate and adapt to evolving industry standards and regulations and new
technological developments. The market for our technology is characterized by
continued and rapid technological advances in both hardware and software
development, requiring ongoing expenditures for research and development, and
timely introduction of new products and enhancements to existing products. Our
future success, if any, will depend in part upon our ability to enhance existing
products, to respond effectively to technology changes and changes in applicable
regulations, and to introduce new products and technologies that are functional
and meet the evolving needs of our clients and users in the healthcare
information systems market.
We rely on a combination of internal development, strategic relationships,
licensing and acquisitions to develop our products and services. The cost of
developing and distributing new healthcare information services and technology
solutions is inherently difficult to estimate. Our development of proposed
products and services may take longer than originally expected, require more
testing than originally anticipated and require the acquisition of additional
personnel and other resources. In addition, there can be no assurance that the
products or services we develop or license will be able to compete with the
alternatives available to our customers.
New or newly integrated products and services will not become profitable
unless they achieve sufficient levels of market acceptance. There can be no
assurance that healthcare providers will accept new products and services from
us, or products and services that result from integrating existing and/or
acquired products and services, including the products and services we are
developing to integrate our services into the physician's office or other
medical facility, such as our handheld solution. In addition, there can be no
assurance that any pricing strategy that we implement for any such products and
services will be economically viable or acceptable to the target markets.
Failure to achieve broad penetration in target markets with respect to new or
newly integrated products and services could have a material adverse effect on
our business prospects. The market for our connectivity products and services in
the healthcare information systems may be slow to develop due to the large
number of practitioners who are resistant to change, as well as the financial
investment and workflow interruptions associated with change, particularly in a
period of rising pressure to reduce costs in the marketplace.
16
Achieving market acceptance of new or newly integrated products and
services is likely to require significant efforts and expenditures. Achieving
market acceptance for new or newly integrated products and services is likely to
require substantial marketing efforts and expenditure of significant funds to
create awareness and demand by participants in the healthcare industry. In
addition, deployment of new or newly integrated products and services may
require the use of additional resources for training our existing sales force
and customer service personnel and for hiring and training additional
salespersons and customer service personnel. There can be no assurance that the
revenue opportunities from new or newly integrated products and services will
justify amounts spent for their development, marketing and roll-out.
We could be subject to breach of warranty claims if our software products,
information technology systems or transmission systems contain errors,
experience failures or do not meet customer expectations. We could face breach
of warranty or other claims or additional development costs if the software and
systems we sell or license to customers or use to provide services contain
undetected errors, experience failures, do not perform in accordance with their
documentation, or do not meet the expectations that our customers have for them.
Undetected errors in the software and systems we provide or those we use to
provide services could cause serious problems for which our customers may seek
compensation from us. We attempt to limit, by contract, our liability for
damages arising from negligence, errors or mistakes. However, contractual
limitations on liability may not be enforceable in certain circumstances or may
otherwise not provide sufficient protection to us from liability for damages.
If our systems or the Internet experience security breaches or are
otherwise perceived to be insecure, our business could suffer. A security breach
could damage our reputation or result in liability. We retain and transmit
confidential information, including patient health information. Despite the
implementation of security measures, our infrastructure or other systems that we
interface with, including the Internet, may be vulnerable to physical break-ins,
hackers, improper employee or contractor access, computer viruses, programming
errors, attacks by third parties or similar disruptive problems. Any compromise
of our security, whether as a result of our own systems or systems that they
interface with, could reduce demand for our services.
Our products provide applications that relate to patient medication
histories and treatment plans and any failure by our products to provide and
maintain accurate, secure and timely information could result in product
liability claims against us by our clients or their affiliates or patients. We
maintain insurance that we believe currently is adequate to protect against
claims associated with the use of our products, but there can be no assurance
that our insurance coverage would adequately cover any claim asserted against
us. A successful claim brought against us in excess of our insurance coverage
could have a material adverse effect on our results of operations, financial
condition and/or business. Even unsuccessful claims could result in the
expenditure of funds in litigation, as well as diversion of management time and
resources. Certain of our products are subject to compliance with the Health
Insurance Portability And Accountability Act Of 1996 (HIPAA). Failure to comply
with HIPAA may have a material adverse effect on our business.
17
Government regulation of healthcare and healthcare information technology
is in a period of ongoing change and uncertainty that creates risks and
challenges with respect to our compliance efforts and our business strategies.
The healthcare industry is highly regulated and is subject to changing
political, regulatory and other influences. Federal and state legislatures and
agencies periodically consider programs to reform or revise the United States
healthcare system. These programs may contain proposals to increase governmental
involvement in healthcare or otherwise change the environment in which
healthcare industry participants operate. Particularly, compliance with HIPAA
and related regulations are causing the healthcare industry to incur substantial
costs to change its procedures. Healthcare industry participants may respond by
reducing their investments or postponing investment decisions, including
investments in our products and services. Although we expect these regulations
to have the beneficial effect of spurring adoption of our software products, we
cannot predict with any certainty what impact, if any, these and future
healthcare reforms might have on our business. Existing laws and regulations
also could create liability, cause us to incur additional costs or restrict our
operations. The effect of HIPAA on our business is difficult to predict and
there can be no assurance that we will adequately address the business risks
created by HIPAA. We may incur significant expenses relating to compliance with
HIPAA. Furthermore, we are unable to predict what changes to HIPAA, or the
regulations issued pursuant to HIPAA, might be made in the future or how those
changes could affect our business or the costs of compliance with HIPAA. In
addition, changes in Medicare and Medicaid regulations could have an adverse
effect on the operations and future prospects of our HealthRamp business
operations.
Government regulation of the Internet could adversely affect our business.
The Internet and its associated technologies are subject to government
regulation. Our failure to accurately anticipate the application of applicable
laws and regulations, or any other failure to comply, could create liability for
us, result in adverse publicity, or negatively affect our business. In addition,
new laws and regulations may be adopted with respect to the Internet or other
online services covering user privacy, patient confidentiality, consumer
protection and other services. We cannot predict whether these laws or
regulations will change or how such changes will affect our business. Government
regulation of the Internet could limit the effectiveness of the Internet for the
methods of healthcare e-commerce that we are providing or developing or even
prohibit the sale of particular products and services.
Our Internet-based services are dependent on the development and
maintenance of the Internet infrastructure and data storage facilities
maintained by third parties. Our ability to deliver our Internet-based products
and services is dependent on the development and maintenance of the
infrastructure of the Internet and the maintenance of data storage facilities by
third parties. This includes maintenance of a reliable network backbone and data
storage facilities with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high-speed modems, for
providing reliable Internet access and services. If the Internet continues to
experience increased usage, the Internet infrastructure may be unable to support
the demands placed on it. In addition, the performance of the Internet may be
harmed by increased usage. The Internet has experienced a variety of outages and
other delays as a result of damages to portions of its infrastructure, and it
could face outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as the availability of the Internet
to us for delivery of our Internet-based products and services.
Some of our products and services will not be widely adopted until
broadband connectivity is more generally available. Some of our products and
services and planned services require a continuous broadband connection between
the physician's office or other healthcare provider facilities and the Internet.
The availability of broadband connectivity varies widely from location to
location and even within a single geographic area. The future availability of
broadband connections is unpredictable and is not within our control. While we
expect that many physicians' offices and other healthcare provider facilities
will remain without ready access to broadband connectivity for some period of
time, we cannot predict how long that will be. Accordingly, the lack of these
broadband connections will continue to place limitations on the number of sites
that are able to utilize our Internet-based products and services and the
revenue we can expect to generate form those products and services.
18
Compliance with legal and regulatory requirements will be critical to
LifeRamp's operations should it commence operations. If we, directly or
indirectly through our subsidiaries including LifeRamp, erroneously disclose
information that could be confidential and/or protected health information, we
could be subject to legal action by the individuals involved, and could possibly
be subject to criminal sanctions. In addition, if LifeRamp is launched and fails
to comply with applicable insurance and consumer lending laws, states could
bring actions to enforce statutory requirements, which could limit its business
practices in such states, including, without limitation, limiting or eliminating
its ability to charge or collect interest on its loans or related fees, or limit
or eliminate its ability to secure its loans with its borrowers' life insurance
policies. Any such actions, if commenced, would have a material and adverse
impact on LifeRamp's business, operations and financial condition. Further,
there can be no assurance that a capitalization of LifeRamp will be achieved or,
if achieved, will be successful.
We have been granted certain patent rights, trademarks and copyrights
relating to our software. However, patent and intellectual property legal issues
for software programs, such as our products, are complex and currently evolving.
Since patent applications are secret until patents are issued in the United
States, or published in other countries, we cannot be sure that we are first to
file any patent application. In addition, there can be no assurance that
competitors, many of which have far greater resources than we do, will not apply
for and obtain patents that will interfere with our ability to develop or market
product ideas that we have originated. Furthermore, the laws of certain foreign
countries do not provide the protection to intellectual property that is
provided in the United States, and may limit our ability to market our products
overseas. We cannot give any assurance that the scope of the rights we have are
broad enough to fully protect our technology from infringement.
Litigation or regulatory proceedings may be necessary to protect our
intellectual property rights, such as the scope of our patent. Such litigation
and regulatory proceedings are very expensive and could be a significant drain
on our resources and divert resources from product development. There is no
assurance that we will have the financial resources to defend our patent rights
or other intellectual property from infringement or claims of invalidity.
We also rely upon unpatented proprietary technology and no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to or disclose
our proprietary technology or that we can meaningfully protect our rights in
such unpatented proprietary technology. No assurance can be given that efforts
to protect such information and techniques will be successful. The failure to
protect our intellectual property could have a material adverse effect on our
operating results, financial position and business.
As of March 21, 2005, we had 12,959,074 outstanding shares of common stock
and 25,125,028 shares of common stock reserved for issuance upon the exercise of
options, warrants, and shares of our convertible preferred stock and convertible
redeemable debentures outstanding on such date. Most of these shares will be
immediately saleable upon exercise or conversion under registration statements
we have filed or plan to file with the SEC. The exercise prices of options,
warrants or other rights to acquire common stock presently outstanding range
from $0.60 cents per share to $298.20 per share. During the respective terms of
the outstanding options, warrants, preferred stock, convertible debentures, and
other outstanding derivative securities, the holders are given the opportunity
to profit from a rise in the market price of our common stock, and the exercise
of any options, warrants or other rights may dilute the book value per share of
our common stock and put downward pressure on the price of our common stock. The
existence of the options, conversion rights, redemption rights or any
outstanding warrants may adversely affect the terms on which we may obtain
additional equity financing. Moreover, the holders of such securities are likely
to exercise their rights to acquire common stock at a time when we would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise or conversion of such securities.
19
We have raised substantial amounts of capital in private placements from
time to time. The securities offered in such private placements were not
registered under the Securities Act or any state "blue sky" law in reliance upon
exemptions from such registration requirements. Such exemptions are highly
technical in nature and if we inadvertently failed to comply with the
requirements of any of such exemptive provisions, investors would have the right
to rescind their purchase of our securities or sue for damages. If one or more
investors were to successfully seek such rescission or prevail in any such suit,
we could face severe financial demands that could materially and adversely
affect our financial position. Financings that may be available to us under
current market conditions frequently involve sales of our common stock at prices
below the prices at which our common stock currently trades on the American
Stock Exchange, as well as the issuance of warrants or convertible securities at
a discount to market price.
Investors in our securities may suffer dilution. The issuance of shares of
common stock or shares of common stock underlying warrants, options or preferred
stock or convertible debentures, particularly those with beneficial conversion
features, will dilute the equity interest of existing stockholders and could
have a significant adverse effect on the market price of our common stock. The
sale of common stock acquired at a discount could have a negative impact on the
market price of our common stock and could increase the volatility in the market
price of our common stock. In addition, we may seek additional financing which
may result in the issuance of additional shares of our common stock and/or
rights to acquire additional shares of our common stock. The issuance of our
common stock in connection with such financing may result in substantial
dilution to the existing holders of our common stock. Those additional issuances
of common stock would result in a reduction of the existing stockholders'
percentage interest in our company.
Historically, our common stock has experienced significant price
fluctuations. One or more of the following factors influence these fluctuations:
o unfavorable announcements or press releases relating to the
technology sector;
o regulatory, legislative or other developments affecting us or the
healthcare industry generally;
o conversion of our preferred stock and convertible debt into common
stock at conversion rates based on then current market prices or
discounts to market prices of our common stock and exercise of
options and warrants at below current market prices;
o sales by those financing our company through securities
convertible into our common stock of which has been registered with
the SEC and may be sold into the public market immediately upon
conversion; and
o market conditions specific to technology and internet companies,
the healthcare industry and general market conditions.
In recent years the stock market has experienced significant price and
volume fluctuations. These fluctuations, which are often unrelated to the
operating performance of specific companies, have had a substantial effect on
the market price for many healthcare related technology companies. Factors such
as those cited above, as well as other factors that may be unrelated to our
operating performance, may adversely affect the price of our common stock.
20
We have not had earnings, but if earnings were available, it is our
general policy to retain any earnings for use in our operations. Therefore, we
do not anticipate paying any cash dividends on our common stock in the
foreseeable future despite the recent reduction of the federal income tax rate
on dividends. Any payment of cash dividends on our common stock in the future
will be dependent upon our financial condition, results of operations, current
and anticipated cash requirements, preferred rights of holders of preferred
stock, plans for expansion, as well as other factors that our Board of Directors
deems relevant. We anticipate that our future financing agreements may prohibit
the payment of common stock dividends without the prior written consent of those
investors.
We may have to lower prices or spend more money to compete effectively
against companies with greater resources than us, which could result in lower
revenues. The eventual success of our products in the marketplace will depend on
many factors, including product performance, price, ease of use, support of
industry standards, competing technologies and customer support and service.
Given these factors we cannot assure you that we will be able to compete
successfully. For example, if our competitors offer lower prices, we could be
forced to lower prices which could result in reduced or negative margins and a
decrease in revenues. If we do not lower prices we could lose sales and market
share. In either case, if we are unable to compete against our main competitors,
which include established companies with significant financial resources, we
would not be able to generate sufficient revenues to grow our company or reverse
our history of operating losses. In addition, we may have to increase expenses
to effectively compete for market share, including funds to expand our
infrastructure, which is a capital and time intensive process. Further, if other
companies choose to aggressively compete against us, we may have to increase
expenses on advertising, promotion, trade shows, product development, marketing
and overhead expenses, hiring and retaining personnel, and developing new
technologies. These lower prices and higher expenses would adversely affect our
operations and cash flows.
As with any business, growth in absolute amounts of selling, general and
administrative expenses or the occurrence of extraordinary events could cause
actual results to vary materially and adversely from the results contemplated by
any forward-looking statements included in this report. Budgeting and other
management decisions are subjective in many respects and thus susceptible to
incorrect decisions and periodic revisions based on actual experience and
business developments, the impact of which may cause us to alter our marketing,
capital expenditures or other budgets, which may, in turn, affect our results of
operations. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe the
assumptions underlying any forward-looking statements are reasonable, any of the
assumptions could prove inaccurate, and therefore, there can be no assurance
that the results contemplated in any forward-looking statements will be
realized.
In light of the significant uncertainties inherent in the forward-looking
information included in this report, the inclusion of such information should
not be regarded as a representation by us or any other person that our
objectives or plans for our Company will be achieved.
21
Competition
The market for healthcare connectivity services continues to evolve. It is
highly competitive, fragmented and subject to rapid technological change. No
clear leader has emerged. Several competitors have exited the market during the
past three years, having failed to prove the viability of their businesses or
having depleted their financial resources. The technology companies in this
market include large traditional technology vendors such as Siemens, General
Electric, Hewlett Packard, Toshiba and IBM as well as various healthcare-centric
technology companies such as Misys Healthcare Systems, HealthVision and
Navimedix.
A number of healthcare connectivity companies in the United States, both
publicly and privately held, compete directly or indirectly with HealthRamp.
Moreover, competition can be expected to emerge from established healthcare
information vendors and established or emerging Internet-based healthcare
technology vendors. Competition is likely to come from companies with a focus on
clinical information systems and enterprises with Internet commerce or
electronic network focus. Currently, our direct competitors include companies
such as WebMD, ZixCorp, Allscripts, DrFirst, RxNT and RxWriter.com. Future
competition could come from practice management system vendors that may elect to
build e-prescribing functionality rather than form strategic partnerships with
e-prescribing specialists. The same is true of companies in the emerging areas
of electronic medical records and virtual practice support systems, such as
Relay Health and NeedMyDoctor.com. Many of our competitors have greater
financial, technical, product development, marketing and other resources than we
do. These competitors may be better known than we are and have more customers
than we do. There can be no assurance that we will be able to compete
successfully against these companies or any alliances they have formed or may
form.
We believe that we can be competitive in this industry because our
HealthRamp Technology is built on scalable technology architecture, and because
our CarePoint and CareGiver applications feature an elegantly designed user
interface and embodies features and functionality designed to meet real needs in
the healthcare connectivity marketplace. In addition, our proprietary "PDX" data
extraction technology is designed to allow HealthRamp to interface with a
significant number of practice management systems. Moreover, we believe a
confluence of regulatory, technological, economic, demographic, and social
trends has begun to create an environment highly conducive to the growth of
e-prescribing.
Government Regulation
The healthcare industry is highly regulated and is subject to changing
political, regulatory and other influences. Federal and state laws and
regulations regulate many aspects of our business. U.S. healthcare system reform
under the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
and other initiatives at both the federal and state level, could increase
government involvement in healthcare, lower reimbursement rates and otherwise
change the business environment of our customers and the other entities with
which we have a business relationship. We cannot predict whether or when future
health care reform initiatives at the federal or state level or other
initiatives affecting our business will be proposed, enacted or implemented or
what impact those initiatives may have on our business, financial condition or
results of operations. Our customers and the other entities with which we have a
business relationship could react to these initiatives and the uncertainty
surrounding these proposals by curtailing or deferring investments, including
those for our products and services. Additionally, government regulation could
alter the clinical workflow of physicians and other healthcare providers,
thereby limiting the utility of our products and services to existing and
potential customers and curtailing broad acceptance our products and services.
22
We cannot provide any assurance that federal or state governments will not
impose additional restrictions or adopt interpretations of existing laws that
could have a material adverse affect on our business, financial condition and
results of operations. Existing laws and regulations also could create
liability, cause us to incur additional cost and restrict our operations. Many
healthcare laws are complex, applied broadly and subject to interpretation by
courts and other governmental authorities. In addition, many existing healthcare
laws and regulations, when enacted, did not anticipate the methods of healthcare
e-commerce and other products and services that we provide. However, these laws
and regulations may nonetheless be applied to our products and services. Our
failure, or the failure of our business partners, to accurately anticipate the
application of these healthcare laws and regulations, or other failure to
comply, could create liability for us, result in adverse publicity and
negatively affect our businesses.
As a participant in the healthcare industry, our operations and
relationships are regulated by a number of federal, state and local governmental
entities. Because our business relationships with physicians are unique, and the
healthcare electronic commerce industry as a whole is relatively young, the
application of many state and federal regulations to our business operations is
uncertain. It is possible that a review of our business practices or those of
our customers by courts or regulatory authorities could result in a
determination that could adversely affect us. In addition, the healthcare
regulatory environment may change in a way that restricts our existing
operations or our growth. This industry is expected to continue to undergo
significant changes for the foreseeable future, which could have an adverse
effect on our business, financial condition or results of operations. Future
regulation of our business practices or those of our customers may adversely
affect us.
HIPAA
Recent government and industry legislation and rulemaking, especially
HIPAA, and industry groups such as the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO), require the use of standard transactions,
standard identifiers, security and other standards and requirements for the
transmission of certain electronic health information. New national standards
and procedures under HIPAA include the "Standards for Electronic Transactions
and Code Sets" (the Transaction Standards); the "Security Standards" (the
Security Standards); and "Standards for Privacy of Individually Identifiable
Health Information" (the Privacy Standards). The Transaction Standards require
the use of specified data coding, formatting and content in all specified
"Health Care Transactions" conducted electronically. The Security Standards
require the adoption of specified types of security for health care information.
The Privacy Standards grant a number of rights to individuals as to their
identifiable confidential medical information (called Protected Health
Information) and restrict the use and disclosure of Protected Health Information
by Covered Entities. Generally, the HIPAA standards directly affect Covered
Entities, defined as "health care providers, health care payers, and health care
clearinghouses". In addition, the Privacy Standards affect third parties that
create or access Protected Health Information in order to perform a function or
activity on behalf of a Covered Entity. Such third parties are called "Business
Associates". Covered Entities must have a written "Business Associate Agreement"
with such third parties, containing specified "satisfactory assurances" that the
third party will safeguard Protected Health Information that it creates or
accesses and will fulfill other material obligations to support the covered
entity's own HIPAA compliance. Most of our customers are Covered Entities.
Additionally, Covered Entities will be required to adopt a unique standard
National Provider Identifier (NPI), for use in filing and processing health care
claims and other transactions. We believe that the principal effects of HIPAA
are, or will be, first, to require that our systems be capable of being operated
by our customers in a manner that is compliant with the various HIPAA standards
and, second, to require us to enter into and comply with Business Associate
Agreements with our Covered Entity customers. For most Covered Entities, the
deadlines for compliance with the Privacy Standards and the Transaction
Standards occurred in 2003. Covered Entities must be in compliance with the
Security Standards by April 20, 2005, and must use NPIs in standard transactions
no later than the compliance dates, which are May 23, 2007, for all but small
health plans and one year later for small health plans. We believe that our
systems and products are capable of being used by our customers in compliance
with the Transaction Standards and are, or will be, capable of being used by our
customers in compliance with the Security Standards and the NPI requirements.
However, because all HIPAA Standards are subject to change or interpretation and
because certain other HIPAA Standards, not discussed above, are not yet
published, we cannot predict the future impact of HIPAA on our business and
operations. Additionally, certain state laws are not pre-empted by the HIPAA
Standards and may impose independent obligations upon our customers or us.
23
Other Restrictions Regarding Confidentiality and Privacy of Patient Information
Numerous state and federal laws other than HIPAA govern the collection,
dissemination, use, access to and confidentiality of patient health information.
Many states are considering new laws and regulations that further protect the
confidentiality of medical records or medical information. These state laws are
not in most cases preempted by the HIPAA Privacy Standards and may be subject to
interpretation by various courts and other governmental authorities, thus
creating potentially complex compliance issues for us and our customers and
strategic partners. Definitions in the various state and federal laws concerning
what constitutes individually identifiable data sometimes differ and sometimes
are not provided, creating further complexity. In addition, determining whether
data has been sufficiently de-identified may require complex factual and
statistical analyses. The HIPAA Privacy Standards rule contains a restrictive
definition of de-identified information, which is information that is not
individually identifiable, that could create a new standard of care for the
industry. These other privacy laws at a state or federal level, or new
interpretations of these laws, could create liability for us, could impose
additional operational requirements on our business, could affect the manner in
which we use and transmit patient information and could increase our cost of
doing business. In addition, parties may also have contractual rights that
provide additional limits on our collection, dissemination, use, access to and
confidentiality of patient health information. Claims of privacy rights or
contractual breaches, even if we are not found liable, could be expensive and
time-consuming to defend and could result in adverse publicity that could harm
our business. We utilize an architecture that incorporates encrypted messaging,
firewalls and other security methods to assure customers of a compliant and
secure computing environment. However, no technical security procedure is
infallible, and we will always be at risk of a breach of security by either
willful human effort or inadvertent human error. If we were found liable for any
such breach, such finding could have a material adverse affect on our business,
financial condition and results of operations.
The Internet. New laws and regulations may be adopted with respect to the
Internet or other on-line services covering issues such as privacy, pricing,
content, copyrights, distribution and characteristics and quality of products
and services. The adoption of any new laws or regulations may impede the growth
of the Internet or other on-line services, which could decrease the demand for
our software applications and services, increase our cost of doing business, or
otherwise have an adverse effect on our business, financial condition and
results of operations. Moreover, the manner in which existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy will be applied to activities on the Internet
is uncertain and may take years to resolve. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could have a material
adverse effect on our business, financial condition and results of operations.
Other Regulation of Transaction Services. Other state and federal statutes
and regulations governing transmission of healthcare information may affect our
operations. For example, Medicaid rules require some processing services and
eligibility verification to be maintained as separate and distinct operations.
We carefully review our practices in an effort to ensure that we are in
compliance with all applicable state and federal laws. These laws, though, are
complex and changing, and the courts and other governmental authorities may take
positions that are inconsistent with our practices.
24
Consumer Protection Regulation
The Federal Trade Commission, or FTC, and many state attorneys general are
applying federal and state consumer protection laws to require that the online
collection, use and dissemination of data, and the presentation of web site
content, comply with certain standards for notice, choice, security and access.
Courts may also adopt these developing standards. In many cases, the specific
limitations imposed by these standards are subject to interpretation by courts
and other governmental authorities. We believe that we are in compliance with
these consumer protection standards, but a determination by a state or federal
agency or court that any of our practices do not meet these standards could
result in liability and adversely affect our business. New interpretations of
these standards could also require us to incur additional costs and restrict our
business operations.
Regulation of Healthcare Relationships
Anti-Kickback (AKB) and Stark Laws. There are federal and state laws that
govern patient referrals, physician financial relationships and inducements to
beneficiaries of federal healthcare programs. The federal Anti-Kickback and
Stark laws prohibits any person or entity from offering, paying, soliciting or
receiving anything of value, directly or indirectly, for the referral of
patients covered by Medicare, Medicaid and other federal healthcare programs or
the leasing, purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered by these
programs. Many states also have similar anti-kickback laws that are not
necessarily limited to items or services for which payment is made by a federal
healthcare program. We carefully review our practices in an effort to ensure
that we comply with all applicable laws. However, the laws in this area are both
broad and vague and it is often difficult or impossible to determine precisely
how the laws will be applied, particularly to new services. Penalties for
violating the federal Anti-Kickback and Stark Laws, and similar state laws
include imprisonment, fines and exclusion from participating, directly or
indirectly, in Medicare, Medicaid and other federal healthcare programs. If any
of our healthcare communications or electronic commerce activities were deemed
to be inconsistent with the federal Anti-Kickback and Stark Laws or with state
anti-kickback or illegal remuneration laws, we could face civil and criminal
penalties or be barred from such activities or be required to restructure our
existing or planned sponsorship compensation arrangements and electronic
commerce activities in a manner that could harm our business. Any determination
by a state or federal regulatory agency that any of our practices violate any of
these laws could subject us to civil or criminal penalties and require us to
change or terminate some portions of our business. Even an unsuccessful
challenge by regulatory authorities of our practices could cause us adverse
publicity and be costly for us to respond to.
Anti-Fraud Laws. State and federal laws govern the submission of claims
for medical expense reimbursement. These laws generally prohibit an individual
or entity from knowingly presenting or causing to be presented a claim for
payment from Medicare, Medicaid or other third party payers that is false or
fraudulent, or is for an item or service that was not provided as claimed. These
laws also provide civil and criminal penalties for noncompliance. Liability may
also be imposed on any individual or entity that knowingly makes or uses a false
record or statement to avoid an obligation to pay the federal government.
Certain state laws impose similar liability. The federal government or private
whistleblowers may bring claims under the federal False Claims Act. If we are
found liable for a violation of the federal False Claims Act, or any similar
state law, due to our processing of claims for Medicaid and Medicare, it may
result in substantial civil and criminal penalties. In addition, we could be
prohibited from processing Medicaid or Medicare claims for payment. In addition,
changes in current healthcare financing and reimbursement systems could cause us
to make unplanned modifications of products or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our products and
services by healthcare participants.
25
Government Investigations. There is significant scrutiny by law
enforcement authorities, the U.S. Department of Health and Human Services Office
of Inspector General, the courts and Congress of agreements between healthcare
providers and suppliers or other contractors that have a potential to increase
utilization of government healthcare resources. In particular, scrutiny has been
placed on the coding of claims for payment, incentive programs that increase use
of a product and contracted billing arrangements. Investigators have looked
beyond the formalities of business arrangements to determine the underlying
purposes of payments between healthcare participants. Although, to our
knowledge, neither we nor any of our customers is the subject of any
investigation, we cannot tell whether we or our customers will be the target of
governmental investigations in the future.
Medical Professional Regulation
The practice of most healthcare professions requires licensing under
applicable state law. In addition, the laws in some states prohibit business
entities from practicing medicine, which is referred to as the prohibition
against the corporate practice of medicine. We do not believe that the
information we provide constitutes engaging in the practice of medicine and we
have attempted to structure our strategic relationships and other operations to
avoid violating these state licensing and professional practice laws. A state,
however, may determine that some portion of our business violates these laws and
may seek to have us discontinue those portions or subject us to penalties or
licensure requirements. We provide access to certain information, such as drug
interaction and physician desk reference information to our physician customers.
We employ and contract with physicians who provide only medical information to
consumers, and we have no intention to provide medical care or advice. Any
determination that we are a healthcare provider and acted improperly as a
healthcare provider may result in liability to us.
If compliance with government regulation of healthcare becomes costly and
difficult for us and our customers, we may not be able to implement our business
plan, or we may have to abandon a product or service we are providing or plan to
provide altogether.
LifeRamp Regulation
LifeRamp, a non-depository lender to consumers, is subject to various
insurance, consumer lending and confidentiality and privacy laws and regulations
in the states where it intends to conduct business, as well as certain
applicable federal laws in these areas. LifeRamp has taken steps to comply with
applicable federal and state laws and regulations. As, and if, its business
develops, it intends to become and remain in compliance with the laws of the
various states into which it expands its operations. However, since legal and
regulatory requirements can be complex and changes can be difficult to predict,
there can be no assurance that it will be able to become compliant or maintain
compliance with the applicable legal and regulatory requirements and
interpretations. LifeRamp's business, if commenced, could be materially and
adversely impacted by its failure to comply with such existing or new
requirements applicable to its business.
26
Employees
As of March 16, 2005, we had 42 full-time employees, 10 in sales, 8 in
operations and marketing, 13 in software and technology operations, 4 in
customer and quality care, and 7 in general administrative including executive
and finance personnel. None of our employees is represented by a labor union,
and we have never experienced a work stoppage. We believe our relationship with
our employees to be good. However, our ability to achieve our financial and
operational objectives depends in large part upon our continuing ability to
attract, integrate, retain and motivate highly qualified sales, technical and
managerial personnel, and upon the continued service of our senior management
and key sales and technical personnel. This includes adequate compensation of
our employees through the ability to grant stock options or restricted stock
awards under our 2005 Stock Incentive Plan (the "2005 Plan"). Competition for
such qualified personnel in our industry and the geographical locations of our
offices is intense, particularly in software development and technical
personnel.
In June and September 2004, the Company implemented a reduction in work force
and salary reduction program, pursuant to which 73 employees and consultants
were terminated and, with respect to the June 2004 reduction in work force, some
of the remaining employees and consultants agreed to accept, during the
six-month period ending November 30, 2004, in lieu of a portion of their base
salaries, a retention bonus equal to an individually negotiated multiple of the
amount of their reduction in pay in the form of shares of common stock, payable
only if they remained employed with the Company on November 30, 2004. In
November 2004 the Company's stockholders approved the 2005 Plan which provides
for issuance of common stock of up to 5,500,000 shares to the Company's
employees, consultants and directors through restricted stock awards or reserved
for the exercise of options. In order to retain its employees the Company
awarded restricted stock to all of the then current employees that did not
participate in the above retention bonus program. Those employees who
participated in the retention bonus program were given the choice of receiving
said bonus or relinquishing it in return for the restricted stock award.
Substantially all these employees agreed to relinquish their rights to the above
retention bonus in return for the new award of restricted shares of the
Company's common stock. The issuance of 3,449,248 shares of restricted stock to
the Company's employees was approved by the Board of Directors in 2004, which
generally vested 40% on January 1, 2005 and the remainder vest in eight equal
quarterly installments commencing on April 1, 2005. See Item 11 for additional
information about the 2005 Plan and the proposal to shareholders to increase the
number of shares authorized to be issued under the plan. Vested and unvested
awards and other uses of stock under the 2005 plan exceed the number of shares
authorized under the plan by 3,144,807 shares. The Company is seeking
shareholder approval to increase the number of shares authorized under the plan.
Should the shareholders not authorize this increase, some shares which vest
under the plan after December 31, 2004 may not be issued. The Company will
record an adjustment to reflect the market price at the time of any such
shareholder approval.
ITEM 2. PROPERTIES
In February 2004, we relocated our executive offices from 420 Lexington
Avenue, New York, New York to 33 Maiden Lane, New York, New York, which consists
of approximately 22,000 square feet that we are subletting under a sublease that
expires on June 29, 2008. We are obligated to continue to make monthly rental
payments until the expiration of our Lexington Avenue lease on January 31, 2005
(see Item 3 - Legal Proceedings).
27
As of December 31, 2004 we currently have commitments for payment of rent
for the following four leased offices:
Square Lease
Location Footage Expiration Date
-------- ------- ---------------
New York, New York 21,944 6/29/08
(33 Maiden Lane)
Salt Lake City, Utah 539 7/31/06
Irving, Texas 3,603 9/30/06
Vero Beach, Florida 3,025 8/31/06
In the second quarter of 2004, we decided to vacate our office facilities
in Florida. In connection with this lease abandonment, we recorded an accrual
for expected losses on the lease equal to the present value of the remaining
lease payments, net of reasonable sublease income, of approximately $83,000,
which was recorded in the second quarter of 2004 in selling, general and
administrative expenses in the accompanying statements of operations. During the
third and fourth quarters of 2004 we revised our estimate of the expected lease
loss and recorded an additional accrual of $205,000 in the aggregate.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in claims and litigation that
arise out of the normal course of business. Currently, other than as discussed
below, there are no pending matters that in management's judgment are expected
to have a material adverse effect on the Company's financial statements.
On June 3, 2003, two former executive officers, John Prufeta and Patricia
Minicucci commenced an action against the Company by filing a Complaint in the
Supreme Court of the State of New York for Nassau County (Index No. 03-008576)
in which they alleged that the Company breached separation agreements entered
into in December 2002 with each of them, and that the Company failed to repay
amounts loaned by Mr. Prufeta to the Company. Mr. Prufeta sought approximately
$395,000 (including a loan of $120,000) and Ms. Minicucci sought approximately
$222,000. The Complaint was served on July 23, 2003. On July 15, 2003, the
Company paid in full the $120,000 so loaned together with interest, without
admitting the claimed default. On February 2, 2004, the Supreme Court of the
State of New York for Nassau County issued an order for partial summary judgment
in favor of Ms. Minicucci for the unpaid severance obligations of $138,064. The
Company made severance payments to both former executives through May 2004 but
due to capital constraints has not made any subsequent payments. The Company is
continuing negotiations with the plaintiffs to settle the dispute amicably. The
amounts payable to M. Prufeta and Minicucci are included in accrued expenses in
the accompanying balance sheet as of December 31, 2004.
On August 19, 2003, we commenced an action in the Federal District Court
for the Southern District of Ohio (Case No. C-02-585) against PocketScript, LLC
for $154,000, representing the unpaid principal amount of a note payable to us
for advances made to PocketScript while we were performing due diligence leading
to a potential purchase of PocketScript, which did not occur. On September 15,
2003 the individuals who were owners of an entity that was an owner of
PocketScript filed an action against us and against Darryl Cohen, our former
chief executive officer, personally, in the Court of Common Pleas, Hamilton
County, Ohio (Case No. A0306937). We were served on October 27, 2003. This
action alleges breach of contract and claims $850,000 of damages, and also
alleges fraud and claims $1 million of compensatory damages and $3 million of
punitive damages. On March 4 2004, we entered into a settlement agreement with
PocketScript and its principal and exchanged general releases. Under the terms
of the settlement, PocketScript agreed to pay us $75,000. All parties to the
settlement agreement reserved their rights in the pending state court litigation
between certain members of PocketScript and us. On March 23, 2005, in connection
with the settlement of the dispute with the individuals, we entered into a
settlement agreement in principle. Under the settlement agreement, we agreed to
issue to such individuals an aggregate of 41,667 restricted shares of our common
stock, par value $.001 per share. In order to secure the obligations, the
registrant agreed to deposit the amount of $75,000 due and owing to it from
Pocketscript in an escrow account to satisfy any amounts still due and owing to
the individuals following the sale of the Shares, less an amount of $25,000
payable from the escrow account to such individuals. Following all disbursements
from the escrow account, the parties will execute mutual releases and file
stipulations to dismiss any pending action with prejudice.
28
In the beginning of March 2004, we were effectively served with a Demand
for Arbitration by Mark W. Lerner, a former officer, with respect to his claim
that we improperly terminated his employment agreement, thereby resulting in
claimed damages of as much as $350,000 plus prejudgment interest, statutory
penalties relating to unpaid wages of 25% and legal fees. In 2004 the arbitrator
awarded $204,330 to Mr., Lerner, which amount has been accrued in the financial
statements as of December 31, 2004.
In February 2004 the Company relocated its executive offices (under a
sublease that expires on June 29, 2008) to 33 Maiden Lane, New York, New York.
By stipulation the Company has surrendered its previous premises located at 410
Lexington Avenue. In connection with this lease abandonment, the Company
recorded an accrual for expected losses on the lease equal to the present value
of the remaining lease payments, net of reasonable sublease income in selling,
general and administrative expenses in the accompanying statements of
operations. In addition, the Company's landlord agreed to offset the Company's
security deposit of $130,000 in satisfaction of a portion of the amounts due
under the lease. The remaining obligation to the landlord is included in accrued
expenses in the Company's balance sheet as of December 31, 2004. The landlord
filed a summons and verified complaint against us for alleged damages in the
amount of $83,828, plus interest, costs and expenses in connection with the
alleged breach of the lease agreement, dated January 2002, by and between the
landlord and the Company. The Company has filed an answer to the complaint and
intends to vigorously defend against the litigation.
In June 2004, the Company's former law firm commenced an action against the
Company by filing a complaint in the Supreme Court of the State of New York for
the county of New York (Index No. 108499/04) in which they alleged we breached
our retainer agreement by failing to pay $435,280 for legal services allegedly
performed. The Company believes it has valid defenses and/or counter claims
which the Company intends to vigorously pursue.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The following matters were submitted to our shareholders at the 2004
Annual Meeting of Shareholders held on November 18, 2004 (all votes are listed
on a pre split basis):
Proposal # 1. The following nominees for director were elected at the
Meeting:
Anthony Soich
Steven C. Berger
29
Proposal # 2. Approval of an amendment to the Company's Restated
Certificate Incorporation to effect a reverse stock split of the Company's
Common Stock at a ratio of one (1) for sixty (60).
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
--------- ------------- ---------------- ----------------
176,288,153 10,344,205 339,987 0
Proposal # 3. Ratification and approval of the adoption of the Company's
2005 Stock Incentive Plan.
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
--------- ------------- ---------------- ----------------
19,723,414 12,440,990 721,971 154,025,970
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has traded on the American Stock Exchange under the
symbol "MXR" from April 6, 2000 until December 18, 2003. Since December 19, 2003
and in connection with our reincorporation in Delaware, our common stock has
traded on the American Stock Exchange under the symbol "RCO." The following
table sets forth the per share high and low last sale prices (as adjusted
retroactively for a one-for-sixty reverse stock split effective December 1,
2004) of our common stock for the period indicated as reported by the American
Stock Exchange. On March 21, 2005, the last sale price reported on the American
Stock Exchange was $1.05.
Common Stock Price
------------------
High Low
---- ---
Year Ended December 31, 2004:
Quarter Ended March 31 $ 48.61 $ 32.41
Quarter Ended June 30 $ 38.41 $ 10.80
Quarter Ended September 30 $ 11.40 $ 1.80
Quarter Ended December 31 $ 5.37 $ 0.60
Year Ending December 31, 2003:
Quarter Ended March 31 $ 42.01 $ 17.40
Quarter Ended June 30 $ 22.80 $ 12.60
Quarter Ended September 30 $ 28.21 $ 18.60
Quarter Ending December 31 $ 48.01 $ 26.41
There were 541 holders of record (and approximately 15,532 beneficial
owners) of our common stock as of March 21, 2005. The number of record holders
includes stockholders who may hold stock for the benefit of others.
We did not declare or pay a dividend for the years ending December 31,
2004 or December 31, 2003 and do not expect to pay any dividends on our common
stock in the foreseeable future. We currently intend to retain all available
funds for the development of our business and working capital purposes. The
payment of dividends on our common stock is subject to our prior payment of all
accrued and unpaid dividends on any preferred stock outstanding.
30
For information regarding our securities issued under our equity
compensation plans, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS - "Equity Compensation Plan
Information".
Recent Sales of Unregistered Securities
All securities sold by us during fiscal 2004 in transactions that were not
registered under the Securities Act have been previously reported in Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.
31
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of and for
the last five fiscal years, should be read in conjunction with our consolidated
financial statements and related notes thereto appearing elsewhere in this
report. Our financial statements have been audited by Ehrhardt Keefe Steiner &
Hottman PC, our independent auditors for each of our 2002, 2001 and 2000 fiscal
years and by BDO Seidman, LLP, our independent registered public accounting
firm, of our consolidated financial statements and related notes thereto for
each of our 2004 and 2003 fiscal years. The consolidated selected financial data
provided below is derived from our consolidated financial statements but is not
necessarily indicative of our future results of operations or financial
performance.
2004 2003 2002 2001 2000 (1)
--------------------------------------------------------
(in thousands, except per share data)
Revenues $ 264 $ 191 $ -- $ 29 $ 326
Costs and expenses
Software and technology costs 6,381 2,756 2,366 1,288 865
Selling, general and administrative expenses 21,193 14,493 5,912 5,746 5,925
Costs associated with terminated acquisition -- 142 309 -- --
Impairment of intangible assets -- -- -- 1,111 --
--------------------------------------------------------
Total operating expenses 27,574 17,391 8,587 8,145 6,790
--------------------------------------------------------
Other income (expense)
Other income (loss) 50 26 (47) 12 163
Interest expense and other financing costs (18,377) (9,856) (380) (2,532) (43)
--------------------------------------------------------
Total other income (expense) (18,327) (9,830) (427) (2,520) 120
--------------------------------------------------------
Loss from continuing operations (45,637) (27,030) (9,014) (10,636) (6,344)
--------------------------------------------------------
(Loss) income from discontinued operations (174) (109) -- -- 929
Loss on sale of discontinued operations (3,920) -- -- -- --
--------------------------------------------------------
(Loss) income from discontinued operations (4,094) (109) -- -- 929
--------------------------------------------------------
Net loss (49,731) (27,139) (9,014) (10,636) (5,415)
--------------------------------------------------------
Disproportionate deemed dividend issued
to certain warrant holders (1,034) (2,026) -- -- --
Beneficial conversion discount related
to 2003 Series A Convertible Preferred Stock -- (2,156) -- -- --
Preferred stock dividends -- -- -- -- (1)
--------------------------------------------------------
Net loss applicable to common stockholders $(50,765) $(31,321) $ (9,014) $(10,636) $ (5,415)
========================================================
Net (loss) income per share basic and diluted:
Continuing operations ($ 13.54) ($ 20.84) ($ 8.53) ($ 12.60) ($ 9.00)
Discontinued operations (1.19) -- -- -- 1.20
--------------------------------------------------------
Net loss applicable to common stockholders ($ 14.73) ($ 20.84) ($ 8.53) ($ 12.60) ($ 7.80)
========================================================
Total assets $ 4,313 $ 9,673 $ 3,793 $ 3,101 $ 5,089
Working capital (deficit) $ (6,306) $ (1,098) $ (252) $ (1,404) $ 394
Long-term net of current portion
and debt discount $ 65 $ 269 -- -- --
Stockholders' equity (deficit) $ (3,229) $ 5,997 $ 1,618 $ 1,345 $ 4,202
(1) In February of 2000, we disposed of our remaining medical staffing
business and became solely a developer of software for our own use in
providing Internet based communications for the medical services industry.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We develop and market healthcare connectivity software centered around the
CarePoint Suite of healthcare communication technology products for electronic
prescribing, laboratory orders and results, Internet-based communication, data
integration and transaction processing through a handheld device or browser, at
the patient point of care. Our products enable communication of healthcare
information among physicians' offices, pharmacies, hospitals, pharmacy benefit
managers, health management organizations, pharmaceutical companies and health
insurance companies. In addition, our CareGiver application provides long term
care facilities with a comprehensive solution for wireless order entry and
fulfillment of medications, treatments, equipment and supplies; resident and
facility administration; electronic charting; administrative process automation;
and electronic integration with institutional pharmacies, billing systems,
pharmacists, and other vendors. Our technology is designed to provide access to
safer, better healthcare and more accurate and less expensive POC information
gathering and processing.
Critical Accounting Policies
Critical Accounting Policies and Items Affecting Comparability
Quality financial reporting relies on consistent application of our
accounting policies that are based on accounting principles generally accepted
in the United States. The policies discussed below are considered by management
to be critical to understanding our financial statements and often require
management judgment and estimates regarding matters that are inherently
uncertain.
Revenue Recognition
We account for our revenue under the provisions of Statement of Position
97-2, "Software Revenue Recognition," as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions". We derive our revenues from three primary sources: license
revenues, comprised of fees associated with the licensing of our software to
physicians and long term care facilities; service revenues, from maintenance and
consulting and training services; and revenues from sales to pharmaceutical
companies and other partners. Revenue is recognized when persuasive evidence of
an arrangement exists, all obligations have been performed pursuant to the terms
of such an arrangement, the product has been delivered, the fee is fixed or
determinable and the collection of the resulting receivable is reasonably
assured. If any of these criteria are not met, we defer revenue recognition
until such time as all criteria are met. Payments received in advance of
revenues being recognized are presented as deferred revenue will not be
recognized until it is earned and due under the terms of the agreement.
In October 2004, the Company purchased the business assets of Berdy
Medical Systems, Inc., a company that develops, markets and licenses computer
software and hardware for use in physician practices. Software license revenues
and system (third party computer hardware) sales are recognized upon execution
of the sales contract and delivery of the software and/or hardware. In all
cases, however, the fee must be fixed or determinable, collection of any related
receivable must be considered probable, and no significant post-contract
obligations of the Company shall be remaining. Otherwise, the sale is deferred
until all of the requirements for revenue recognition have been satisfied.
Maintenance fees for routine client support and unspecified product updates are
recognized ratably over the term of the maintenance arrangement. Training,
implementation and EDI services revenues are recognized as the services are
performed.
33
Software and Technology Costs
Technological feasibility for our software is reached shortly before the
products are released commercially. Costs incurred after technological
feasibility is established are not material, and, accordingly, we expense all
software and technology costs when incurred.
Purchase Accounting Valuations
As required under generally accepted accounting principles, when we make
acquisitions such as the assets and businesses of Frontline in 2003 and Berdy
Medical Systems in 2004 we make estimates of the fair value of tangible and
intangible assets acquired and liabilities assumed. The determination of fair
value requires significant judgments and estimates that affect the carrying
value of our assets and liabilities. Periodically, we evaluate our estimates,
including those related to the carrying value of tangible assets, long-lived
assets, capitalized costs and accruals. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable.
Actual results may differ from these estimates under different assumptions or
conditions and as circumstances change.
Goodwill
Goodwill represents acquisition costs in excess of the fair value of net
tangible assets of businesses purchased. In conjunction with our adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), we evaluate our goodwill annually for
impairment, or earlier if indicators of potential impairment exist. The
determination of whether or not goodwill or other intangible assets have become
impaired involves a significant level of judgment in the assumptions underlying
the approach used to determine the value of the reporting units. Changes in our
strategy and or market conditions could significantly impact these judgments and
require adjustments to recorded amounts of intangible assets. We will continue
to evaluate our goodwill for impairment on an annual basis or sooner if
indicators of potential impairment exist.
Long-lived Assets
With the exception of goodwill, long-lived assets, such as property and
equipment and other intangible assets, net, are evaluated for impairment when
events or changes in business circumstances indicate that the carrying amount of
the assets may not be recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of
these assets and their eventual disposition is less than their carrying amount.
Impairment, if any, is assessed using discounted cash flows. During the year
ended December 31, 2004, we recognized impairment losses on our fixed assets
(furniture, equipment and leasehold improvements) totaling $314,000 relating to
suspending operations of our subsidiary LifeRamp Family Financial, Inc. in the
third quarter and the closing of our Florida office.
Contingencies
We are subject to legal proceedings, lawsuits and other claims related to
labor, service and other matters. We are required to assess the likelihood of
any adverse judgments or outcomes to these matters as well as potential ranges
of probable losses. A determination of the amount of reserves required, if any,
for these contingencies are made after careful analysis of each individual
issue. The required reserves may change in the future due to new developments in
each matter or changes in approach, such as a change in settlement strategy in
dealing with these matters. See Item 3 "Legal Proceedings" and the footnotes to
the financial statements for further information.
34
Equity Transactions
In many of our financing transactions, warrants have been issued.
Additionally, we issue options and warrants to non-employees from time to time
as payment for services. In all of these cases, we apply the principles of SFAS
No. 123 "Accounting for Stock-based Compensation" to value these awards, which
inherently include a number of estimates and assumptions including stock price
volatility factors. In addition to interest expense, the Company records
financing and certain offering costs associated with its capital raising efforts
in its statements of operations. These include amortization of debt issue costs
such as cash, warrants and other securities issued to finders and placement
agents, and amortization of debt discount created by in-the-money conversion
features on convertible debt accounted for in accordance with Emerging Issues
Task Force ("EITF") Issue 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
and Issue 00-27, "Application of Issue 98-5 to Certain Convertible Instruments,"
by other securities issued in connection with debt as a result of allocating the
proceeds amongst the securities in accordance with Accounting Principles Board
("APB") Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants", based on their relative fair values, and by any value
associated with inducements to convert debt in accordance with SFAS No. 84,
"Induced Conversions of Convertible Debt". We based our estimates and
assumptions on the best information available at the time of valuation, however,
changes in these estimates and assumptions could have a material effect on the
valuation of the underlying instruments.
Results of Operations
Comparison of years ended December 31, 2004 and December 31, 2003.
Revenues. Total revenues for 2004 increased to $264,000, or 38%, as compared to
$191,000 in 2003. Approximately $162,000 of the 2004 amount was earned from a
distribution partner in connection with marketing our product to a targeted
group of physicians pursuant to an agreement, the initial phase of which ended
in August 2004. An additional $144,000 of revenue from this partner is included
in deferred revenue as of December 31, 2004 and is expected to be earned in 2005
as our software is deployed. In addition, revenues in 2004 include approximately
$42,000 relating primarily to the fulfillment of the deferred revenue of Berdy
Medical Systems upon acquisition in October 2004. Our revenues in 2003 were
earned in connection with prior software customization agreements with third
parties.
Operating Expenses. Total operating expenses for 2004 were $27.6 million,
compared to $17.4 million for 2003, an increase of $10.2 million.
In June and September 2004, the Company implemented a reduction in work
force and salary reduction program, pursuant to which 73 employees and
consultants were terminated and, with respect to the June 2004 reduction in work
force, some of the remaining employees and consultants agreed to accept, during
the six-month period ending November 30, 2004, in lieu of a portion of their
base salaries, a retention bonus equal to an individually negotiated multiple of
the amount of their reduction in pay in the form of shares of common stock,
payable only if they remained employed with the Company on November 30, 2004.
Included in operating expenses for year ended December 31, 2004 are non-cash
expenses of $687,000 relating to this retention bonus program.
35
In November 2004 the Company's stockholders approved the 2005 Stock
Incentive Plan (the "2005 Plan"), which provides for issuance of common stock of
up to 5,500,000 shares to the Company's employees, consultants and directors
through restricted stock awards or reserved for the exercise of options. In
order to retain its employees the Company awarded restricted stock to all of the
then current employees that did not participate in the above retention bonus
program. Those employees who participated in the above retention bonus program
were given the choice of receiving said bonus or relinquishing it in return for
the restricted stock award. Substantially all these employees agreed to
relinquish their rights to the above retention bonus in return for the new award
of restricted shares of the Company's common stock. A total of 3,449,248 shares
of Common Stock were approved for issuance of restricted stock to the Company's
employees which vest generally as to 40% on January 1, 2005 and the remainder
vesting in eight equal quarterly installments commencing on April 1, 2005.
Included in operating expenses for year ended December 31, 2004 are non-cash
compensation expenses of approximately $2 million relating to this restricted
stock program.
Software and technology costs increased $3.6 million, or 131%, from the
prior year, to $6.4 million. The increase is due to the growth in personnel,
including $888,000 relating to the six month retention bonus and restricted
stock award programs that commenced in June and November 2004, respectively,
approximately $700,000 attributable to our engineering and quality assurance
groups, which were formed in December 2003 and the second quarter of 2004,
respectively, $800,000 relating to higher consulting and travel related costs,
$1.1 million relating to technology and communication costs and $200,000
relating to depreciation and amortization of technology and other intangible
assets.
Selling, general and administrative expenses increased $607 million, or
46%, from the prior year, to $22.4 million. The increase relates in part to
operating expenses incurred by the Company in the period relating to the
development of LifeRamp of approximately $2.4 million as compared to $1.0
million in 2003. The remainder of the increase in the 2004 period over the 2003
period is attributable primarily to the following: $1.2 million relating to the
value of a warrant issued to the CEO whereby per his employment agreement he is
entitled to purchase up to one-nineteenth of the outstanding shares of our
common stock, at an exercise price of $1.14, increased salaries and related
costs for sales, marketing, customer care, executive and administrative
personnel of approximately $900,000, $1.8 million relating to the six-month
retention bonus and restricted stock award programs that commenced in June and
November 2004, respectively, non-cash compensation expenses totaling $900,000
relating to the reduction in the value of stock previously issued to vendors,
consultants and employees for services rendered, $1.0 million relating to
increased rent and lease abandonment costs; asset impairment charges of
$314,000, all offset in part by an approximate $1.8 million reduction in
expenses incurred for travel, meals, advertising and consulting services.
Other Income and (Expense) for 2004 were $(18.3 million), compared to
$(9.8 million) for the prior year, an increase of $8.5 million. The increase is
primarily due to financing costs incurred in July 2004 relating to additional
issuances of debt and equity instruments in connection with the anti-dilutive
provisions of our March 2004 financing transactions and debt issuance costs
relating to the issuance of warrants along with convertible promissory notes
which is being amortized over the six month term of the notes. In addition, a
debt conversion expense of approximately $6.7 million was incurred in 2004
relating to the reduction in the conversion rate of convertible debt issued in
the July 2004 financing.
Discontinued Operations. The year ended December 31, 2004 reflects a loss
from discontinued operations of $4.1 million relating to the sale of OnRamp on
September 30, 2004 and its operating loss for the nine months. Goodwill of
$3,357,000 was removed from the balance sheet as a result of the sale of OnRamp.
36
Dividends. The year ended December 31, 2004 was impacted by
disproportionate deemed dividends totaling $1.0 million, caused by the
modification of warrants held by certain warrant holders and the issuance of
additional shares of common stock to previous investors, to induce these
investors to exercise their warrants and continue to invest in future periods.
The year ended December 31, 2003 was impacted by disproportionate deemed
dividends totaling $2.0 million
Net Loss. As a result of the above factors, the net loss applicable to our
common shareholders for the year ended December 31, 2004 increased to $50.8
million, as compared to $31.3 million in 2003.
Comparison of years ended December 31, 2003 and December 31, 2002.
Revenues. Total revenues for 2003 were $191,000 compared to no revenues in 2002.
The increase was primarily due to the recognition of $173,000 of revenues
related to certain technology agreements, coupled with revenue earned from a
distribution partner in connection with our product to a targeted group of
physicians of $18,000.
Operating Expenses. Total operating expenses for 2003 were $17.4 million,
compared to $8.6 million for 2002, an increase of $8.8 million.
Software and technology costs increased $390,000, or 16.5%, from the prior
year to $2.8 million. The increase is due to the growth in personnel cost of
$105,000, coupled with additional costs associated with the formation of our new
engineering department of $40,000, and the increases in consulting and travel
related costs of $88,000 and $41,000, respectively, as well as higher technical
licensing, technology tools and communication costs of $116,000 due to the
increased support of the new technology.
Selling, general and administrative expenses increased $8.6 million, or
145%, from the prior year to $14.5 million. The increase is due to higher
salaries and benefits costs of $492,000 which includes $392,000 for our expanded
marketing department and $100,000 spent on the growing sales operations
department coupled with an increase of $1.3 million in advertising and
promotion, including our television advertisement campaign, and increased travel
related costs, and professional fees of $643,000 and $3.7 million, respectively.
Additionally, executive compensation costs and board of director costs increased
approximately $2,530,000 due to increased personnel, coupled with non-cash
charges related to stock option, warrants and restricted stock grants.
Terminated Acquisition. Costs associated with a terminated acquisition
were $142,000 and related to the write-off of expenses associated with the
potential acquisition of PocketScripts.
Other Income and Expense
Other income (expense) for 2003 were $(9.8 million), compared to $(0.4
million) for the prior year, an increase of $9.4 million. The increase is
primarily due to the increased number of various types and levels of capital
raises done during 2003.
Dividends. As a result of the financings mentioned above, the year was
impacted by a disproportionate deemed dividend, caused by the modification of
warrants held by certain warrant holders and common stock held by certain
purchasers of our common stock. Additionally, we recorded a beneficial
conversion feature discount related to the placement of our 2003 Series A
convertible preferred stock in December 2003. The Black-Scholes values of the
warrant modifications and the intrinsic value of the beneficial conversion
feature of $2.0 million and $2.2 million, respectively, are reflected as an
increase in net loss applicable to common stockholders and in basic and diluted
loss per share.
37
Net Loss. As a result of the above factors, the net loss applicable to our
common shareholders for the year ended December 31, 2003 increased to $31.3
million, as compared to $9.0 million in 2002.
Liquidity and Capital Resources
We had $455,000 in cash as of December 31, 2004 compared to $1,806,000 in
cash as of December 31, 2003. The net working capital deficit was ($6,306,000)
as of December 31, 2004, compared to a deficit of ($1,098,000) at December 31,
2003.
During 2004, net cash used in operating activities was $13,495,000
compared to $12,847,000 in 2003. During 2004 we raised approximately $12.6
million of net proceeds through various private placements of our common stock,
convertible debentures and promissory notes, together with common stock warrant
and option exercises.
The Company has incurred operating losses for the past several years, the
majority of which are related to the development of the Company's healthcare
connectivity technology and related marketing efforts. These losses have
produced operating cash flow deficiencies, and negative working capital, which
raise substantial doubt about its ability to continue as a going concern. The
Company's future operations are dependent upon management's ability to source
additional equity capital.
The Company expects to continue to experience losses in the near term,
until such time that its technologies can be successfully deployed with
physicians, clinics and skilled nursing facilities and long term care facilities
to produce revenues. The continuing deployment, marketing and the development of
the merged technologies will depend on the Company's ability to obtain
additional financing. The Company has not generated any significant revenue to
date from this technology. The Company is currently funding operations through
the sale of common stock and convertible debt, and there are no assurances that
additional investments or financings will be available as needed to support the
development and deployment of the merged technologies. The need for the Company
to obtain additional financing is acute and failure to obtain adequate financing
could result in lost business opportunities, the sale of the Company at a
distressed price or may lead to the financial failure of the Company.
We are funding our operations now through the sale of our securities.
There can be no assurance that additional investments or financings will be
available to us as needed on favorable terms or at all to support the
development and deployment of the HealthRamp Technology. Failure to obtain such
capital on a timely basis could result in lost business opportunities, the sale
of the HealthRamp Technology at a distressed price or the financial failure of
our company.
Recent Developments
On January 12, 2005, the Company entered into a securities purchase
agreement with DKR Soundshore Oasis Holding Fund Ltd., Harborview Master Fund,
L.P. and Platinum Partners Value Arbitrage Fund, L.P., each an institutional
investor, pursuant to which the Company agreed to sell, and the investors agreed
to purchase, 8% convertible redeemable debentures in the aggregate amount of up
to $4,000,000 and five-year warrants to purchase up to 1,666,667 shares of
common stock at an exercise price of $2.40. The debentures are convertible into
common stock of the Company at an initial conversion price of $2.40. A first
closing of $2,000,000 occurred on January 13, 2005 and a second closing of
$2,000,000 shall occur upon the completion of certain closing conditions set
forth in the securities purchase agreement. The Company is obligated to redeem
one-fifth of the principal and interest amount on the debentures in cash or, at
the option of the Company, shares of common stock, on the first day of each
month, commencing on the earlier of (a) May 12, 2005, and (b) the first date
following the 20th day after the effective date of the registration statement
registering for resale the securities issuable upon conversion of the
debentures, and ending upon the full redemption of the debentures. If the
Company elects to make redemption payments in shares of common stock, the
principal amount is convertible based upon a conversion price equal to the
lesser of the initial conversion price or 85% of the average of the three lowest
closing bid prices for the Company's common stock during the 20 trading days
immediately prior to the monthly redemption date. The Company is also obligated
to pay 8% in interest on the outstanding principal on the debentures (i) on the
effective date on which the debentures are converted into shares of common stock
of the Company, (ii) on each monthly redemption date or (iii) on the maturity
date, at the interest conversion rate.
38
Assuming the maximum amount of $4,000,000 is purchased, the Company has
agreed to issue to the investors additional investment rights to purchase
additional debentures in the aggregate principal amount of up to $1,320,000
along with five year warrants to purchase an aggregate of 550,000 shares of the
Company's common stock, on the same terms and conditions as the original
debentures and warrants. The debentures and warrants are subject to customary
protection against dilution.
As a result of the first closing, previously issued and outstanding notes
of the Company in the aggregate principal amount of $452,000, plus interest, are
automatically convertible into one hundred and twenty percent of principal
amount of debentures, together with warrants, of the Company having the same
terms and conditions as set forth above. In addition, upon each closing, the
Company's financial advisor is entitled to receive a warrant to purchase seven
percent of the shares of common stock issued or issuable upon conversion or
exercise of the debentures and warrants at an exercise price of $2.40.
On January 12, 2005, the Company entered into a securities purchase
agreement (the "Equity Line Agreement") with each of Yokuzuna Holdings and
Harborview Master Fund, L.P., two institutional investors, whereby, subject to
certain closing conditions and other criteria being met, such investors agreed
to provide an equity line of credit to the Company (the "Equity Line Financing")
to purchase from the Company an aggregate amount of up to $25,000,000 through
the issuance of shares of common stock by the Company to the investors. Since at
least one of the investors which is a party to the Equity Line Agreement also
owns Convertible debentures issued by the company with a fluctuating conversion
or redemption price, the investor could potentially affect the terms on which
the investor could purchase the shares of common stock underlying the Equity
Line Financing through conversion or redemption of Convertible debentures and
the sale of shares of common stock acquired following conversion or redemption
of the Convertible debentures into the public marketplace. Therefore, the
investor is considered not to be irrevocably bound to purchase shares of common
stock and the Equity Line Financing does not constitute a viable means for the
Company to obtain capital under current interpretations of the federal
securities laws by the SEC relating to "equity line" financing arrangements. As
a result, the Company will not be able to register the shares of common stock
underlying the Equity Line Financing or draw down under the line of credit.
Therefore the Company has determined not to seek stockholder approval of the
Equity Line Financing on its definitive proxy statement filed with the SEC on
March 16, 2005. Although there can be no assurances that this will occur, the
Company may determine to seek stockholder approval of the Equity Line Financing
in the future in the event the investors who own the Convertible debentures no
longer own any of these securities or if a new investor unaffiliated with the
current investors agrees to participate in the Equity Line Financing.
39
On March 31, 2005, the Company entered into a securities purchase
agreement with Alpha Capital AG, Ellis International Ltd. and Double U Master
Fund LP, each an institutional investor, pursuant to which the Company agreed to
sell, and the investors agreed to purchase, 8% convertible redeemable debentures
in the aggregate amount of $2,100,000 and five-year warrants to purchase 840,000
shares of common stock at an exercise price of $1.25. The debentures are
convertible into common stock of the Company at an initial conversion price of
$1.25. A first closing of $1,050,000 occurred on March 31, 2005. A second
closing of $1,050,000 shall occur upon the completion of certain closing
conditions set forth in the securities purchase agreement. The Company is
obligated to redeem one-fifth of the principal and interest amount on the
debentures in cash or, at the option of the Company, shares of common stock, on
the first day of each month, commencing on the earlier of (a) July 29, 2005, and
(b) the first date following the 20th day after the effective date of the
registration statement registering for resale the securities issuable upon
conversion of the debentures, and ending upon the full redemption of the
debentures. If the Company elects to make redemption payments in shares of
common stock, the principal amount is convertible based upon a conversion price
equal to the lesser of the initial conversion price or 85% of the average of the
three lowest closing bid prices for the Company's common stock during the 20
trading days immediately prior to the monthly redemption date. The Company is
also obligated to pay 8% in interest on the outstanding principal on the
debentures (i) on the effective date on which the debentures are converted into
shares of common stock of the Company, (ii) on each monthly redemption date or
(iii) on the maturity date, at the interest conversion rate.
Assuming the maximum amount of $2,100,000 is purchased, the Company has
agreed to issue to the investors additional investment rights to purchase
additional debentures in the aggregate principal amount of up to $693,000 along
with five year warrants to purchase an aggregate of 554,400 shares of the
Company's common stock, on the same terms and conditions as the original
debentures and warrants. The debentures and warrants are subject to customary
protection against dilution. At the first closing, the Company paid a cash fee
of 3% of the original purchase price for liquidated damages owed to the
investors under the January 12, 2005 financing agreements. In addition, upon
each closing, the Company's financial advisor is entitled to receive a warrant
to purchase seven percent of the shares of common stock issuable upon conversion
of the debentures at an exercise price of $1.25.
In connection with the above transactions and in order to obtain the
waiver and consent of the January 12, 2005 investors, the Company entered into
an amendment to the securities purchase agreement, dated as of January 12, 2005,
with DKR Soundshore Oasis Holding Fund Ltd., Harborview Master Fund, L.P. and
Platinum Partners Value Arbitrage Fund, L.P., each an institutional investor,
pursuant to which the initial conversion price for the 8% convertible redeemable
debentures in the aggregate amount of up to $4,000,000 ($2,000,000 of which were
sold to the investors at the first closing) was reduced from $2.40 to $1.25 and
the exercise price of the five-year warrants to purchase up to 1,666,667 shares
of common stock was reduced from $2.40 to $1.25. In addition, the additional
investment rights to purchase additional debentures in the aggregate principal
amount of up to $1,320,000 along with five year warrants to purchase an
aggregate of 550,000 shares of the Company's common stock, on the same terms and
conditions as the original debentures and warrants, were modified by the
amendment to reduce the conversion and exercise price from $2.40 to $1.25.
Moreover, the conversion price of convertible redeemable debentures in the
aggregate principal amount of $546,015 and the exercise price of warrants to
purchase an aggregate of 201,351 shares of common stock was reduced from $2.40
to $1.25. Pursuant to the amendment, if the Company does not file a registration
statement covering the underlying shares of common stock on or before April 5,
2005, the original investors have the right not to purchase convertible
debentures and warrants otherwise required at the second closing.
40
Contractual Obligations
Below is a table that presents our contractual obligations and commitments
at December 31, 2004:
Payment Due By Period
(in thousands)
TOTALS 2005 2006 2007 2008
------ ---- ---- ---- ----
Notes payable $ 167,000 $ 167,000
Convertible debt 727,000 527,000 $ 200,000
Operating leases 1,939,000 614,000 $ 580,000 490,000 255,000
Total Contractual Obligations $2,833,000 $1,308,000 $ 580,000 $ 490,000 $ 455,000
---------- ---------- ---------- ---------- ----------
See Note 6 to the financial statements for details of the principal
amounts of the notes and the debt discount associated therewith. In addition to
the principal amounts of the debt noted above, we also have an obligation for
payment of interest expense on the notes payable and convertible debt which is
approximately $69,000 at December 31, 2004. Also, see Note 9 to the financial
statements for information regarding commitments and contingent liabilities.
Attached hereto and filed as a part of this Annual Report on Form 10-K are
our consolidated financial statements, beginning on page F-1.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Share-Based Payment" (SFAS 123R), which replaces SFAS 123
and supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. For the Company, SFAS 123R is effective for
periods beginning after June 15, 2005. Early application of SFAS 123R is
encouraged, but not required.
Public companies are required to adopt the new standard using a modified
prospective method and may elect to restate prior periods using the modified
retrospective method. Under the modified prospective method, companies are
required to record compensation cost for new and modified awards over the
related vesting period of such awards prospectively and record compensation cost
prospectively for the unvested portion, at the date of adoption, of previously
issued and outstanding awards over the remaining vesting period of such awards.
No change to prior periods presented is permitted under the modified prospective
method. Under the modified retrospective method, companies record compensation
costs for prior periods retroactively through restatement of such periods. The
Company has not yet determined the method of adoption it will use.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold or engage in transactions with market risk sensitive
instruments.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Annual Report on Form 10-K are
our consolidated financial statements, beginning on page F-4.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 20, 2003, upon recommendation and approval of our audit committee,
we dismissed Ehrhardt Keefe Steiner & Hottman, PC, which served as our
independent registered public accounting firm for our 2002 fiscal year, and
determined to engage BDO Seidman, LLP as our independent registered public
accounting firm for our 2003 fiscal year. This change in independent auditors
was previously reported by us in a Current Report on Form 8-K, dated June 20,
2003, filed June 26, 2003 and in a Current Report on Form 8-K/A, dated June 20,
2003, filed September 4, 2003.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of disclosures controls and procedures
under Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934
are inadequate as of December 31,2004.
Our auditors, BDO Seidman, LLP, have advised us and our audit committee
that, under standards established by the Public Company Oversight Accounting
Board (United States), reportable conditions involve matters that come to the
attention of auditors that relate to significant deficiencies in the design or
operation of internal controls of an organization that, in the auditors'
judgment, could adversely affect the organization's ability to record, process,
summarize and report financial data consistent with the assertions of management
in the consolidated financial statements.
While the company has taken several steps to improve internal controls in
2004, BDO Seidman, LLP has advised our management and our Audit Committee that,
in BDO Seidman, LLP's opinion, there were reportable conditions during 2004,
which constituted material weaknesses in internal control. The identified
material weakness stems from the company's numerous non-routine equity
transactions involving complex and judgmental accounting issues. While all of
these transactions were recorded, BDO Seidman in their audit work noted
instances where Generally Accepted Accounting Principals were not correctly
applied and adjustments to the company's financial statements were required.
As a result of the material weaknesses described above, our management,
including our Chief Executive Officer and our Chief Financial Officer, has
determined that our disclosure controls and procedures were inadequate as of
December 31, 2004. As part of the remedial steps taken in 2004, the company
added the position of Vice President of Finance to oversee technical accounting,
financial reporting and internal control issues. The individual hired in August
2004 for this position notified the company of his intent to leave at the end of
the 1st quarter in 2005. The company is actively searching for a replacement.
The company is also searching for an additional staff accounting resource
to assist the controller in accounting and reporting transactions
42
Additionally, in order to better determine the appropriate accounting for
complex equity transactions, the company intends to engage outside expertise to
formulate the proper accounting treatment for such transactions.
ITEM 9B. OTHER INFORMATION
On March 31, 2005, the Company entered into a securities purchase
agreement with Alpha Capital AG, Ellis International Ltd. and Double U Master
Fund LP, each an institutional investor, pursuant to which the Company agreed to
sell, and the investors agreed to purchase, 8% convertible redeemable debentures
in the aggregate amount of $2,100,000 and five-year warrants to purchase 840,000
shares of common stock at an exercise price of $1.25. The debentures are
convertible into common stock of the Company at an initial conversion price of
$1.25. A first closing of $1,050,000 occurred on March 31, 2005. A second
closing of $1,050,000 shall occur upon the completion of certain closing
conditions set forth in the securities purchase agreement. The Company is
obligated to redeem one-fifth of the principal and interest amount on the
debentures in cash or, at the option of the Company, shares of common stock, on
the first day of each month, commencing on the earlier of (a) July 29, 2005, and
(b) the first date following the 20th day after the effective date of the
registration statement registering for resale the securities issuable upon
conversion of the debentures, and ending upon the full redemption of the
debentures. If the Company elects to make redemption payments in shares of
common stock, the principal amount is convertible based upon a conversion price
equal to the lesser of the initial conversion price or 85% of the average of the
three lowest closing bid prices for the Company's common stock during the 20
trading days immediately prior to the monthly redemption date. The Company is
also obligated to pay 8% in interest on the outstanding principal on the
debentures (i) on the effective date on which the debentures are converted into
shares of common stock of the Company, (ii) on each monthly redemption date or
(iii) on the maturity date, at the interest conversion rate.
Assuming the maximum amount of $2,100,000 is purchased, the Company has
agreed to issue to the investors additional investment rights to purchase
additional debentures in the aggregate principal amount of up to $693,000 along
with five year warrants to purchase an aggregate of 554,400 shares of the
Company's common stock, on the same terms and conditions as the original
debentures and warrants. The debentures and warrants are subject to customary
protection against dilution. At the first closing, the Company paid a cash fee
of 3% of the original purchase price for liquidated damages owed to the
investors under the January 12, 2005 financing agreements. In addition, upon
each closing, the Company's financial advisor is entitled to receive a warrant
to purchase seven percent of the shares of common stock issuable upon conversion
of the debentures at an exercise price of $1.25.
In connection with the above transactions and in order to obtain the waiver and
consent of the January 12, 2005 investors, the Company entered into an amendment
to the securities purchase agreement, dated as of January 12, 2005, with DKR
Soundshore Oasis Holding Fund Ltd., Harborview Master Fund, L.P. and Platinum
Partners Value Arbitrage Fund, L.P., each an institutional investor, pursuant to
which the initial conversion price for the 8% convertible redeemable debentures
in the aggregate amount of up to $4,000,000 ($2,000,000 of which were sold to
the investors at the first closing) was reduced from $2.40 to $1.25 and the
exercise price of the five-year warrants to purchase up to 1,666,667 shares of
common stock was reduced from $2.40 to $1.25. In addition, the additional
investment rights to purchase additional debentures in the aggregate principal
amount of up to $1,320,000 along with five year warrants to purchase an
aggregate of 550,000 shares of the Company's common stock, on the same terms and
conditions as the original debentures and warrants, were modified by the
amendment to reduce the conversion and exercise price from $2.40 to $1.25.
Moreover, the conversion price of convertible redeemable debentures in the
aggregate principal amount of $546,015 and the exercise price of warrants to
purchase an aggregate of 201,351 shares of common stock was reduced from $2.40
to $1.25. Pursuant to the amendment, if the Company does not file a registration
statement covering the underlying shares of common stock on or before April 5,
2005, the original investors have the right not to purchase convertible
debentures and warrants otherwise required at the second closing.
On or about March 30, 2005, certain individuals filed a first amended original
petition against Mr. Andrew Brown, our current chief executive officer and
director, and Mr. Darryl Cohen, our former chief executive officer and director
alleging, among other things, several causes of action based upon alleged
representations made by Mr. Brown and Mr. Cohen to these individuals. The
plaintiffs also named a former Company advisor and the Company's attorneys as
defendants in the litigation. The Company is not a defendant in the litigation.
The Company has been advised by Mr. Brown that he believes the allegations
against him are frivolous, that he intends to vigorously defend against them,
and that he has good and meritorious defenses and/or counterclaims to the
litigation. Although the Company is not a defendant in the litigation, the
Company has notified its directors and officers liability insurance carrier
regarding the litigation and has agreed to initially indemnify Mr. Brown and Mr.
Cohen for costs and expenses related to their defense in this litigation,
subject to the indemnification provisions governing the parties. The Company has
no reason to believe the insurance carrier will not reimburse the Company for
such costs and expenses following payment of the initial deductible amount.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
Our directors and executive officers, as of March 14, 2005, are as follows:
Name Age Position Director or
---- --- -------- Officer Since
-------------
Steven C. Berger (1)(2) 44 Director 2004
Andrew Brown 35 President, Chief Executive Officer, 2003
Chairman and Director
Louis E. Hyman 37 Executive Vice President and Chief 2001
Technology Officer
Ron Munkittrick 45 Chief Financial Officer and Secretary 2004
Steven A. Shorr (1)(2)(3) 36 Director 2004
Tony Soich (1) 44 Director 2004
Jeffrey A. Stahl (2)(3) 49 Director 2003
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
All of our executive officers are full-time employees. Each executive
officer holds office until his or her successor is elected and qualified or
until his or her earlier resignation, retirement or removal.
Our Board of Directors is composed of five directors, divided into three
classes. Each class of director serves for a term expiring at the third
succeeding annual meeting of stockholders after the year of election of such
class, and until their successors are elected and qualified. Messrs. Brown and
Shorr are our Board's Class III directors whose term of office will expire in
2006. Messrs. Berger and Soich are our Board's Class II directors whose term of
office will expire in 2007. Dr. Stahl is our Board's Class I director whose term
of office will expire in 2005.
Biographical Information on each current executive officer and director is set
forth below.
Steven C. Berger. Steven Berger has been chief financial officer of
Global/CHC Worldwide LLC, a chemical coatings company, since February 2004. From
October 1999 to present, Mr. Berger has been President of Morgan Harris & Co.,
where he was involved in equity trading. From June 2000 to June 2003, Mr. Berger
was chief financial officer of Virtual BackOffice Inc., a company that provides
"virtual" secretarial services. Mr. Berger graduated from Boston University with
a BS in Business Administration with a concentration in Finance.
44
Andrew Brown. Andrew Brown was appointed our Chief Executive Officer and
Chairman of the Board in April 2004. Prior to this appointment, Mr. Brown served
as our President and Chief Operating Officer since October 2003. Prior to such
appointment, Mr. Brown was an employee and affiliate of External Affairs, Inc.,
which was a consultant to us from August 2001 to April 2004. External Affairs is
a consulting firm focused on investor relations, financing and strategic advice
to small public and private companies. Prior to working for External Affairs,
from July 1997 to August 2001, Mr. Brown served as president and chief
investment officer of CounterPoint Capital Management, an investment fund
focused on small public and private companies. Mr. Brown graduated from Queens
College with Honors, with a BA in Economics and Accounting, and from New York
University's Stern School of Business, with an MBA in Finance, International
Business and Economics. Mr. Brown is a licensed certified public accountant.
Louis E. Hyman. Louis Hyman joined us in May 2001 as Executive Vice
President and Chief Technology Officer, and acted as interim Chief Technology
Officer for the two months prior thereto, while he was performing consulting
work for us. From November 2000 until joining us, Mr. Hyman was president and
chief executive officer of Ideal Technologies, Inc., a healthcare integration
consulting firm. From 1999 to November 2000, Mr. Hyman was vice president for
information technology at WebMD Corporation and its predecessor companies. For
more than eight years prior to 1999, Mr. Hyman was vice president and director
of development for LaPook Lear Systems, Inc., a predecessor of WebMD, Inc. Mr.
Hyman graduated from St. John's University summa cum laude where he earned a BS
degree in Computer Science.
Ronald C. Munkittrick was appointed as our Chief Financial Officer and
Secretary, effective October 12, 2004. Mr. Munkittrick had been our consultant
since early June 2004 and was a consultant to other entities from December 2003
through June 2004. Previously, Mr. Munkittrick served as chief financial officer
of Cape Success LLC, a staffing and information technology consulting company,
from September 2001 through November 2003, chief financial officer of Decima
Ventures, a venture capital company, from April 2001 through September 2001,
chief financial officer of Site59.com, an online travel company, from April 2000
to April 2001, and vice president of finance of Genesis Direct, a direct
marketing company, from November 1995 to April 2000.
Steven A. Shorr. Since December 2001, Mr. Steven Shorr has operated his
own accounting practice providing businesses and individuals with tax,
accounting and consulting services. From July 2001 through November 2001, Mr.
Shorr was a manager with Jeffrey A. Getzel & Co. LLP, an accounting practice.
From April 2000 to April 2001, Mr. Shorr served as controller of CounterPoint
Capital Management, LLC, an investment fund with holdings in small public and
private companies. Prior to that he was a manager for a public accounting firm
with a specialization in real estate, Cavalcante & Company, CPAs. Prior to that,
Mr. Shorr served as a fraud investigator for Commonwealth Land Title Insurance
Company. He began his professional career as an accountant with the real estate
specialty firm of Kenneth Leventhal & Company. He graduated from Queens College,
with Honors, with a BA in Accounting. He is a member of the New York State
Society of Certified Public Accountants.
Tony Soich. Mr. Soich has been a Managing Director in the Investment
Banking Division of Ladenburg Thalmann & Co. Inc. since June 2002. Prior to
joining Ladenburg, Mr. Soich was an independent consultant from November 2001 to
June 2002. From August 1999 to October 2001, Mr. Soich was a Managing Director
of Corporate Finance at Roth Capital Partners and head of the Structured Finance
Group (SFG) and Director of Investment Banking at The Boston Group in Los
Angeles. Mr. Soich started his career as a tax and corporate attorney in New
York City with Shearman & Sterling and Deloitte, Haskins & Sells, advising
investment banking clients and LBO fund clients in tax and financial
structuring. Mr. Soich holds a BSBA, MBA, and JD, with honors, from Drake
University and an LLM, in Taxation, from New York University. Mr. Soich is a
Certified Public Accountant in Iowa and Attorney in New York and Iowa.
45
Jeffrey A. Stahl. Dr. Jeffrey Stahl is a medical doctor in private
practice in the area of non-invasive cardiology since May 2000. From January
1996 until May 2000, Dr. Stahl was the Director of Non-Invasive Cardiology at
St. Francis Hospital in Roslyn, New York. Dr. Stahl graduated from Boston
University with a BA and from Albert Einstein College of Medicine with an MD.
Audit Committee
The Company has an Audit Committee established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. Among other
things, the Audit Committee reviews the financial reports and other financial
information provided by the Company to any governmental body and the public; the
Company's system of internal controls regarding finance, accounting, legal
compliance and ethics that management and the Board may from time to time adopt;
and the Company's auditing, accounting and financial reporting processes
generally. The Audit Committee also recommends to the Board the selection of the
independent auditors and approves fees and other compensation to be paid to the
independent auditors. The Audit Committee operates under a written charter
adopted by the Company's Board of Directors which comports with the standards of
the Securities and Exchange Commission and American Stock Exchange ("AMEX")
requirements for independent audit committees. The Audit Committee annually
reviews and assesses the charter and will, if it determines it appropriate,
recommend changes to the charter to the entire Board of Directors. The Audit
Committee currently consists of Steven C. Berger, Tony Soich and Steve Shorr,
each of whom meets the independence requirements for audit committee members
under the listing standards of the Securities and Exchange Commission and AMEX.
None of the current members have been designated by the Company's Board of
Directors to be a "financial expert," as such term is defined under rules and
regulations promulgated by the Securities and Exchange Commission. The Board of
Directors believes that the members comprising the Audit Committee, all of whom
have had distinguished careers within prominent and sophisticated businesses,
have the requisite expertise and abilities to fulfill their responsibilities on
the Audit Committee. During the fiscal year ended December 31, 2004, the Audit
Committee met five times.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file. Based
solely on the Company's review of the copies of such reports by it, the Company
believes that during fiscal 2004 all such filings were made, except that (a)
Messrs. Munkittrick, Soich and Hyman filed late initial statements of beneficial
ownership of securities on Form 3 and (b) each of Dr. Stahl and Messrs. Brown,
Berger, Soich, Shorr, Hyman and Munkittrick filed late annual statements of
changes in beneficial ownership of securities on Form 5.
46
Code of Ethics
We have adopted a code of ethics (filed as Exhibit 14 to this Form 10-K)
that applies to our employees including our principal executive officer and
principal financial officer, principal accounting officer or controller, or
persons performing similar functions.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth information
concerning compensation for services in all capacities to the Company for the
three years ended December 31, 2004, awarded or paid to, or earned by our chief
executive officer, the two most highly compensated executive officers who earned
more than $100,000 in 2004 who were serving as such at December 31, 2004 and
three additional executive officers who would otherwise have been included had
they remained executive officers at December 31, 2004 (the "Named Officers").
Summary Compensation Table
Annual Compensation Long-Term Compensation
Name and Principal Restricted Securities All Other
Position Year Salary Bonus Other Stock Awards Underlying Options Compensation
Darryl R. Cohen 2004 $226,443 $65,000 $121,122(1) - - -
Chairman and Chief 2003 $262,644 $150,000 $ 10,685(2) $340,000(3) 50,000 $81,933(4)
Executive Officer (former) 2002 $ 42,404 - - - - -
Andrew Brown 2004 $107,446 - 2,427,187 $102,375 (5)
Chairman, Chief Executive -
Officer, President -
Ronald Munkittrick 2004 $38,308 - - 903,506 46,250 (6)
Executive Vice President - - - -
and Chief Financial Officer - - - -
Paul Hessinger 2004 $101,538 $25,000 - - -
Executive Vice President 2003 $100,00 $25,000 - 5,333 -
(former) - -
Louis E. Hyman 2004 $197,404 - 986,842 -
Executive Vice President 2003 $217,865 $15,000 - 8,333 -
and Chief 2002 $211,860 - - 2,083
Technology Officer
Mitchell Cohen 2004 $138,094 $50,000 - - -
Executive Vice President
and Chief Financial
Officer (former)
------------------
(1) Includes automobile allowance, income tax on granted stock options and life
insurance premiums for such executive.
47
(2) Includes automobile allowance and life insurance premiums for such
executive.
(3) Indicates grant date value of award of 16,667 shares of restricted stock
which vesting was accelerated in full on November 20, 2003.
(4) Prior to his resignation on April 25, 2004, Mr. Cohen joined our company as
chief executive officer in September 2003. Prior to that time, Mr. Cohen served
as a consultant to us. "All Other Compensation" includes consulting fees paid to
Mr. Cohen.
(5) Mr. Brown joined our company as president and chief operating officer in
November 2003. Prior to that time, Mr. Brown served as a consultant to us. "All
Other Compensation" includes consulting fees paid to Mr. Brown.
(6) Mr. Munkittrick joined our company as an employee in September 2004 and was
appointed as our chief financial officer in October 2004. Prior to that time,
Mr. Munkittrick served as a consultant to us. "All Other Compensation" includes
consulting fees paid to Mr. Munkittrick.
Option Grants Table. The following table sets forth information on
grants of stock options during fiscal 2004 to the Named Officers. All such
options are exercisable to purchase shares of Common Stock. No stock
appreciation rights ("SARs") were granted during such period to such persons.
Options Granted in 2004
Number of
Securities Percentage of Total Valuation under
Underlying Options Granted to Exercise Price Expiration Black-Scholes
Name Options Granted Employees in 2004 (per share) Date Pricing Method (1)
-------------------------------------------------------------------------------------------------------------------
Darryl R. Cohen 0
Paul Hessinger 0
Louis E. Hyman(2) 986,842 19.71% $1.14 12/2/09 $ 986,338
Ron Munkittrick(2) 902,256 18.02% $1.14 12/2/09 $ 901,795
Andrew Brown (2) 2,427,187 48.48% $1.14 12/2/09 $2,425,947
----------------
(1) The Black-Scholes option-pricing model estimates the option's fair value by
considering the following assumptions: (a) the option's exercise price and
expected life; (b) the underlying current market price of our common stock on
the date of grant and expected volatility; (c) expected dividends; and (d) the
risk free interest rate corresponding to the term of the option. The values in
the table use an expected volatility up to 134.17%, a risk-free rate of 3.21%,
no dividend yield and anticipated exercise at the end of the option term.
(2) Represents a five-year option of which 40% vested on January 1, 2005 and the
remaining 60% vests in eight equal quarterly installments commencing on April 1,
2005; fully vests on January 1, 2007.
48
Aggregated Option Exercises in 2004 and Fiscal Year-End Option Values
Number of Shares Underlying Unexercised Value of Unexercised In-the-Money
Options at 12/31/04 Options at 12/31/04 (1)
Name Shares
Acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Darryl R. Cohen 0 0 79,000 0 $226,730 -
Paul R. Hessinger 0 0 0 0 - -
Louis E. Hyman (2) 0 0 12,687 988,404 - $2,299,342
Ron Munkittrick (2) 0 0 208 903,298 - $2,102,256
Andrew Brown (2) 0 0 1,118,803 1,386,717 $2,501,963 $3,153,382
There were no exercises of options by Named Officers in fiscal year 2004.
(1) The dollar values represent the difference between $3.47 per share, the
closing price of our common stock on December 31, 2004, and the exercise price
per share of the respective stock options, multiplied by the number of shares
subject to the stock option.
(2) Represents a five-year option of which 40% vested on January 1, 2005 and the
remaining 60% vests in eight equal quarterly installments commencing on April 1,
2005; fully vests on January 1, 2007.
The Company currently has no retirement, pension or profit-sharing program
for the benefit of its directors, executive officers or other employees. The
Company has a 401(k) plan for its employees, but does not make any contributions
to the plan.
Employment Agreements
On June 1, 2004, the Company entered into an employment agreement with
Andrew Brown. During the employment period, which will end on June 30, 2006, Mr.
Brown will be paid a base salary at an annual rate of $240,000 per year;
provided that, during the six-month period ending November 30, 2004, Mr. Brown
will be paid a base salary at the rate of $120,000 per year and receive a
retention bonus of three times the amount of his reduction in pay payable in the
form of shares of the Company's common stock, but only if he remains employed as
Chief Executive Officer on November 30, 2004, is terminated before that date
without "cause" or resigns before that date for "good reason". On December 2,
2004 Mr. Brown agreed to relinquish his retention bonus in return for an award
of options to purchase 1,353,383 shares of common stock at an exercise price of
$1.14, the fair market value of the Company's common stock on the date of grant.
The employment agreement also provides for the payment of performance-based
bonuses tied to the growth of the Company's gross revenues, the grant of up to
100,000 options under the 2004 Stock Incentive Plan, with an exercise price of
$10.80 per share, and the issuance to Mr. Brown of a warrant whereby he will be
entitled to purchase up to one-nineteenth of the outstanding shares of the
Company on a fully diluted basis through January 31, 2005, at an exercise price
of $1.14. The employment agreement also provides that in the event that Mr.
Brown's employment is terminated for good reason within six months or his
employment is terminated within one year without cause after any person or group
acquires more than 25% of the combined voting power of the Company's then
outstanding Common Stock, all of Mr. Brown's options will become fully vested
and immediately exercisable and Mr. Brown will be paid an amount equal to twice
his annual base salary and twice his bonus compensation received during the
twelve months immediately preceding the date of termination of Mr. Brown's
employment; provided that if the change in control resulted from the sale of the
Company for less than $31 million, the payments to Mr. Brown will be in amounts
as described above in this paragraph as if the word "twice" had been deleted.
In June 2004, the Company entered into amendments of its employment
agreements with Louis Hyman, Chief Technology Officer, and Mitchell M. Cohen,
our former Chief Financial Officer, which provide that in the event that Mr.
Hyman's or Mr. Cohen's employment is terminated within one year without cause
after any person or group acquires more than 25% of the combined voting power of
the Company's then outstanding Common Stock, all of his options will become
fully vested and immediately exercisable and he will be paid an amount equal to
twice his annual base salary and twice his bonus compensation received during
the twelve months immediately preceding the date of termination of his
employment; provided that if the change in control resulted from the sale of the
Company for less than $31 million, the payments to Mr. Hyman and/or Mr. Cohen
will be in amounts as described above in this paragraph as if the word "twice"
had been deleted. Effective on September 8, 2004, Mr. Cohen resigned his
position as the Company's Chief Financial Officer and his employment agreement
was terminated.
49
On October 12, 2004, the Company entered into an employment agreement with
Ronald C. Munkittrick, Chief Financial Officer. Mr. Munkittrick will be paid an
annual base salary of $195,000 provided, however, that Mr. Munkittrick has
agreed to a salary reduction to $120,000 per annum through December 31, 2004 and
a salary reduction to $150,000 per annum from January 1, 2005 through March 31,
2005. The employment agreement also provides that in the event that Mr.
Munkittrick's employment is terminated within one year without cause after any
person or group acquires more than 25% of the combined voting power of the
Company's then outstanding Common Stock, all of his options and/or restricted
stock awards will become fully vested and immediately exercisable and he will be
paid an amount equal to twice his annual base salary and twice his bonus
compensation that he was entitled to receive during the twelve months
immediately preceding the date of termination of his employment; provided that
if the change in control resulted from the sale of the Company for less than $31
million, the payments to Mr. Munkittrick will be in amounts as described above
in this paragraph as if the word "twice" had been deleted.
Change in Control Arrangements
As set forth above under "Employment Agreements," our employment
agreements with each of Messrs. Brown, Hyman and Munkittrick provide that, upon
a change of control of the Company, any unvested options to acquire shares of
our common stock which have been granted pursuant to their respective employment
agreements, will become fully vested and exercisable.
Equity Compensation Plan Information
The Company has the following compensation plans currently in effect: the
1999 Stock Option Plan, the 2003 Stock Incentive Plan, the 2003 Consultants
Stock Option, Stock Warrant and Stock Award Plan, the 2004 Stock Incentive Plan
(collectively, the "Compensation Plans") and the 2005 Stock Incentive Plan.
1999 Stock Option Plan
In August 1999, the Board of Directors adopted, and in July 2000,
stockholders approved, the 1999 Stock Option Plan (the "1999 Plan"), which
provides for the grant of incentive stock options ("ISOs") to officers and other
employees of the Company and non-qualified options to directors, officers,
employees and consultants of the Company. Options granted under the plan
generally vest over a period of one or more years and expire at various times up
to ten years. ISOs are granted at a price equal to the market value on the date
of grant. The Board of Directors reserved 216,667 shares of common stock for
granting of options under the 1999 Plan. If any option granted under the plan
expires or terminates for any reason without having been exercised in full or
ceases for any reason to be exercisable, the un-purchased shares subject to such
options becomes available again for grants of options under the plan. The
aggregate fair market value of the common stock to which ISOs are exercisable
for the first time by any employee during any calendar year cannot exceed
$100,000. Any options granted in excess of that amount will be granted as
non-qualified options. The Board of Directors may terminate or amend the plan in
any respect at any time; provided, that the Board may not amend the following
aspects without shareholder approval: (a) increase total number of shares
issuable under the plan; (b) modify eligibility for grants of ISOs; (c) modify
exercise prices of shares under ISOs; and (d) extend the expiration date of the
plan.
50
2003 Stock Incentive Plan
In February 2003, the Board of Directors adopted, and in May 2003,
stockholders approved, the 2003 Stock Incentive Plan (the "2003 Plan"), which
provides for the grant of ISOs, supplemental stock options, stock appreciation
rights and performance shares to directors, officers, employees, consultants and
advisors of the Company and its subsidiaries. Options granted under the plan
generally vest over a period of one or more years and expire at various times up
to ten years. Upon exercise, shares will be issued upon the payment of the
exercise price in cash, by delivery of shares of common stock, options or a
combination of these methods. ISOs are granted at a price equal to the market
value on the date of grant. The Board of Directors reserved 166,667 shares of
common stock for grants under the 2003 Plan. No one (1) person participating in
the 2003 Plan may receive option or other awards for more than 66,667 shares of
common stock in any calendar year. If any of the options or stock appreciation
rights or performance shares granted under the plan expire or terminate for any
reason before they have been exercised in full, the unissued shares subject to
such options or stock appreciation rights or performance shares shall again be
available. The aggregate fair market value of the common stock to which ISOs are
exercisable for the first time by any employee during any calendar year cannot
exceed $100,000. The performance shares, at the discretion of the plan
administrator and contingent upon the achievement of specified performance
objectives within a specified performance objective period, may be made in any
combination of common stock, cash and notes.
2003 Consultants Stock Option, Stock Warrant and Stock Award Plan
In October 2003, the Board of Directors, and in December 2003 stockholders
approved, the 2003 Consultants Stock Option Warrant and Stock Award Plan (the
"2003 Consultants Plan"), which provides for the grant of non-qualified options,
warrants, restricted stock and unrestricted stock to consultants of, or other
natural persons who provide bona fide services, other than services in
connection with the offer or sale of the Company's securities in a capital
raising transaction to, the Company. The Board of Directors reserved 83,333
shares of common stock for grants under the 2003 Consultants Plan. If any option
or warrant expires or is cancelled prior to its exercise in full, the shares
subject to such option or warrant may again be made subject to an option or
warrant or awarded as restricted common stock or unrestricted common stock under
the plan. Under the plan, the Board has sole and absolute discretionary
authority to determine who are to receive warrants, options, restricted common
stock, or unrestricted common stock under the plan; the number of shares of
common stock to be covered by such grant or such options or warrants and the
terms thereof; and the type of common stock granted--restricted common stock,
unrestricted common stock or a combination of restricted and unrestricted common
stock. The Board has the discretionary authority to prescribe, amend and rescind
rules and regulations relating to the plan, to interpret the plan, to prescribe
and amend the terms of the option or warrant agreements and to make all other
determinations deemed necessary or advisable for the administration of the plan.
The plan also allows the Board to pay consultants' fees in unrestricted common
stock in lieu of cash.
51
2004 Stock Incentive Plan
In October 2003, the Board of Directors adopted, and in December 2003
stockholders approved, the 2004 Stock Incentive Plan (the "2004 Plan"), which
provides for the grant of ISOs, supplemental stock options, stock appreciation
rights and performance shares to directors, officers, consultants and advisors
of the Company and its subsidiaries. ISOs granted under the plan generally vest
over a period of one or more years and expire at various times up to ten years.
Upon exercise, shares will be issued upon the payment of the exercise price in
cash, by delivery of shares of common stock, options or a combination of these
methods and expire up to ten years after the date of grant. ISOs are granted at
a price equal to the market value on the date of grant. The Board of Directors
reserved 250,000 shares of common stock for grants under the 2004 Plan. No one
(1) person participation in the 2004 Plan may receive option or other awards for
more than 50,000 shares of common stock in any calendar year. If any of the
options or stock appreciation rights or performance shares granted under the
plan expire or terminate for any reason before they have been exercised in full,
the unissued shares subject to such options or stock appreciation rights or
performance shares shall again be available. The aggregate fair market value of
the common stock to which ISOs are exercisable for the first time by any
employee during any calendar year cannot exceed $100,000. The performance
shares, at the discretion of the plan administrator and contingent upon the
achievement of specified performance objectives within a specified performance
objective period, may be made in any combination of common stock, cash or notes.
2005 Stock Incentive Plan
In September 2004, the Board of Directors adopted, and on November 18,
2004 the stockholder's approved, the Company's 2005 Stock Incentive Plan (the
"2005 Plan"). The 2005 Plan was designed to provide an incentive to employees
(including directors and officers who are employees), and to consultants and
directors who are not employees of the Company and to offer an additional
inducement in obtaining the services of such persons. Moreover, the 2005 Plan
was designed to compensate both current or former employees and consultants of
the Company to whom the Company had commitments or obligations. The Plan
provides for the grant of "incentive stock options" ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
nonqualified stock options which do not qualify as ISOs ("NQSOs"), stock
appreciation rights ("SARs") and stock of the Company which may be subject to
contingencies or restrictions (collectively, "Awards") Subject to the provisions
of Paragraph 12, any shares of Common Stock subject to an option or SAR which
for any reason expires, is canceled or is terminated unexercised or which ceases
for any reason to be exercisable or a restricted stock Award which for any
reason is forfeited, shall again become available for the granting of Awards
under the Plan. The Company shall at all times during the term of the Plan
reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan. Notwithstanding the maximum
number of shares of the Company's Common Stock available under the 2005 Plan,
the Company shall not grant Awards of Common Stock to its employees (including
officers and directors who are employees) and consultants in excess of thirty
(30%) percent of the Company's outstanding shares of common stock, on a
fully-diluted, as converted basis, including conversion of convertible notes or
exercise of warrants outstanding. The Plan shall be administered by the Board of
Directors or a committee of the Board of Directors consisting of not less than
three directors, at least two (2) of whom shall be a "non-employee director"
within the meaning of Rule 16b-3 of the Securities and Exchange Act of 1934.
In a definitive proxy statement filed with the SEC on March 16, 2005, the
Company is proposing, at a Special Meeting of Stockholders to be held on Monday,
April 11, 2005, to amend the 2005 Plan to increase the number of shares of
Common Stock available for issuance under the plan. Currently, the aggregate
number of shares available for issuance under the 2005 Plan is limited to
5,500,000 shares of Common Stock. During the period from November 18, 2004 (the
date on which the approval of the current maximum number of shares available for
issuance under the Plan was based) to the Record Date for the special meeting,
an aggregate of 5,500,000 shares of Common Stock have been issued or reserved
for issuance to the Company's employees, consultants and directors through
restricted stock awards or reserved for the exercise of options, thereby
reducing the number of shares of Common Stock currently available for issuance
under the Plan by this same number. An additional 3,144,807 shares of Common
Stock have been approved for issuance to the Company's employees, consultants
and directors through restricted stock awards or reserved for the exercise of
options by the Company's board of directors, subject to stockholder approval to
increase the number of shares of Common Stock available for issuance under the
2005 Plan. Accordingly, as of March 16, 2005, there are no shares of Common
Stock available for the grant of restricted stock awards and options under the
2005 Plan. Shareholders will be asked to approve a resolution to amend the 2005
Plan to increase the number of shares available for issuance under the 2005 Plan
by an additional 10,000,000 shares of Common Stock. If the Amendment is approved
by shareholders, an aggregate of 15,500,000 shares of Common Stock will be
outstanding or reserved for issuance or available for issuance under the 2005
Stock Incentive Plan. Should the shareholders not authorize this increase, some
shares which vest under the plan after December 31, 2004 may not be issued. The
Company will record an adjustment to reflect the market price at the time of any
such shareholder approval.
52
Compensation Committee Interlocks and Insider Participation
During 2003 until October 10, 2003, Messrs. Scalzi and Havens and Joan
Herman (former directors) served on our Compensation Committee. Thereafter,
through April 2004 our Compensation Committee consisted of Mr. David Friedensohn
(a former director) and Dr. Stahl, and from April 2004 through June 2004
consisted of Dr. Stahl, Mr. Richard Kellner (a former director) and Mr. Berger,
and from July 2004 to present consists of Dr.. Stahl, Mr. Shorr and Mr. Berger,
none of whom were officers or employees of our company or our subsidiaries or
had any relationship regarding disclosure under Item 404 of Regulation S-K
during or prior to 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 4, 2005, certain
information regarding the ownership of voting securities of the Company by each
stockholder known to the management of the Company to be (i) the beneficial
owner of more than 5% of the Company's Common Stock, (ii) the directors of the
Company, (iii) the current executive officers of the Company, and (iv) all
directors and executive officers of the Company as a group.
Shares Beneficially Percentage
Name and Address of Beneficial Owner (1) Owned (2) of Class
--------------------------------------------------------------------------------
Andrew Brown (3) 724,523 5.4%
Blue Valley Ltd. (4) 1,114,824 8.1%
Cherry Blossom Ltd (5) 1,241,850 9.0%
Forum Managers Ltd. (6) 901,761 6.7%
Lakeview Properties Ltd. (7) 901,761 6.7%
Norfolk Ltd. (8) 1,110,886 8.1%
Jeffrey A. Stahl, MD (9) 71,132 *
Louis E. Hyman (10) 483,625 3.7%
Steven C. Berger (11) 67,798 *
Steven A. Shorr (12) 68,352 *
Tony Soich (13) 67,798 *
Ron Munkittrick (14) 428,883 3.3%
Directors and executive officers,
as a group (7 persons) 1,912,111 13.2%
53
-------------------
* Represents beneficial ownership of less than one percent.
(1) Unless otherwise indicated, the address for each of the beneficial owners
is c/o Ramp Corporation, 33 Maiden Lane, New York, New York 10038.
(2) "Beneficial ownership" is defined in the regulations promulgated by the
SEC as having or sharing, directly or indirectly (1) voting power, which
includes the power to vote or to direct the voting, or (2) investment
power, which includes the power to dispose or to direct the disposition of
shares of the Common Stock of the Company. The definition of beneficial
ownership includes shares underlying options or warrants to purchase
common stock, or other securities convertible into common stock, that
currently are exercisable or convertible or that will become exercisable
or convertible within 60 days. Unless otherwise indicated, the Company
believes that the beneficial owner has sole voting and investment power
based upon the information furnished by such owners.
(3) Includes (a) 24,167 shares issuable upon exercise of warrants, and (b)
696,190 shares issuable upon exercise of stock options exercisable within
60 days from the date of the table. Does not include warrants issuable to
Mr. Brown under his employment agreement whereby Mr. Brown will be
entitled to purchase up to one-nineteenth of the outstanding shares of our
common stock, at an exercise price of $1.14.
(4) Includes 211,372 shares issuable upon exercise of warrants. The address of
the holder is Burbage House, 83-85 Curtain Road, London EC2A 3BS.
(5) Includes 235,456 shares issuable upon exercise of warrants. The address of
the holder is 20 McCallum Street, 10-03 Asia Chambers, Singapore 069046.
(6) Includes 170,900 shares issuable upon exercise of warrants. The address of
the holder is 7 Globe House, 15 Fitzroy Mews, London, UK.
(7) Includes 170,900 shares issuable upon exercise of warrants. The address of
the holder is 21 Leigh Street, London WC1H 9QX.
(8) Includes 211,372 shares issuable upon exercise of warrants. The address of
the holder is 20 McCallum Street, 12-03 Asia Chambers, Singapore 069046.
(9) Consists of 71,132 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
(10) Consists of (a) 833 shares held by Mr. Hyman and his wife of which he
shares dispositive power, (b) 833 shares issuable upon exercise of
warrants held by Mr. Hyman and his wife, and (c) 481,959 shares issuable
upon exercise of stock options exercisable within 60 days from the date of
the table.
(11) Consists of 67,798 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
(12) Includes 67,798 shares issuable upon exercise of stock options exercisable
within 60 days from the date of the table.
(13) Consists of 67,798 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
(14) Consists of 428,883 shares issuable upon exercise of stock options
exercisable within 60 days from the date of the table.
54
Equity Compensation Plan Information
The following table provides information about our Common Stock that may
be issued upon the exercise of options, warrants and rights under our stock
incentive plans.
(c)
(a) Number of securities remaining
Number of securities to (b) available for future issuance
be issued upon exercise Weighted average exercise price under equity compensation plans
of outstanding options, of outstanding options, (excluding securities reflected
Plan Category warrants and rights warrants and rights in Column (a))
-------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by security 3,580,562 $2.34 0
holders
Equity compensation
plans not approved by security N/A N/A N/A
holders
In addition to the issuance of Common Stock under our stock incentive
plans set forth in the above table, we have entered into restricted stock
agreements to issue restricted shares of common stock and stock option
agreements to issue an aggregate of 3,144,807 shares of common stock underlying
stock options to certain of our current executive officers, employees and
consultants which are subject to the vesting provisions contained in each
agreement and stockholder approval. These obligations shall be paid through the
issuance of restricted shares of Common Stock or options to be issued under the
2005 Plan following stockholder approval of the Amendment.
The following table sets forth the number of restricted shares of our
Common Stock and shares of our Common Stock underlying options which have been
granted to each of our executive officers, executive officers as a group,
non-executive directors as a group, and non-executive officers and employees,
including consultants, as a group under our 2005 Stock Incentive Plan as of
March 4, 2005. As a result of the grants set forth below, the total number of
shares of Common Stock reserved for issuance under the 2005 Plan is 8,644,807,
of which 5,500,000 shares of Common Stock have been previously approved by
stockholders.
55
NEW PLAN BENEFITS - 2005 Stock Incentive Plan
-------------------------------------------------------------------------------------------------------------------------------
Name and Position Number of Shares Exercise Price Number of Shares of Dollar Value of
Underlying Options of Options Common Stock Common Stock
-------------------------------------------------------------------------------------------------------------------------------
Andrew M. Brown 1,353,383 $1.14 N/A N/A
Chairman of the Board, President &
Chief Executive Officer
-------------------------------------------------------------------------------------------------------------------------------
Ron Munkittrick 902,256 $1.14 N/A N/A
Chief Financial Officer
-------------------------------------------------------------------------------------------------------------------------------
Louis E. Hyman 986,842 $1.14 N/A N/A
Chief Technology Officer
-------------------------------------------------------------------------------------------------------------------------------
Executive Officer Group (3 persons) 3,242,481 $1.14 N/A N/A
-------------------------------------------------------------------------------------------------------------------------------
Non-Executive Director Group (4 563,912 $1.14 N/A N/A
persons)
-------------------------------------------------------------------------------------------------------------------------------
Non-Executive Officer and Employee 210,000 (1) 4,628,414 (2)
Group
(Including Consultants)
-------------------------------------------------------------------------------------------------------------------------------
(1) The exercise price is equal to the fair market value of the Common Stock
on the date of grant.
(2) The value of the Common Stock is equal to the fair market value of the
Common Stock on the date of issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since 1996, we had a policy that any transactions with directors or
executive officers or any entities in which they are associated as directors or
executive officers or in which they have a financial interest, will only be on
terms that would be reached in an arm's-length transaction, consistent with
industry standards and approved by a majority of our disinterested directors.
This policy provides that no such transaction shall be either void or voidable,
solely because of such relationship or interest of such directors or officers or
solely because an interested director is present at the meeting of the board of
directors or a committee thereof that approves such transaction or solely
because the interested director's vote is counted for such purpose. In addition,
interested directors may be counted in determining the presence of a quorum at a
meeting of the board of directors or a committee thereof that approves such a
transaction. We have also adopted a policy that prohibits any loans to officers
and directors. All of the transactions described below have been approved
according to this policy.
In 1999, we entered into a consulting agreement with Mr. Samuel Havens,
our former director, which provides that we pay Mr. Havens $5,000 per month for
his consulting services in connection with our marketing efforts. At Mr. Havens'
request, we deferred certain of his monthly payments. During 2002, we paid Mr.
Havens $20,000 for his services under the agreement. In 2003, we paid Mr. Havens
an additional $40,000. As of March 31, 2004, we owed Mr. Havens $40,000, which
amount was paid concurrently with Mr. Havens' resignation as a director through
the issuance of 57,143 shares of our common stock.
56
Upon his resignation from the board of directors on October 10, 2003, we
agreed to immediately vest all of Mr. Patrick Jeffries' options and to remove
all forfeiture conditions from his forfeitable stock grants.
Arthur L. Goldberg, our chief financial officer from May 2003 until
November 2003, provided his services to us through Tatum CFO Partners, LLP, a
national consulting firm of which he is a partner, and which provides the
services of financial professionals to businesses. Pursuant to an employment
letter between us and Mr. Goldberg, and a Resources Agreement between us and
Tatum, both dated May 20, 2003, Mr. Goldberg was compensated by us at a daily
rate of $1,250; 16-2/3% of such amount was paid directly to Tatum.
Until his appointment as our President and Chief Operating Officer in
October 2003, Andrew Brown was employed by External Affairs, Inc. In August
2003, we entered into a consulting agreement with External Affairs for a term
ending June 30, 2004, under which External Affairs agreed to act as our investor
relations and strategy consultant and assist us with our capital raising
efforts. The agreement provided for payments to External Affairs of $328,000,
and a discretionary bonus potential of up to $275,000 based upon our attaining a
specified level of revenue during the term of the agreement. External Affairs
received a cash bonus in July 2003 of $50,000 for its services during the year
ended June 30, 2003. On October 10, 2003, Mr. Brown was appointed as our
President and Chief Operating Officer, and we agreed to reduce the compensation
payable to External Affairs under the August 2003 Consulting Agreement by an
amount equal to the compensation payable to Mr. Brown as President and Chief
Operating Officer. External Affairs was granted 8,333 restricted shares of our
common stock in July 2003, which shares were forfeitable if, by January 6, 2004,
we had not met certain performance goals, which goals were met. Pursuant to the
agreement, External Affairs also received a five-year option to purchase an
aggregate of 25,000 shares of our common stock at $15.00 per share, of which (i)
options to purchase 8,333 shares vest in 25% increments every three months
beginning September 9, 2003 conditioned on Mr. Brown continuing to render
services to us at the end of each three-month period, and (ii) options to
purchase 16,667 shares will vest on July 9, 2008, subject to earlier vesting in
June 2004 based upon a formula contained in the agreement. The agreement
provides that, upon the occurrence of a change in control of our company, all
options described in the agreement will be deemed fully vested and exercisable.
The agreement is terminable by either us or External Affairs for any reason on
ninety days prior written notice, subject to certain offset rights in the event
of termination by External Affairs for other than "good reason". External
Affairs has transferred all of its options and restricted shares to Mr. Brown.
During 2004 and 2003, we paid an aggregate of $310,450 to External Affairs in
consulting fees.
During 2003, we issued five-year warrants to purchase (i) 2,067 shares of
our common stock at $41.40 per share on April 1, 2003, (ii) 4,133 shares of our
common stock at $41.40 per share on June 24, 2003, and (iii) 3,000 shares of our
common stock at $30.00 per share on July 1, 2003, to Andrew Brown as
compensation for consulting services provided to us under our agreement with
External Affairs.
The brother of Mr. Louis Hyman, our Executive Vice President and Chief
Technology Officer, is the president of TekPerts Technologies, Inc., a
technology consulting firm. On October 1, 2003, we entered into a one-year
consulting agreement with TekPerts Technologies, under which we agreed to pay
TekPerts Technologies a monthly consulting fee of $11,667 and to grant an option
to purchase an aggregate of 1,167 shares of our common stock at an exercise
price of $27.00 per share, the closing price of our common stock on the American
Stock Exchange on such date, which options vest as to 146 shares quarterly
beginning December 31, 2003. The agreement with TekPerts Technologies was
terminated by us as of June 1, 2004.
57
Andrew Brown's sister is employed by HealthRamp, as a Business Manager, at
an annual base salary of $55,000. In October 2003, she was granted options to
purchase 833 shares of our common stock at an exercise price of $26.40 per
share, the closing price of our common stock on the American Stock Exchange on
the date of grant.
Until his termination by us, Darryl Cohen's brother was employed by us as
Sales Director, Practice Management System of HealthRamp, at an annual base
salary of $72,500. On December 1, 2003, he was granted options to purchase 833
shares of our common stock at an exercise price of $41.40 per share, the closing
price of our common stock on the American Stock Exchange on the date of grant.
Prior to his resignation effective on September 8, 2004, Mitchell M.
Cohen, our former executive vice president and chief financial officer, had a
one-year employment agreement terminating on November 30, 2004. The Agreement
provided that Mr. Cohen will be compensated at an annual salary of $180,000. The
agreement also provided for the grant of options to purchase an aggregate of
6,667 shares of our common stock in eight equal three-month installments, the
first of which vests on December 31, 2003, in each case provided that Mr. Cohen
is in our employ at such time. Such options were granted on November 20, 2003 at
an exercise price of $26.40 per share, when the closing price of our common
stock on that date on the American Stock Exchange was $39.00. If Mr. Cohen had
been terminated by us without cause prior to September 30, 2004, he would have
been entitled to his base salary for three months.
On November 10, 2003, we completed the purchase of substantially all of
the tangible and intangible assets, and assumed certain liabilities of the
Frontline Physicians Exchange and Frontline Communications business of The
Duncan Group, Inc. We paid (a) $1,567,000 in cash at the closing, (b) $500,000
payable through the issuance of our common stock (approximately 15,267 shares)
the resale value of which is guaranteed to the seller under certain conditions,
(c) $1,500,000 payable through the issuance of our common stock (approximately
42,450 shares) that will be delivered to the seller only if the revenue of the
acquired business exceeds $1 million for all of 2003, (d) a royalty equal to 15%
of the gross revenue of the business during 2003 and 2004, (e) up to an
additional $1,500,000 payable through the issuance of our common stock based on
the number of physician offices that are active customers of the seller who
adopt our technology and generate certain revenues to us, and (f) an additional
$1,000,000 payable through the issuance of our common stock if the average
annual revenue of the acquired business for the calendar years 2003 and 2004
equals or exceeds $1,500,000. Our board of directors approved the purchase of
Frontline, which was effectuated as an arm's length transaction, in November
2003. In November 2003, in connection with our acquisition of Frontline, The
Duncan Group, Inc. received an aggregate 61,050 shares of our common stock,
45,788 shares of which were subject to forfeiture if a revenue goal was not met,
which has been attained. Ms. Nancy Duncan, our former executive vice president,
and M. David Duncan, are husband and wife and together own, indirectly, all of
the issued and outstanding stock of The Duncan Group, Inc.
On September 30, 2004, we closed the transaction pursuant to that certain
Asset Purchase Agreement, dated as of September 29, 2004, by and among us, The
Duncan Group, Inc., M. David Duncan and Nancy L. Duncan, to sell the assets
previously acquired from The Duncan Group, Inc. on November 10, 2003 related to
the business of Duncan known as Frontline Physicians Exchange and Frontline
Communications. In accordance with the Asset Purchase Agreement, we agreed to
sell all of the assets of our Frontline division, now known as the OnRamp
division, to The Duncan Group, Inc. in consideration of (i) our receipt of
$500,000 in cash paid at closing; (ii) termination of the employment agreement
between us and each of M. David Duncan and Nancy L. Duncan; (iii) release and
discharge of our obligations to Duncan under that certain Asset Purchase
Agreement dated as of November 7, 2003, between the Company and Duncan (the
"2003 Purchase Agreement"), to issue to Duncan up to an additional $2,500,000
through the issuance of shares of our common stock upon the achievement of
certain financial milestones; (iv) release and discharge of our obligations to
Duncan under the 2003 Purchase Agreement to pay Duncan a royalty equal to 15% of
the gross revenue of the OnRamp business during 2003 and 2004; and (v) release
and discharge of our obligations under the 2003 Purchase Agreement to pay Duncan
any shortfall amount following the sale of certain shares of our common stock by
Duncan. Our board of directors approved the sale of OnRamp, which was
effectuated as an arm's length transaction, on September 29, 2004.
58
In connection with our sale of OnRamp, Nancy Duncan's two-year employment
agreement with us which provided that Ms. Duncan will be compensated at an
annual salary of $140,000 was terminated. In connection with our sale of OnRamp,
our employment relationship with M. David Duncan, previously employed by us at
an annual salary of $90,000, was terminated.
59
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
BDO Seidman, LLP served as the Company's independent registered public
accountants for the fiscal years ended December 31, 2004 and 2003.
Audit Fees
BDO Seidman, LLP fees totaled $433,000 and $380,000 for 2004 and 2003,
respectively, for services rendered for the audit of our annual consolidated
financial statements for fiscal 2004 and 2003 included in our Form 10-K and the
reviews of the financial statements included in our Forms 10-Q for said periods.
Audit-Related Fees
For fiscal 2004 and 2003, BDO Seidman, LLP billed us $215,000 and $150,000
respectively for services rendered for assurance, consultations and related
services that are reasonably related to the performance of the audit or review
of the financial statements of the Company.
Tax Fees
For fiscal 2004 and 2003, BDO Seidman, LLP billed us $39,000 and $50,000,
respectively, for services rendered in connection with tax consultation and
compliance for the Company.
All Other Fees
There were no other fees paid to BDO Seidman, LLP during the fiscal years
ended December 31, 2004 and 2003.
In connection with the revised standards for independence of the Company's
independent registered public accountants promulgated by the SEC, the Audit
Committee has considered whether the provision of such services is compatible
with maintaining the independence of BDO Seidman, LLP and has determined that
such services are compatible with the continued independence of BDO Seidman,
LLP.
It is our practice that all services provided to us by our independent
registered public accountants be pre-approved by our Audit Committee. No part of
our independent auditor services related to Audit Related Fees, Tax Fees or All
Other Fees listed above was approved by the audit committee pursuant to the
exemption from pre-approval provided by paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
60
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
(a) Documents filed as part of this Report
(1) Financial Statements
See Financial Statements included after the signature page beginning at page
F-1.
(2) Financial statement schedules
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
(3) List of Exhibits
The exhibits listed in the accompanying Exhibit Index are filed or incorporated
by reference as part of this Report.
61
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 F-8
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Ramp Corporation
New York, NY
We have audited the accompanying consolidated balance sheets of Ramp
Corporation and subsidiaries (the Company) as of December 31, 2004 and 2003, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public
Company Oversight Accounting 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. The Company is not
required to have, nor were we engaged to perform, an audit over its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ramp
Corporation and subsidiaries at December 31, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
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 has experienced
significant recurring losses from operations and has deficiencies in working
capital and equity at December 31, 2004 that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/BDO Seidman, LLP
BDO Seidman, LLP
New York, NY
March 16, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Medix Resources, Inc.
New York, NY
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of Medix Resources, Inc. and
subsidiaries (the Company) for the year ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with 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
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Medix Resources, Inc. and subsidiaries for the year ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has experienced recurring
losses and has a working capital deficit which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 14, 2003
Denver, Colorado
F-3
Ramp Corporation (formerly Medix Resources, Inc.)
Consolidated Balance Sheets
December 31,
------------------------------
2004 2003
------------- -------------
Assets
Current assets
Cash $ 455,000 $ 1,806,000
Accounts receivable, less allowance for doubtful
accounts of $17,000 - 2004; nil - 2003 97,000 182,000
Deferred financing costs 79,000 --
Prepaid expenses and other 540,000 321,000
------------- -------------
Total current assets 1,171,000 2,309,000
------------- -------------
Non-current assets
Property and equipment, net 796,000 731,000
Security deposits 254,000 398,000
Goodwill 1,792,000 4,853,000
Other intangible assets, net 300,000 1,382,000
------------- -------------
Total non-current assets 3,142,000 7,364,000
------------- -------------
Total assets $ 4,313,000 $ 9,673,000
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Promissory notes and current portion of long term debt,
net of debt discount of $225,000 - 2004; nil - 2003 $ 469,000 $ 232,000
Accounts payable 1,859,000 847,000
Accounts payable - related parties -- 261,000
Accrued expenses 4,889,000 2,065,000
Deferred revenue 260,000 2,000
------------- -------------
Total current liabilities 7,477,000 3,407,000
------------- -------------
Long-term debt, net of current portion and
debt discount of $135,000 and $169,000 65,000 269,000
Commitments and contingencies
Stockholders' equity (deficit)
1996 Preferred stock, 10% cumulative convertible, $1 par value,
488 shares authorized, 155 shares issued, 1 share outstanding,
liquidation preference $10,000 plus accrued and unpaid dividends -- --
2003 Series A convertible stock, $1 par value, 3,200 shares
authorized, nil and 3,112 shares issued and outstanding at
December 31, 2004 and 2003, respectively -- 3,000
Common stock, $0.001 par value, 400,000,000 shares authorized,
6,333,733 and 2,420,740 issued and outstanding at
December 31, 2004 and 2003, respectively 6,000 2,000
Deferred compensation (1,395,000) (86,000)
Additional paid-in capital 120,259,000 78,446,000
Accumulated deficit (122,099,000) (72,368,000)
------------- -------------
Total stockholders' equity (deficit) (3,229,000) 5,997,000
------------- -------------
Total Liabilities and Stockholders' Equity (Deficit) $ 4,313,000 $ 9,673,000
============= =============
See notes to consolidated financial statements.
F-4
Ramp Corporation (formerly Medix Resources, Inc.)
Consolidated Statements of Operations
2004 2003 2002
--------------------------------------------
Revenues $ 264,000 $ 191,000 $ --
Costs and expenses
Software and technology costs 6,381,000 2,756,000 2,366,000
Selling, general and administrative expenses 21,193,000 14,493,000 5,912,000
Costs associated with terminated acquisition -- 142,000 309,000
--------------------------------------------
Total operating expenses 27,574,000 17,391,000 8,587,000
--------------------------------------------
Other income (expense)
Other income 50,000 26,000 (47,000)
Interest expense and other financing costs (11,664,000) (9,856,000) (380,000)
Debt conversion expense (6,713,000) -- --
--------------------------------------------
Total other income (expense) (18,327,000) (9,830,000) (427,000)
--------------------------------------------
Loss from continuing operations (45,637,000) (27,030,000) (9,014,000)
--------------------------------------------
Loss from discontinued operations (174,000) (109,000) --
Loss on sale of discontinued operations (3,920,000) -- --
--------------------------------------------
Loss from discontinued operations (4,094,000) (109,000) --
--------------------------------------------
Net loss (49,731,000) (27,139,000) (9,014,000)
--------------------------------------------
Disproportionate deemed dividend issued
to certain warrant holders (1,034,000) (2,026,000) --
Beneficial conversion feature discount related to
2003 Series A convertible preferred stock -- (2,156,000) --
--------------------------------------------
Net loss applicable to common stockholders $(50,765,000) $(31,321,000) $ (9,014,000)
============================================
Net loss per share basic and diluted:
Continuing operations ($13.54) ($20.84) ($8.53)
Discontinued operations (1.19) -- --
--------------------------------------------
Net loss applicable to common stockholders ($14.73) ($20.84) ($8.53)
============================================
Basic and diluted weighted average
common shares outstanding 3,446,268 1,502,634 1,056,955
See notes to consolidated financial statements.
F-5
Ramp Corporation
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
For the Years Ended December 31, 2004, 2003 and 2002
------------------------------------------------------------------------------------------------------------------------------------
1996 1999 Series C 2003 Series A
Preferred Stock Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance- December 31, 2001 1 0 375 0 0 0 944,190 $1,000
Extension of warrant exercise period
Exercise of options and warrants 29,116 0
Warrants and in the money conversion
feature issued with convertible note payable
Warrants issued in satisfaction of liability
Stock issued on conversion of note payable 40,087 0
Stock and warrants issued in private placement 228,375 0
Preferred Stock conversions (300) 11,667 0
Stock Issued with equity line, net of offering cost of $77,000 32,579 0
Stock options and warrants Issued for services
Stock options issued to officer for financial support
Fair Value of option vesting acceleration
Warrants issued to officer for cash advance made
Net loss
Dividends declared
-----------------------------------------------------------------------------
Balance- December 31, 2002 1 0 75 0 0 0 1,286,014 1,000
Modification of warrants in return for nonemployee services
Stock, Warrants and Options in return for nonemployee services
Stock-based compensation 16,667
Exercise of options and warrants 124,387
Warrants and beneficial conversion discounts
associated with private placements of convertible
debentures and promissory notes
Common Stock issued for conversion of debentures
and promissory notes 678,417 1,000
Common Stock issued for acquisition of ePhysicians 1,667
------------------------------------------------------------------------------------------------------------------------------
Additional Total
Paid-in Accumulated Deferred Equity
Capital Deficit Compensation (Deficit)
------------------------------------------------------------------------------------------------------------------------------
Balance- December 31, 2001 $35,403,000 ($34,059,000) $0 $1,345,000
Extension of warrant exercise period 58,000 58,000
Exercise of options and warrants 817,000 817,000
Warrants and in the money conversion
feature issued with convertible note payable 70,000 70,000
Warrants issued in satisfaction of liability 590,000 590,000
Stock issued on conversion of note payable 1,048,000 1,048,000
Stock and warrants issued in private placement 5,201,000 5,201,000
Preferred Stock conversions 1,000 1,000
Stock Issued with equity line, net of offering cost of $77,000 972,000 972,000
Stock options and warrants Issued for services 260,000 260,000
Stock options issued to officer for financial support 132,000 132,000
Fair Value of option vesting acceleration 94,000 94,000
Warrants issued to officer for cash advance made 44,000 44,000
Net loss (9,014,000) (9,014,000)
Dividends declared
-----------------------------------------------------------------------
Balance- December 31, 2002 44,690,000 (43,073,000) 0 1,618,000
Modification of warrants in return for nonemployee services 110,000 110,000
Stock, Warrants and Options in return for nonemployee services 1,173,000 1,173,000
Stock-based compensation 2,402,000 (86,000) 2,316,000
Exercise of options and warrants 1,625,000 1,625,000
Warrants and beneficial conversion discounts
associated with private placements of convertible
debentures and promissory notes 8,388,000 8,388,000
Common Stock issued for conversion of debentures
and promissory notes 10,792,000 10,793,000
Common Stock issued for acquisition of ePhysicians 48,000 48,000
See notes to consolidated financial statements
F-6
Ramp Corporation
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
For the Years Ended December 31, 2004, 2003 and 2002
------------------------------------------------------------------------------------------------------------------------------------
1996 1999 Series C 2003 Series A
Preferred Stock Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Common Stock issued for acquisition of Frontline 61,050
Common Stock and warrants issued
in private placements 230,403
Exchange of 1999 Series C Preferred Stock
for common stock (75) 2,500
2003 series A Preferred stock issued in
private placement 3,112 3,000
Net loss
-----------------------------------------------------------------------------
Balance- December 31, 2003 1 0 0 0 3,112 3,000 2,420,740 2,000
Issuance and modification of stock and warrants
associated with financings 38,889 0
Modification of warrants in return for nonemployee services
Stock, Warrants and Options issued for nonemployee services 481,079
Stock-based compensation 798,811 1,000
Exercise of options and warrants 1,197,331 1,000
Warrants and beneficial conversion discounts
associated with private placements of convertibles
debentures and promissory notes 408,957 1,000
Common Stock issued for conversion of debentures,
promissory notes and preferred stock including
debt conversion costs (3,112) (3,000) 451,819 1,000
Common Stock issued for acquisition 316,290
Common Stock and warrants issued
in private placements 219,817 0
Net loss
-----------------------------------------------------------------------------
Balance- December 31, 2004 1 0 0 0 0 0 6,333,733 $6,000
=============================================================================
------------------------------------------------------------------------------------------------------------------------------
Additional Total
Paid-in Accumulated Deferred Equity
Capital Deficit Compensation (Deficit)
------------------------------------------------------------------------------------------------------------------------------
Common Stock issued for acquisition of Frontline 2,638,000 2,638,000
Common Stock and warrants issued
in private placements 3,637,000 3,637,000
Exchange of 1999 Series C Preferred Stock
for common stock 0
2003 series A Preferred stock issued in
private placement 2,943,000 (2,156,000) 790,000
(27,139,000) (27,139,000)
Net loss
-----------------------------------------------------------------------
Balance- December 31, 2003 78,446,000 (72,368,000) (86,000) 5,997,000
Issuance and modification of stock and warrants
associated with financings 1,073,000 1,073,000
Modification of warrants in return for nonemployee services 89,000 89,000
Stock, Warrants and Options issued for nonemployee services 3,731,000 3,731,000
Stock-based compensation 7,099,000 (1,309,000) 5,791,000
Exercise of options and warrants 3,871,000 3,872,000
Warrants and beneficial conversion discounts
associated with private placements of convertibles
debentures and promissory notes 9,095,000 9,096,000
Common Stock issued for conversion of debentures,
promissory notes and preferred stock including debt
conversion costs 10,874,000 10,872,000
Common Stock issued for acquisition 454,000 454,000
Common Stock and warrants issued
in private placements 5,527,000 5,527,000
Net loss (49,731,000) (49,731,000)
-----------------------------------------------------------------------
Balance- December 31, 2004 $120,259,000 ($122,099,000) ($1,395,000) ($3,229,000)
=======================================================================
See notes to consolidated financial statements
F-7
Ramp Corporation (formerly Medix Resources, Inc.)
Consolidated Statements of Cash Flows
For the Years Ended December 31,
--------------------------------------------
2004 2003 2002
--------------------------------------------
Cash flows from operating activities
Net loss $(49,731,000) $(27,139,000) $ (9,014,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Loss from discontinued operations 174,000
Loss on sale of discontinued operations 3,920,000 -- --
Depreciation and amortization 456,000 294,000 343,000
Impairment of long-lived assets 314,000 -- --
Loss on disposal of assets -- -- 69,000
Write-off of capitalized software costs -- -- 1,066,000
Common stock, options, warrants and promissory note
issued for services, consulting and settlements 9,522,000 4,105,000 354,000
Common stock, warrants and promissory note issued for
interest and other financing costs, non-cash portion 18,007,000 9,428,000 304,000
Changes in assets and liabilities
Accounts receivable, net 85,000 3,000 --
Prepaid expenses and other (75,000) (553,000) 238,000
Accounts payable and accrued liabilities 3,575,000 1,186,000 998,000
Deferred revenue 258,000 (171,000) 173,000
--------------------------------------------
Net cash used in operating activities (13,495,000) (12,847,000) (5,469,000)
--------------------------------------------
Cash flows from investing activities:
Net proceeds from sale of discontinued operations 449,000 -- --
Software development costs incurred -- -- (633,000)
Purchase of property and equipment (905,000) (331,000) (96,000)
Business acquisition costs, net of cash acquired -- (2,079,000) --
--------------------------------------------
Net cash used in investing activities (456,000) (2,410,000) (729,000)
--------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of debt and notes payable 6,182,000 7,771,000 1,000,000
Principal payments on debt and notes payable (2,981,000) (262,000) (355,000)
Proceeds from issuance of preferred and
common stock, net of offering costs 5,527,000 6,560,000 6,097,000
Proceeds from the exercise of options and warrants 3,872,000 1,625,000 817,000
--------------------------------------------
Net cash provided by financing activities 12,600,000 15,694,000 7,559,000
--------------------------------------------
Net increase/(decrease) in cash (1,351,000) 437,000 1,361,000
Cash, beginning of period 1,806,000 1,369,000 8,000
--------------------------------------------
Cash, end of period $ 455,000 $ 1,806,000 $ 1,369,000
============================================
Supplemental information to statement of cash flows:
Cash paid for interest $ 3,000 $ 118,000 $ 28,000
Conversion of notes payable and accrued
interest into common stock 5,175,000 -- 1,000,000
Common stock issued in connection with acquisitions 454,000 2,685,000 --
Dividends declared payable in common stock -- -- 2,000
See notes to consolidated financial statements for additional
supplemental cash flow information
F-8
RAMP CORPORATION
(formerly Medix Resources, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Ramp Corporation (formerly known as Medix Resources, Inc.), a Delaware
corporation, through its wholly-owned HealthRamp subsidiary, provides Internet
based communication, data integration, and transaction processing designed to
provide access to safer and better healthcare. Ramp's products enable
communication of high value-added healthcare information among physician
offices, hospitals, health management organizations, and health insurance
companies. The Company was originally incorporated in Colorado in 1988 as
Nur-Staff West, Inc. In 1988, the Company changed its name to Med-Temps,
Incorporated, in 1990, the Company changed its name to International Nursing
Services, Inc. and in 1998 the Company changed its name to Medix Resources, Inc.
From 1988 until 2000, the Company operated as a temporary healthcare staffing
company, with offices at various times in Colorado, New York, Texas and
California. The Company disposed of the healthcare staffing operations in
February 2000 and retained only the offices in Colorado which the Company closed
in 2003 and relocated its headquarters to New York City.
In January 1998, the Company acquired Cymedix Corporation, which was
merged into its wholly-owned healthcare technology subsidiary, Cymedix Lynx
Corporation, and in 2000 began focusing solely on the development and
commercialization of software and connectivity solutions for certain areas of
the healthcare industry. In March, 2003 the Company acquired the business and
assets of ePhysician, Inc., whose technology has been integrated with those of
our previously developed Cymedix suite of technologies, resulting in the
CarePoint(TM) Suite (the "CarePoint Suite") that the Company is currently
marketing to physicians and other healthcare professionals.
In November 2003, the Company acquired the businesses and assets of
Frontline Physicians Exchange and Frontline Communications ("Frontline"), used
in or necessary for the conduct of its 24-hour telephone answering services for
physicians and other medically-related businesses and virtual office services to
non-medical businesses and professionals. In September 2004, the Company sold
all of the assets of the Frontline division, known as the OnRamp division, to
the former owners of Frontline. The sale of OnRamp is part of refocusing the
Company's financial resources and management efforts on its core HealthRamp
operations.
In 2003, the Company formed a wholly-owned subsidiary, LifeRamp Family
Financial, Inc. ("LifeRamp"), in Utah that has not yet commenced business
operations. LifeRamp's business purpose is the making of non-recourse loans to
terminally ill cancer patients secured by their life insurance policies. In July
2004, the Company decided to indefinitely delay the commencement of business
operations of LifeRamp while exploring financing and other possible
alternatives. Subsequently in October 2004, the Company ceased all operations at
LifeRamp and is actively pursuing alternatives for its LifeRamp investment. In
January 2005, the Company began exploring options for capitalizing the LifeRamp
business separately from the Company or spinning off all or a portion of
LifeRamp. In February 2005, LifeRamp received $300,000 in bridge financing from
investors in contemplation of such a transaction (see Note 13 - Subsequent
F-9
Events). The LifeRamp business is using the proceeds from the bridge financing
to fund operations while it pursues the strategic recapitalization. There can be
no assurance that the Company will complete a transaction that will recoup its
investment or any portion thereof.
The accompanying consolidated financial statements have been prepared on a
going concern basis that contemplates the realization of assets and liquidation
of liabilities in the ordinary course of business. The Company has incurred
significant operating losses for the past several years, the majority of which
are related to the development of the Company's healthcare connectivity
technology and related marketing efforts. These losses have produced operating
cash flow deficiencies, negative working capital and a significant retained
deficit,, which raise substantial doubt about its ability to continue as a going
concern. The Company's future operations are dependent upon management's ability
to source additional equity capital.
The Company expects to continue to experience losses in the near term,
until such time that its technologies can be successfully deployed with
physicians to produce revenues. The continuing deployment, marketing and the
development of the merged technologies will depend on the Company's ability to
obtain additional financing. The Company has not generated any significant
revenue to date from this technology. The Company is currently funding
operations through the sale of debt and equity instruments, and there are no
assurances that additional investments or financings will be available as needed
to support the development and deployment of the merged technologies. The need
for the Company to obtain additional financing is acute and failure to obtain
adequate financing could result in lost business opportunities, the sale of the
Company at a distressed price or may lead to the financial failure of the
Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Ramp Corporation and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
On December 1, 2004, the Company completed a 1-for-60 reverse stock split
of its outstanding common stock. All information related to common stock,
options and warrants to purchase common stock and per share amounts included in
the accompanying consolidated financial statements have been adjusted to give
effect to the reverse stock split.
Use of Estimates
The preparation of consolidated 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 date of such financial statements and the reported amounts of
revenue and expenses during the periods indicated. Actual results could differ
from those estimates.
Concentrations of Credit Risk
The Company's credit concentrations are limited due to the wide variety of
customers in the health care industry and the geographic areas into which the
Company's systems and services are sold.
F-10
At certain times during the year, the Company maintains cash and cash
equivalents in bank accounts in amounts above the federally insured limits.
Fair Value of Financial Instruments
Due to their short maturities, the carrying value of financial
instruments, including cash and cash equivalents, accounts receivable and
accounts payable approximate their fair values as of December 31, 2004 and 2003.
The carrying amounts of debt instruments approximate their fair value as
of December 31, 2004 and 2003 because interest rates on these instruments
approximate market interest rates and their maturities are short in duration.
Revenue Recognition
We account for our revenue under the provisions of Statement of Position
97-2, "Software Revenue Recognition," as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions". We derive our revenues from three primary sources: license
revenues, comprised of fees associated with the licensing of our software to
physicians and long term care facilities; service revenues, from maintenance and
consulting and training services; and revenues from sales to pharmaceutical
companies and other partners. Revenue is recognized when persuasive evidence of
an arrangement exists, all obligations have been performed pursuant to the terms
of such an arrangement, the product has been delivered, the fee is fixed or
determinable and the collection of the resulting receivable is reasonably
assured. If any of these criteria are not met, we defer revenue recognition
until such time as all criteria are met. Revenue is generally recognized over
the term of the contract. Payments received in advance are recognized as
deferred revenue.
In October 2004, the Company purchased the business assets of Berdy
Medical Systems, Inc., a company that develops, markets and licenses computer
software and hardware for use in physician practices. Software license revenues
and system (third party computer hardware) sales are recognized upon execution
of the sales contract and delivery of the software and/or hardware. In all
cases, however, the fee must be fixed or determinable, collection of any related
receivable must be considered probable, and no significant post-contract
obligations of the Company shall be remaining. Otherwise, the sale is deferred
until all of the requirements for revenue recognition have been satisfied.
Maintenance fees for routine client support and unspecified product updates are
recognized ratably over the term of the maintenance arrangement. Training,
implementation and EDI services revenues are recognized as the services are
performed.
Segment Information
The Company follows Statement of Financial Accounting Standard ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related Information",
which establishes standards for reporting and displaying certain information of
operating segments. As a result of the Company's sale of all of the assets of
Frontline on September 30, 2004, the Company discontinued its professional
services segment and manages and evaluates its operations in one reportable
segment: Technology. The results of operations of the professional services
segment have been classified as discontinued operations and prior periods have
been restated.
F-11
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences result primarily
from depreciation and amortization, and net operating loss carryforwards.
Purchase Accounting Valuations
As required under generally accepted accounting principles, when we make
acquisitions such as the assets and businesses of Frontline in 2003 and Berdy
Medical Systems in 2004 we make estimates of the fair value of tangible and
intangible assets acquired and liabilities assumed. The determination of fair
value requires significant judgments and estimates that affect the carrying
value of our assets and liabilities. Periodically, we evaluate our estimates,
including those related to the carrying value of tangible assets, long-lived
assets, capitalized costs and accruals. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable.
Actual results may differ from these estimates under different assumptions or
conditions and as circumstances change.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided
utilizing the straight-line method over the estimated useful lives for owned
assets, ranging from 3 to 7 years.
Software and Technology Costs
The Company incurred $6,381,000, $2,756,000 and $2,366,000 of costs during
2004, 2003 and 2002, respectively, associated with its software research and
development efforts, which it expensed in the accompanying statements of
operations. Such costs primarily include payroll, employee benefits, and other
headcount-related costs associated with product development. Technological
feasibility for the Company's software products is reached shortly before the
products are released commercially. Costs incurred after technological
feasibility is established are not material, and, accordingly the Company
expenses all software and technology costs when incurred.
During 2003, the Company had provided advances totaling approximately
$462,000 to a company that has technology that the Company was potentially
interested in acquiring (either in whole or in part) and to a second company
that was to complete the development of this technology, the advances being on a
"work-for-hire" basis with ownership of the work belonging to the Company. It
was ultimately determined that the technology did not meet the agreed-upon
performance criteria and in the third quarter of 2003, the Company wrote off the
entire amount advanced, which is reflected in software and technology costs in
the accompanying statement of operations.
Interest Expense and Other Financing Costs
In addition to interest expense, the Company records financing and certain
offering costs associated with its capital raising efforts in its statements of
operations. These include amortization of debt issue costs such as cash,
warrants and other securities issued to finders and other service providers, and
amortization of debt discount created by in-the-money conversion features on
convertible debt accounted for in accordance with Emerging Issues Task Force
("EITF") Issue 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," and Issue
00-27, "Application of Issue 98-5 to Certain Convertible Instruments," by other
securities issued in connection with debt as a result of allocating the proceeds
amongst the securities in accordance with Accounting Principles Board ("APB")
Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants", based on their relative fair values, and by any value
associated with inducements to convert debt in accordance with SFAS No. 84,
"Induced Conversions of Convertible Debt".
F-12
Long Lived Assets
The Company reviews its long-lived assets, including its property and
equipment and its intangible assets other than goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recovered in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". The Company looks primarily to the
undiscounted future cash flows in its assessment of whether or not long-lived
assets have been impaired. In 2004, the Company abandoned its Florida office,
ceased all operations of LifeRamp and commenced vacating its office facilities
in Texas and Utah. In connection with these abandonments, the Company recorded
an asset impairment charge of approximately $314,000 relating to fixed assets
and leasehold improvements. In January 2005, the Company began exploring options
for capitalizing the LifeRamp business separately from the Company or spinning
off all or a portion of LifeRamp - see Note 13, Subsequent Events. During 2003
and 2002, the Company determined that no impairment charges were necessary.
Goodwill
Under SFAS No. 142, the Company reviews its goodwill for impairment at
least annually, or more frequently whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recovered. The Company
first looks to the market capitalization of the Company in its assessment of
whether or not total goodwill has been impaired. Although the market
capitalization of the Company as a whole during 2004 exceeded the aggregate net
worth of the Company, the analysis required under generally accepted accounting
principles is to be done by reporting unit. In connection with the sale of
OnRamp, goodwill of $3,357,000 was removed from the balance sheet in the third
quarter of 2004 (see Note 4 - Discontinued Operations). Absent the sale of
OnRamp, the Company would likely have written down goodwill and other intangible
assets associated with its OnRamp operations in response to changing business
conditions during the third quarter. Notwithstanding this, during 2004 and 2003,
the Company determined that no impairment of its goodwill was required. Total
goodwill, at December 31, 2004, includes $1,605,000 related to the unamortized
balance of goodwill acquired through the Cymedix acquisition in 1998, and
$187,000 of goodwill related to the acquisition of the assets of Berdy Medical
Systems in October 2004 (see Note 3 - Acquisitions).
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
were $845,000, $1,344,000 and $23,000 for the years ended December 31, 2004,
2003, and 2002, respectively. Approximately $601,000 and $872,000 was incurred
during 2004 and 2003, respectively in conjunction with our television
advertisement campaign.
F-13
Basic Loss Per Share
The Company applies the provisions of SFAS No. 128, "Earnings Per Share".
All dilutive potential common shares have an antidilutive effect on diluted per
share amounts and therefore have been excluded in determining net loss per
share. Accordingly, the Company's basic and diluted loss per share are
equivalent and, accordingly, only basic loss per share has been presented.
Stock Based Compensation
The Company accounts for employee stock-based compensation awards based on
their intrinsic value in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations Under the intrinsic value
method, no compensation expense is recognized for employee stock-based
compensation awards for which the exercise price and number of shares are known
at the grant date, the exercise price is equal to the fair market value at the
grant date, and vesting will occur solely based on the passage of time. In
addition, restricted stock awards have been granted without cost to the
recipients and are being expensed on a straight-line basis over the vesting
periods.
The Company accounts for non-employee stock based compensation awards
based on their fair value in accordance with SFAS No. 123, "Accounting For Stock
Based Compensation" as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure - an Amendment SFAS No. 123".
The Company has adopted the disclosure-only provisions of SFAS No.123 and
continues to apply the accounting principles prescribed by APB No. 25 to its
employee stock-based compensation awards. The weighted-average estimated grant
date fair value, as defined by SFAS No.123, of options granted in 2004 and 2003,
was $0.23 and $0.31, respectively and was immaterial in 2002, as calculated
using the Black-Scholes option valuation model. Had compensation cost for the
Company's options issued to its employees been determined based on the fair
value at the grant date for awards consistent with the provisions of SFAS No.
123, the Company's net loss and net loss per common share would have been
changed to the pro forma amounts indicated below:
Year ended December 31,
-------------------------------------------------------
2004 2003 2002
-------------------------------------------------------
Net loss applicable to common
stockholders - as reported $ (50,765,000) $ (31,321,000) $ (9,014,000)
Add: stock based employee compensation
cost included in net loss 1,351,000 2,328,000 -
Less: stock based employee compensation
cost as if the fair value method had been
applied to all awards (2,895,000) (3,867,000) (2,184,000)
Net loss applicable to common stockholders
-------------------------------------------------------
- pro forma $ (52,309,000) $ (32,860,000) $ (11,198,000)
-------------------------------------------------------
Basic and diluted per common share
-------------------------------------------------------
- as reported $ (14.73) $ (20.84) $ (8.53)
-------------------------------------------------------
Basic and diluted per common share
-------------------------------------------------------
- pro forma $ (15.18) $ (21.87) $ (10.59)
-------------------------------------------------------
F-14
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
Year ended December 31,
--------------------------------------------------
2004 2003 2002
--------------------------------------------------
Approximate risk free rate 3.69% 5.50% 5.50%
Average expected life 5 years 5 years 5 years
Dividend yield 0% 0% 0%
Volatility range 106% - 124% 90.65% - 114.85% 95%
The Black-Scholes option valuation model was not developed for use in
valuing employee stock options. Instead, this model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable, which differ significantly from the Company's stock
option awards. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Reclassifications
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Share-Based Payment" (SFAS 123R), which replaces SFAS 123
and supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. For the Company, SFAS 123R is effective for
periods beginning after June 15, 2005. Early application of SFAS 123R is
encouraged, but not required.
Public companies are required to adopt the new standard using a modified
prospective method and may elect to restate prior periods using the modified
retrospective method. Under the modified prospective method, companies are
required to record compensation cost for new and modified awards over the
related vesting period of such awards prospectively and record compensation cost
prospectively for the unvested portion, at the date of adoption, of previously
issued and outstanding awards over the remaining vesting period of such awards.
No change to prior periods presented is permitted under the modified prospective
method. Under the modified retrospective method, companies record compensation
costs for prior periods retroactively through restatement of such periods. The
Company has not yet determined the method of adoption it will use.
In December 2004, the FASB issued SFAS No. 153, which amends Accounting
Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions" to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 is effective for nonmonetary
assets exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company is currently evaluating the impact of SFAS 153.
NOTE 3 - ACQUISITIONS
On October 22, 2004, the Company purchased from Berdy Medical Systems,
Inc. ("Berdy"), all of the tangible and intangible assets of Berdy. The purchase
price consisted of an aggregate amount of $400,000 payable through the issuance
of restricted shares of the Company's common stock, par value $.001. In
addition, Berdy shall receive five (5%) percent of maintenance fees collected in
connection with the SmartClinic electronic medical records system business
purchased by the Company over a two-year period pursuant to the terms and
conditions of an escrow agreement. In connection with the closing, each of
Berdy's principal executive officers, Jack Berdy, MD and Mr. Rick Holtmeier have
entered into employment agreements with the Company's wholly-owned subsidiary
HealthRamp, Inc., on terms and conditions agreed upon by both parties. The
allocation of the purchase price of the Berdy assets to the assets purchased
based on their estimated fair market values at the date of acquisition is as
follows:
F-15
Tangible assets $ 12,500
Technology 225,000
Customer - related intangibles 79,800
Customer - related liabilities (49,900)
Goodwill 186,600
--------
Total $454,000
========
The pro forma impact of the acquisition of the assets of Berdy is
insignificant to the financial statements of the Company.
On March 4, 2003, the Company purchased from Comdisco Ventures, Inc.,
substantially all of the assets formerly used by ePhysician, Inc. in its
software and technology business. Prior to its cessation of operations in 2002,
ePhysician developed and provided ePhysician Practice, a suite of software
products that enable physicians to prescribe medications, access drug reference
data, schedule patients, view formulary information, review critical patient
information and capture charges at the point of care using a Palm OS-based
handheld device and the Internet. The aggregate purchase price was $348,000,
including $300,000 of cash and 100,000 shares of the Company's common stock
valued at $48,000. The acquisition was accounted for as a purchase transaction
and, accordingly, the purchase price was allocated to the assets and liabilities
based on their estimated fair values. The Company's purchase price allocation to
the assets purchased based on their estimated fair market values at the date of
acquisition as follows:
Technology $150,000
Customer lists 50,000
Trademarks 50,000
Fixed assets 98,000
--------
Total $348,000
========
The above assets are being amortized over their estimated useful lives,
which range between one and two years.
Costs associated with terminated acquisitions amount to $142,000 and
$309,000 during 2003 and 2002, respectively, and relate to the write-off of
certain expenses associated with the PocketScripts acquisition. The Company
entered into an agreement to acquire PocketScripts, LLC in December 2002; the
agreement was terminated in March 2003.
F-16
NOTE 4 - DISCONTINUED OPERATIONS
On November 10, 2003, in connection with an Asset Purchase Agreement (the
"2003 Asset Purchase Agreement") entered into between the Company and The Duncan
Group, Inc., ("DGI"), the Company completed the purchase of substantially all of
the tangible and intangible assets, and assumed certain liabilities, of DGI,
d/b/a Frontline. Frontline provides telephone answering services to physicians
and other medically-related businesses and answering and other virtual office
services to non-medical businesses and professionals. In connection with the
2003 Asset Purchase Agreement, the Company agreed to pay (a) $1,567,000 in cash
at the closing, (b) $500,000 to be paid in common stock, (c) $1,500,000 to be
paid in common stock which is forfeitable if Frontline's gross revenue did not
total at least $1 million for the calendar year ended 2003, (d) additional cash
payments equal to 15% of Frontline's gross revenue during 2003 and 2004, (e) up
to an additional $1,500,000 to be paid in common stock based on the number of
physician offices that are active customers of DGI who adopt the Company's
technology and generate certain revenues to the Company, and (f) an additional
$1 million of common stock if the average annual revenue of Frontline for the
calendar years ending 2003 and 2004 equals or exceeds $1,500,000. In connection
with (b) and (c) above, the Company agreed to issue to DGI at closing such
number of shares of the Company's common stock equal to the specified dollar
amounts above, which number of shares were based upon the average closing price
of our common stock for the twenty (20) days immediately preceding the closing
date. Utilizing this formula, the Company issued an aggregate of 61,050 shares
of common stock to DGI at closing, which the Company valued at $43.20 per share,
the closing stock price on November 10, 2003, in accordance with EITF Issue
99-12, "Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination." In connection with the
expected cash payment equal to 15% of Frontline's gross revenues during 2003,
$221,000 was included as additional purchase price and was included in accounts
payable-related parties in 2003. The Company was to record additional purchase
price when and if the remaining conditions of (d), (e), and (f) were satisfied.
The acquisition was accounted for as a purchase transaction and,
accordingly, the purchase price was allocated to the assets and liabilities of
Frontline based on their estimated fair values as prepared by an independent
valuation specialist. Included in the valuation analysis are the values assigned
to purchased fixed assets, trade name and related trade marks, customer
relationships, non-compete agreements and software and other technology. The
estimated fair values included in the accompanying consolidated financial
statements as of December 31, 2003 were as follows:
Current assets $ 161,000
Property and equipment 194,000
Amortizable identifiable intangible assets 1,268,000
Goodwill 3,248,000
Liabilities (183,000)
-----------
Total $ 4,688,000
===========
On September 30, 2004, the Company closed a transaction pursuant to
another Asset Purchase Agreement (the "2004 Asset Purchase Agreement"), dated as
of September 29, 2004, by and between the Company, DGI, M. David Duncan (a
former employee of the Company) and Nancy L. Duncan (a former Executive Vice
President of the Company), to sell the assets of the Company previously acquired
from DGI on November 10, 2003 (including intellectual property, tangible
personal property, accounts receivable, and other assets, net of certain
liabilities) related to the business of Frontline. In accordance with the 2004
Asset Purchase Agreement, the Company agreed to sell all of the assets of the
Company's Frontline division, now known as the OnRamp division, in consideration
of (i) the Company's receipt of $500,000 in cash paid at closing; (ii)
termination of the employment agreement between the Company and each of M. David
Duncan and Nancy L. Duncan; (iii) release and discharge of the Company's
obligations to DGI under the 2003 Asset Purchase Agreement, to issue Incentive
Shares (as defined in the 2003 Asset Purchase Agreement) to Duncan; (iv) release
and discharge of the Company's obligations to DGI under the 2003 Asset Purchase
Agreement to pay DGI a royalty equal to 15% of the gross revenue of the OnRamp
business during 2003 and 2004 (of which $326,000 was accrued and unpaid as of
September 30, 2004); and (v) release and discharge of the Company's obligations
under the 2003 Asset Purchase Agreement to pay DGI any shortfall amount
following the sale of certain shares of the Company's common stock by Duncan.
F-17
The sale of OnRamp resulted in a loss of approximately $3.9 million.
Goodwill of $3,357,000 which includes $109,000 recorded in 2004 was removed from
the balance sheet in the sale of OnRamp. Absent the sale of OnRamp during the
third quarter of 2004, the Company would likely have written down goodwill and
other intangible assets associated with its OnRamp operations in response to
changing business conditions during the third quarter.
Revenues and loss from the discontinued OnRamp segment operations were as
follows:
Period From
November 10, 2003
Nine Months Ended through
September 30, 2004 December 31, 2003
----------------------------------------------
Revenues $ 1,081,000 $ 242,000
Loss from discontinued operations (174,000) (110,000)
NOTE 5 - BALANCE SHEET DISCLOSURES
Valuation and qualifying accounts:
In connection with the acquisition of the assets of Berdy Medical Systems
in October 2004 the Company established a bad debt reserve in the amount
of $17,000. There was no bad reserve in 2003 or 2002.
Prepaid expenses and other current assets consist of the following:
December 31,
---------------------------
2004 2003
---------------------------
Prepaid insurance $216,000 $218,000
Sales commissions 218,000 --
Other current assets 106,000 103,000
---------------------------
$540,000 $321,000
===========================
Property and equipment consist of the following:
December 31,
--------------------------
2004 2003
--------------------------
Furniture and fixtures $ 298,000 $ 451,000
Computer hardware and purchased software 1,148,000 805,000
Leasehold improvements -- 49,000
--------------------------
1,446,000 1,305,000
Less: accumulated depreciation and amortization (650,000) (574,000)
--------------------------
$ 796,000 $ 731,000
==========================
F-18
Depreciation expense was $305,000, $157,000, and $127,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004, the Company's intangible assets, net consisted of
the following:
Accumulated Average useful
Cost Amortization Lives
Trade name and related marks $ 50,000 $ 46,000 2 years
Customer-related intangibles 130,000 53,000 2 years
Software and other technology 375,000 156,000 2 years
-------------------------------
Totals $ 555,000 $ 255,000
===============================
Amortization expense during 2004 and 2003 totaled $151,000 and 136,000,
respectively, and amortization expense is projected to be approximately $173,000
in 2005 and $127,000 in 2006.
Accrued expenses consist of the following:
December 31,
---------------------------
2004 2003
---------------------------
Accrued payroll and benefits $1,046,000 $ 854,000
Accrued lease abandonment costs 317,000 57,000
Accrued professional fees 1,154,000 764,000
Accrued severance 772,000 382,000
Accrued settlements 700,000 --
Accrued interest 22,000 8,000
Accrued marketing fees 327,000 --
Other accrued expenses 551,000 --
---------------------------
$4,889,000 $2,065,000
===========================
F-19
NOTE 6 - DEBT
Debt consists of:
----------------------------------
2004 2003
--------- ---------
Convertible notes, investors, interest accrues at 6% $ 452,000 -
Convertible note - investor, interest accrues at
10%, payable through December 15, 2004 (1) 25,000 -
Convertible note - investor, interest accrues at
10%, payable through January 25, 2005 50,000 -
Promissory note, interest accrues at the prime rate,
payable the earlier of August 20, 2005 or upon
completion of a financing with gross proceeds of at
least $5,000,000 150,000
Notes payable -finance company, interest accrues
at 6.5%, monthly payments of principal and interest
of $3,000 are payable through June 2005 17,000 $ 116,000
Revolving line of credit (2) 33,000
Convertible note - investor, interest accrues at
7%, payable through November 2008 200,000 200,000
Convertible note - investor, interest accrues at
7%, payable through January 2005 (3) 150,000
Equipment line of credit (2) 31,000
Promissory note payable -finance company, interest
accrues at 7.5%, monthly payments of principal
and interest of $2,000 are payable through July 2007 (2) 84,000
Promissory note payable -finance company, interest
accrues at 8.6%, monthly payments of principal
and interest of $2,000 are payable through August 2006 (2) 48,000
Notes payable -finance company, interest accrues
at 9.9%, payable through December 2005 (2) 8,000
--------- ---------
Total Debt 894,000 670,000
Debt discount (360,000) (169,000)
Current portion (469,000) (232,000)
--------- ---------
Long - term debt $ 65,000 $ 269,000
========= =========
(1) The investor has agreed to convert the note into shares of common stock upon
the effectiveness of the filing of a registration statement on Form S-3 in 2005.
(2) These debt obligations were those of the Company's OnRamp division which
were assumed by the purchaser of OnRamp's net assets on September 30, 2004. (See
Note 4 - Discontinued Operations)
(3) Converted into 13,889 shares of the Company's common stock on January 22,
2004.
Convertible Debentures and Promissory Notes: 2004
In May and June 2004 the Company issued an aggregate of $1,650,000 of
promissory notes which bear interest at the prime rate plus 2%. The notes plus
accrued interest were repaid on July 14, 2004 from the proceeds of the issuance
of $4,200,000 of convertible promissory notes (see below). In connection with
investment advisory services, two individuals received an aggregate of 16,667
shares of the Company's unregistered common stock and 16,667 unregistered common
stock purchase warrants at an exercise price of $10.80. The fair value of these
issuances of $478,000 was recorded as debt issuance costs.
F-20
On July 14, 2004, the Company entered into a Note and Warrant Purchase
Agreement (the "Note Purchase Agreement") with two accredited investors ("July
2004 Investors"). Under the terms of the Note Purchase Agreement, the Company
issued a convertible promissory note due January 14, 2005 in the aggregate
principal amount of $2,100,000 to each investor. In connection with the
agreements, the note holders were issued a security interest in and to all of
the assets of the Company, including the Company's intellectual property. Each
promissory note is convertible into shares of common stock at an initial
conversion price of $18.00 per share, or 116,667 shares of common stock. In
addition, the Company issued to each investor warrants exercisable into 312,255
shares of common stock at exercise prices ranging from $6.60 per share to $24.00
per share. The warrants have a term of one year. The issuance of the warrants
along with the convertible notes resulted in a debt discount of $1,580,000 which
is being amortized over the six-month term of the notes. In connection with the
notes, the Company made a cash payment of $320,000 to a placement agent, and
agreed to issue to the placement agent warrants exercisable into 23,333 shares
of common stock at exercise prices ranging from $6.60 per share to $24.00 per
share for a one year term, which were valued at approximately $94,000.. The cash
paid and value of the warrants issued to the placement agent which total
$415,000 were recorded as deferred financing costs, and are being amortized over
the maturity of the related notes or upon the notes' conversion, if such
conversion occurs earlier.
On July 14, 2004, the Company entered into a Letter Agreement (the "Letter
Agreement") with an investor (the "March 2004 Investor") in connection with the
anti-dilution provisions contained in that certain Common Stock and Warrant
Purchase Agreement, dated March 4, 2004, between the investor and the Company
(see Note 7 - 2004 Private Placements). Under the terms of the Letter Agreement
and in consideration for the waiver by the investor of its anti-dilution rights,
the Company issued to the investor an additional 402,174 shares of common stock,
a convertible promissory note in the aggregate principal amount of $1,920,000
convertible into shares of the Company's common stock at a conversion price of
$18.00 per share, or 106,666 shares of common stock, and warrants exercisable
into 285,490 shares of common stock at exercise prices ranging from $6.60 per
share to $24.00 per share. The warrants have a term of one year. In connection
with the above issuance of the common stock and warrants under the Letter
Agreement, two placement agents received an aggregate of 28,673 shares of the
Company's common stock, valued at approximately $292,000.
The issuance of the additional shares of common stock, the convertible
promissory note and the warrants to the investor resulted in non-cash financing
costs of approximately $7.3 million which were recorded in the third quarter of
2004. In addition, on the condition that the warrants issued in March 2004 with
respect to all of the 36,232 shares of common stock underlying such warrant was
exercised and the aggregate exercise price of $2,174 was received by the Company
within three days from the date thereof, the exercise price with respect to all
of the shares of common stock underlying the original warrant issued in March
2004 then being exercised was reduced from $48.00 per share to $0.06 cents per
share. This repricing resulted in a disproportionate deemed dividend of $118,000
which was recorded in the third quarter of 2004.
On October 29, 2004, the Company issued a secured convertible promissory
note in the principal amount of $50,000 bearing interest at the rate of 10.0%
per annum, due January 25, 2005, convertible at the option of the holder, into
shares of the Company's common stock at a conversion price of $1.20 per share.
Interest is payable in cash. Additionally, the Company issued to the investor a
warrant to purchase 41,667 shares of the Company's common stock at an exercise
price of $1.80 per share. The issuance of the warrants along with the
convertible note resulted in a debt discount of $35,955 which is being amortized
over the term of the note. The warrant is exercisable at any time through
October 29, 2009.
F-21
In October 2004, the Company entered into letter agreements with its March
2004 and July 2004 Investors, with respect to the reduction of the exercise
price of outstanding warrants to purchase an aggregate of 910,000 shares of
common stock, from prices ranging from $6.60 to $24.00, to $1.95 per share. In
connection with the exercise of warrants to purchase an aggregate of 631,552
shares of common stock, the noteholders agreed to a reduction of principal
amount of outstanding notes in the aggregate amount of $981,509 and to pay cash
proceeds to the Company in the aggregate amount of $250,000. In November, 2004,
the Company agreed with the same investors with respect to the reduction of the
exercise price of the remaining outstanding warrants to purchase an aggregate of
278,448 shares of common stock, from a price of $1.95 per share to $0.90 cents
per share. In connection with the exercise of warrants to purchase all of the
shares of common stock, the note holders agreed to a reduction of principal
amount of outstanding notes in the aggregate amount of $250,603. The reduction
of the exercise prices of the warrants in October and November 2004 were
recorded as additional interest expense in the aggregate amount of $502,676.
In November, 2004, the Company also agreed with the same three existing
convertible note holders with respect to the reduction of the conversion price
of outstanding convertible notes to purchase an aggregate of 340,000 shares of
common stock, from $18.00 per share, to $0.90 per share. In connection with the
conversion of notes to purchase shares of common stock, the note holders agreed
to a reduction of principal amount of outstanding notes in the aggregate amount
of $306,000. Effective December 2, 2004 each of the secured note holders agreed
to exchange all of their convertible secured promissory notes, in the aggregate
remaining principal amount of $4,731,870, plus interest in the amount of
$137,162, due January 14, 2005, into an aggregate number of restricted shares of
the Company's common stock, par value $.001 per share, having a market value of
$1.14 per share, plus the issuance of three-year warrants to purchase an
aggregate of 1,000,000 shares of common stock at an exercise price of $1.14 per
share. The reduction of the conversion price in November and December 2004
resulted in a debt conversion expense totaling $6.7 million. In connection with
the agreements, the note holders agreed to terminate their security interest in
and to all of the assets of the Company, including the Company's intellectual
property. The exchange of debt into equity eliminates certain restrictive
covenants relating to the Company's ability to enter into subsequent financings
and anti-dilution provisions, which were contained in the note agreements with
the original note holders. The Company is obligated to list for trading and
register for resale the shares of common stock and the shares of common stock
underlying the warrants issuable to the investors on its next registration
statement filed with the Securities and Exchange Commission, or within 60 days
following the date of the agreements upon a written demand by the note holders
requesting the filing of such registration statement.
On December 2, 2004, the Company issued to certain investors convertible
promissory notes in the aggregate principal amount of $400,000 bearing interest
at the rate of six percent (6.0%) per annum, due March 1, 2005. In connection
with the note financing, the Company issued a convertible promissory note in the
principal amount of $52,000 to an entity as an advisory fee on the same terms
and conditions as the investors. One hundred and twenty percent (120%) of the
outstanding principal amount of the notes plus accrued interest thereon shall be
automatically convertible into other securities of the Company which may be
issued by the Company in any subsequent transaction with gross proceeds to the
Company of a minimum of $1,000,000. (See Note 13 - Subsequent Events). Interest
on the notes is payable in cash or securities issued in a subsequent
transaction. The Company also agreed to issue to the investors an aggregate of
480,000 shares of the Company's common stock and the advisor received 48,000
shares of the Company's common stock. The issuance of the shares of common stock
to the investors resulted in a debt discount of approximately $311,000 which is
being amortized to interest expense over the term of the notes. The issuance of
the note and shares of common stock to the advisor was recorded as deferred
financing costs which is being amortized to interest expense and other financing
costs over the term of the notes.
F-22
Convertible Debentures and Promissory Notes: 2003
During April, May and June 2003, the Company completed the private
placements of $400,000, $250,000 and $1,200,000 in convertible debentures (the
"03-1 Debentures," "03-2 Debentures" and "03-3 Debentures," respectively, and
the "Debentures," collectively). The Debentures have 18-month terms, bear
interest at 7% per annum and are convertible into common stock at the following
prices: 03-1 Debentures - $9.00; 03-2 Debentures - $9.00; and 03-3 Debentures -
$10.80.
The Company received a total of approximately $1,541,000 from these
placements, net of cash offering costs of approximately $309,000. In connection
with the 03-1 Debentures, the Company issued warrants to the investors to
purchase 25,000 shares of common stock at an exercise price of $0.60 per share.
In connection with the 03-2 and 03-3 Debentures, the Company issued warrants to
a placement agent and its designees to purchase 5,000 shares of common stock at
$9.60 per share, and 11,111 shares of common stock at $15.00 per share,
respectively, resulting in additional offering costs of approximately $215,000.
The aggregate offering costs of $524,000 were initially recorded as deferred
financing costs and amortized on a straight-line basis over the related
Debenture's term.
The Company registered the common stock underlying the Debentures and the
warrants in a registration statement filed with the Securities and Exchange
Commission. The Company filed a registration statement (the "Registration
Statement") with the Securities and Exchange Commission on June 4, 2003, which
was declared effective on October 16, 2003. As a result of this delay in the
registration statement becoming effective, the Company was obligated to pay the
holders a penalty, which was settled in October 2003 (see below).
The Debentures were issued with in-the-money conversion features since
their stated conversion prices were below the fair market value of the Company's
common stock at the commitment dates. Additionally, the Company issued warrants
to the investors in the 03-1 Debentures, which resulted in a higher effective
beneficial conversion feature for this issuance. The Company applied the
principles in EITF Issue 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
Issue 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments",
to determine the appropriate original issue discounts (OID) on the Debentures,
which amounted to $1,350,000. This OID was initially being amortized on a
straight-line basis over the related Debenture's term.
F-23
In October 2003 the holders of the Debentures elected to convert them into
common stock, and the holder of the debenture, who received a warrant to
purchase 25,000 shares of common stock at $0.60, also exercised the warrant in a
cashless exercise. The Company issued a total of 222,179 shares of its common
stock, of which 183,334 shares were based upon the principal amount of these
debentures, 24,615 on the exercise of the warrant and the balance of 14,230
shares were issued for interest and due to the delay in the effectiveness of the
registration statement applicable to these shares. The value of the 14,230
shares on October 24, 2003, the date of issue, at $28.80 per share (the closing
price of our common stock on the American Stock Exchange that day), less $33,000
of interest and $105,000 of late effectiveness penalty, both accrued in the
third quarter of 2003, was $273,000, and that amount was charged to expense in
the fourth quarter of 2003. As a result of the conversion of the Debentures, the
total unamortized debt discount and issuance costs of $1,439,000 related to the
Debentures were charged to expense in the fourth quarter of 2003. Thus all of
the financing costs and the OID issued in connection with the Debentures were
expensed in 2003.
Between July 29, 2003 and October 15, 2003, various Lenders (the
"Lenders") made loans to the Company in the aggregate principal amount of
$2,250,000 (the "Loans") (see below).
During July 2003 and September 2003, the Company completed two private
placements totaling of $1,400,000 of convertible debentures having an 18-month
term, which bear interest at 7% per annum. On September 30, 2003, the Company
issued an aggregate of $1,400,000 of promissory notes (the "Notes"), with an
18-month term and bearing interest at a rate of 10% per annum. The Notes were
issued in exchange for $1,400,000 of outstanding 7% convertible debentures
previously issued by the Company. The holders of these debentures consented to
the exchange when it was determined that, under the rules of the American Stock
Exchange, stockholder approval was required before the Company could honor
requests to convert these debentures into shares of the Company's common stock.
Therefore, the Company accounted for the Notes in lieu of the debentures during
the third quarter of 2003. The Company received a total of approximately
$1,291,000 from these placements, net of cash offering costs of approximately
$109,000. In connection with the Notes, the Company issued warrants to a
placement agent and its designees to purchase 16,667 shares of common stock at
$13.20 per share, and to purchase 2,899 shares of common stock at $15.60 per
share, respectively, resulting in additional offering costs of approximately
$359,000.
In October 2003 the Company borrowed $600,000 and $250,000 and issued 10%
promissory notes due on November 15, 2003 and December 1, 2003, respectively.
These notes were secured by the pledge of 16,667 shares of the Company's common
stock owned by Darryl Cohen, the Company's former Chairman and CEO, and by 8,333
shares of the Company's common stock owned by Andrew Brown, the Company's then
President and COO (now CEO). In consideration for this pledge Messrs. Cohen's
and Brown's stock based compensation award became fully vested (see Note 7). In
connection with these transactions the Company issued warrants expiring in
October 2008 to the finder and its designees to purchase a total of 4,333 shares
of its common stock at $0.60 per share, combined with warrants to purchase in
the aggregate 2,333 shares of the Company's common stock at $0.60 per share in
satisfaction of a finder's fee due on the September Note discussed above. The
Black-Scholes valuation of these warrants to purchase 6,667 shares is $176,000.
On November 15, 2003, the Company entered into an Exchange Agreement with
the Lenders whereby the Company agreed to issue 93 shares of the Company's
common stock for every $1,000 of the Loans delivered by the Lenders. As a result
of the exchange agreement the Company recorded debt discount in the face amounts
of the Loans to reflect the newly added beneficial conversion feature. Through
December 2003, Lenders delivered promissory notes in the aggregate principal
amount of $2,250,000 to be exchanged for 208,334 shares of our common stock. The
Lenders waived their rights to any accrued interest. All but $150,000 of the
Loans were exchanged prior to December 31, 2003, and thus the majority of the
offering costs and debt discount related to the Loans was expensed during the
fourth quarter of 2003. The remaining $150,000 of Loans was converted during
January of 2004.
F-24
On November 5, 2003 the Company sold a $1,000,000 7% convertible debenture
that matures on April 30, 2005, but the holder may require the Company to redeem
it after March 31, 2004 at a price that would reflect any increase in the market
price of the common stock above the conversion price. The debenture is
convertible into common stock at $15.00 per share while the closing price of our
common stock on the American Stock Exchange on November 5, 2003 was $39.60 and,
therefore, this debenture was issued with an in-the-money conversion feature.
The Company reserved 133,333 shares of its common stock pursuant to this
debenture. In addition, on November 7, 2003 the Company sold $3,000,000 of its
7% convertible promissory notes that mature in March 2005, to two buyers, these
notes being convertible at $15.00 per share and also issued warrants with a term
of five years to purchase 10,000 shares of common stock at $60.00 per share to
the buyers. In connection with these placements, finders were paid $200,000 in
cash and received 7% convertible debentures in the face amount of $200,000
convertible into common stock at $15.00 per share. The closing price of our
common stock on the American Stock Exchange on November 7, 2003 was $46.20 and
therefore these promissory notes were issued with an in-the-money conversion
feature. The Company reserved 440,000 shares of its common stock pursuant to
these notes, warrants and debentures. This convertible debenture and these
convertible promissory notes were converted in December 2003. As a result of the
conversion the Company expensed the related debt issue costs of $439,000 and
related OID of $4,200,000 during the fourth quarter of 2003.
Convertible Debentures and Promissory Notes: 2002
The Company entered into a secured convertible loan agreement, dated
February 19, 2002, pursuant to which the Company borrowed $1,000,000 from
WellPoint Health Networks Inc., in which a then member of the Company's audit
committee was a related party. WellPoint converted the note into 40,087 common
shares on October 9, 2002, which includes approximately $48,000 of accrued
interest. The loan was secured by the grant of a security interest in all the
Company's intellectual property, including its patent, copyrights and
trademarks. The conversion of the loan eliminated the aforementioned security
interest.
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)
As of December 31, 2004, the Company has authorized 400,000,000 shares of
common stock and 2,500,000 shares of preferred stock, of which 488 shares have
been authorized relating to the 1996 preferred stock issuance and 3,200 shares
have been authorized relating to the 2003 Series A convertible stock plan.. On
November 18, 2004, the Company's stockholders approved a 1 for 60 reverse stock
split which was effective for trading purposes as of December 1, 2004. The
number of post-split shares outstanding on December 2, 2004, was 5,310,013. All
references in the financial statements to shares, share prices, per share
amounts and stock option plans have been adjusted retroactively to reflect this
reverse stock split.
Stockholder Rights Plan
On May 27, 2004 the Company adopted a stockholder rights plan (commonly
known as a "poison pill") in order to deter possibly abusive tactics by a
stockholder or group. The stockholder rights plan is set forth in a Rights
Agreement dated May 27, 2004 between Ramp and Computershare Trust Company, Inc.,
as Rights Agent. The Rights Agreement provides for the distribution of one
preferred share purchase right ("Right") on each share of common stock issued
and outstanding as of the close of business on June 4, 2004. Initially the
Rights will trade with the common stock and will not be represented by separate
certificates. Each Right represents the right to purchase, for an exercise price
of $40 per Right, one one-hundredth (1/100) share of Ramp Series B Participating
Preferred Stock, par value $.001 per share, but will not be exercisable unless
and until certain events occur.
F-25
2004 Private Placements
In March 2004, the Company sold 181,159 shares of common stock to an
investor at a purchase price of $27.60 per share, raising proceeds of
$4,762,000, net of $249,000 in offering costs (the "March 2004 Private
Placement). In connection with the private placement, the investor also received
a five-year warrant to purchase 36,232 shares of common stock at an exercise
price of $48.00 per share. The Company also issued a five-year warrant to
purchase 2,899 shares of common stock at $48.00 per share to a finder and
five-year warrants to purchase an aggregate of 13,857 shares of our common stock
at $48.00 per share to the placement agent and its affiliates for its services
in the placement. In addition, finders and placement agents received an
aggregate of 6,783 shares of the Company's common stock. The investor has an
anti-dilutive feature in the event the Company raises funds at a price of less
than $27.60 per share (see Note 6 for discussion of events occurring in July
2004 regarding the issuance of additional shares of common stock, convertible
promissory note, and warrants relating to this anti-dilutive feature, as well as
the reduction in the exercise price of the warrant described above).
Also, during the quarter ended March 31, 2004, the Company completed a
private placement of its common stock and raised net proceeds of $765,000. A
total of 191,250 units were placed, each consisting of ten sixtieths (10/60)
post split (ten pre split) shares of common stock and two sixtieths (2/60)
warrants. Subscribers purchased each unit for $4.00 and are entitled to exercise
warrant rights to purchase one sixtieth (1/60) share of common stock at a
purchase price of 36.00 per share for a five-year period commencing on or after
July 1, 2004 and terminating on June 30, 2009.
2003 Private Placements
During the first quarter of 2003, the Company completed a private
placement of its $.001 par value common stock and received proceeds of
$1,499,000, net of $95,000 in fees. A total of 3,151,250 units were placed, each
consisting of two sixtieths (2/60) shares of common stock and one sixtieth
(1/60) warrant. Subscribers purchased each unit for $24.00 and are entitled to
exercise warrant rights to purchase one sixtieth (1/60) share of common stock at
a purchase price of $30.00 per share during the exercise period commencing on
January 1, 2003 and ending December 31, 2007. The Company registered the above
common stock and shares of common stock covered by the warrants for resale in a
registration statement with the Securities and Exchange Commission.
In the second quarter of 2003, the Company completed a private placement
of its common stock and received proceeds of $471,550, net of $23,450 in fees.
The Company also issued warrants expiring in May and June of 2008 to finders to
purchase a total of 1,954 shares of common stock at $18.00 per share. A total of
247,500 units were placed, each consisting of ten sixtieths (10/60) shares of
common stock and a warrant to purchase five sixtieths (5/60) shares of common
stock. Subscribers purchased each unit for $2.00 and are entitled to exercise
the warrant to purchase five sixtieths (5/60) shares of common stock at a
purchase price of $18.00 per share during the exercise period commencing on July
15, 2003 and ending December 31, 2007.
F-26
During the third quarter of 2003, the Company completed a private
placement of its common stock and received proceeds of $1,499,000, before fees
of $95,000. The Company also issued five year warrants expiring in July and
August of 2008 to finders to purchase a total of 6,883 shares of common stock at
$18.00 per share. A total of 743,750 units were placed, each consisting of ten
sixtieths (10/60) shares of common stock and a warrant to purchase five
sixtieths (5/60) shares of common stock. Subscribers purchased each unit for
$2.00 and are entitled to exercise the warrant to purchase five shares of common
stock at a purchase price of $18.00 per share during the exercise period
commencing on July 15, 2003 and ending December 31, 2007.
During the fourth quarter of 2003, the Company completed a private
placement of its common stock and received proceeds of $350,000. A total of
76,040 units were placed, each consisting of ten sixtieths (10/60) shares of
common stock and a warrant to purchase five sixtieths (5/60) shares of common
stock. Subscribers purchased each unit for $2.00 and are entitled to exercise
the warrant to purchase five sixtieths (5/60) shares of common stock at a
purchase price of $18.00per share during the exercise period commencing on July
15, 2003 and ending December 31, 2007.
On December 31, 2003, the Company entered into a Series A Convertible
Preferred Stock Purchase Agreement (the "December Agreement"). Under the terms
of the December Agreement, the Company sold an aggregate of 3,000 shares of
Series A Convertible Preferred Stock for net proceeds of $2,869,000. In addition
to cash offering costs of $131,000, the Company also issued 112 shares of Series
A convertible preferred stock in aggregate to two placement agents. Each share
of the Series A Convertible Preferred Stock is convertible into a number of
shares of common stock equal to $1,000 divided by the conversion price of the
Series A Convertible Preferred Stock, initially $24.00 per share. The total
number of shares of common stock initially issuable upon conversion of the
Series A Convertible Preferred Stock is 125,000. During the first quarter of
2004 all of the 3,112 shares of Series A Convertible Preferred Stock and accrued
dividends thereon were converted into 130,571 common shares. In addition, during
2003 the Company issued warrants to purchase an aggregate of 51,667 shares of
common stock, 39,167 of which are exercisable at $36.60 per share and 12,500 of
which are exercisable at $42.00 per share. The warrants have a term of five
years. In connection with this placement, the Company recorded a beneficial
conversion discount of $2,156,000 as an increase to its accumulated deficit and
net loss applicable to common stockholders.
2002 Private Placement
During 2002, the Company initiated three private placement offerings each
consisting of one share of common stock and warrants to purchase common stock.
The exercise price of the offering was $24.00 per share. The warrants, included
with each unit, entitled the holder to purchase common shares at $30.00 per
share, expiring five years after offering date. Over the three offerings,
$5,491,000 was raised in total proceeds, net of offering costs of $290,000,
through the issuance of 228,375 shares of common stock.
1999 Private Placements
During 1999, the Company initiated three private placement offerings each
consisting of one share of preferred stock (as designated) and warrants to
purchase common stock.
The first private placement consisted of 300 shares of Series A preferred
stock each with 1,000 warrants for $1,000 per unit, which raised total proceeds
of $300,000. The warrants included with each unit entitle the holder to purchase
common shares at $60.00 per share, expiring in October 1, 2000. The preferred
shares were convertible into common shares at $15.00 per common share through
March 1, 2003. During 1999, 115 shares of Series A preferred stock were
converted into 7,667 common shares During 2000, 185 shares of Series A preferred
stock were converted into 12,333 common shares. All of the warrants relating to
the Series A preferred stock were exercised in 2000.
F-27
The second private placement consisted of 1,832 shares of Series B
preferred stock each with 2,000 warrants for $1,000 per unit, which raised total
proceeds of $1,816,500 (net of offering costs of $15,500). The warrants included
with each unit entitle the holder to purchase common shares at $30.00 per share,
expiring on October 1, 2002. The Company also issued a warrant to purchase 833
shares of common stock at $30.00, expiring in May 2002, for services rendered in
connection with the private placement. During 1999 and 2000, 1,782 shares of
Series B preferred stock were converted into 59,400 common shares. During 2002,
50 shares of Series B preferred stock were converted into 1,667 common shares.
These warrants expired in October 2002. Upon cancellation, the Company extended
the expiration date for 8,000 of these warrants to April 2003. Using a Black
Scholes pricing model, $58,000 of expense was charged to equity as the value of
this repricing.
The third private placement consisted of 1,995 shares of Series C
preferred stock each with 4,000 warrants for $1,000 per unit, which raised total
proceeds of $1,995,000. The warrants, included with each unit, entitled the
holder to purchase common shares at $30.00 per share, expiring in April 1, 2003.
The preferred shares were convertible beginning April 1, 2000 into common shares
at $30.00 per common share through April 1, 2003. During 2000, 1,120 shares of
Series C preferred stock were converted into 37,333 common shares. During 2001,
500 shares of Series C preferred stock were converted into 1,667 shares of
common stock. During 2002, 300 shares of Series C preferred stock were converted
into 10,000 shares of common stock. In October 2003 the Company purchased the
remaining 75 shares of its 1999 series C convertible preferred stock and issued
2,500 shares of its common stock in exchange therefore. This transaction was
treated as a capital transaction with no net value being recorded in equity;
however, the fair value of the common shares issued in excess of the carrying
value of the preferred shares was accounted for as a dividend to the affected
equity holders during the fourth quarter of 2003. After April 1, 2000, the
warrants are callable by the Company for $0.60 upon thirty days written notice.
The Company has not called any of these warrants as of the date hereof.
1996 Private Placement
The Company has one remaining unit of its 1996 preferred stock outstanding
at December 31, 2004 and 2003. The remaining unit may be converted into the
Company's common stock including accrued dividends at the lesser of $75.00 per
common share or 75% of the prior five day trading average of the Company's
common stock.
Common Stock Issued for Settlements and Services
In connection with a settlement agreement with an existing investor, the
Company issued approximately 21,667 shares to this investor during the second
quarter of 2004. The Company accounted for this as a disproportionate deemed
dividend in the amount of $336,000 which increased the net loss applicable to
common shareholders and basic and diluted net loss per share for the year ended
December 31, 2004.
F-28
During 2004 the Company issued common stock and warrants to various
consultants and vendors for past and current services rendered. Approximately
$3.7 million of non-cash expenses were recorded in the 2004 financial statements
relating to these issuances.
Equity Line
The Company entered into an Equity Line of Credit Agreement dated as of
June 12, 2001, which provided that the Company could put to the provider,
subject to certain conditions, the purchase of common stock of the Company at
prices calculated from a formula as defined in the agreement. During the period
January to April 2002, the Company received $972,000, net of commissions and
escrow fees from eight equity line advances, resulting in the issuance of 32,579
shares of common stock. This agreement was terminated in April 2002.
Stock Options and Warrants
In August 1999, the Board of Directors adopted the 1999 Stock Option Plan
(the "1999 Plan"), which provides for the grant of incentive stock options
("ISOs") to officers and other employees of the Company and non-qualified
options to directors, officers, employees and consultants of the Company.
Options granted under the plan generally vest over a period of one or more years
and expire at various times up to ten years. ISOs are granted at a price equal
to the market value at the date of grant. The Board of Directors reserved
166,667 shares of common stock for granting of options under the 1999 Plan. At
the 2001 Annual Meeting the shareholders approved an increase to 50,000 shares
of common stock for issuance under the 1999 Plan.
In February 2003, the Board of Directors adopted, and in May 2003
stockholders approved, the 2003 Stock Incentive Plan (the "2003 Plan"), which
provides for the grant of ISOs, supplemental stock options, stock appreciation
rights and performance shares to directors, officers, employees, consultants and
advisors of the Company and its subsidiaries. Options granted under the plan
generally vest over a period of one or more years and expire at various times up
to ten years. Upon exercise, shares will be issued upon the payment of the
exercise price in cash, by delivery of shares of common stock, options or a
combination of these methods. ISOs are granted at a price equal to the market
value at the date of grant. The Board of Directors reserved 166,667 shares of
common stock for grants under the 2003 Plan.
In October 2003, the Board of Directors adopted, and in December 2003
stockholders approved, the 2004 Stock Incentive Plan (the "2004 Plan"), which
provides for the grant of ISOs, supplemental stock options, stock appreciation
rights and performance shares to directors, officers, consultants and advisors
of the Company its subsidiaries. ISOs granted under the plan generally vest over
a period of one or more years and expire at various times up to ten years. Upon
exercise, shares will be issued upon the payment of the exercise price in cash,
by delivery of shares of common stock, options or a combination of these methods
and expire up to ten years after the date of grant. ISOs are granted at a price
equal to the market value at the date of grant. The Board of Directors reserved
250,000 shares of common stock for grants under the 2004 Plan.
In October 2003, the Board of Directors established the 2003 Consultants
Stock Option Warrant and Stock Award Plan (the "2003 Consultants Plan"), which
provides for the grant of non-qualified options, warrants, restricted stock and
unrestricted stock to consultants of, or other natural persons who provide bona
fide services, other than services in connection with the offer or sale of the
Company's securities in a capital raising transaction to, the Company. The Board
of Directors reserved 83,333 shares of common stock for grants under the 2003
Consultants Plan.
F-29
In September 2004, the Board of Directors adopted, and in November 2004
stockholders approved, the 2005 Stock Incentive Plan (the "2005 Plan"), which
provides for issuance of common stock of up to 5,500,000 shares to the Company's
employees, consultants and directors through restricted stock awards or reserved
for the exercise of options. Options granted under the plan generally vest over
a period of one or more years and expire at various times up to ten years. ISOs
are granted at a price equal to the market value at the date of grant.
The Board of Directors made certain stock awards and granted stock options
effective July 10, 2003. As an incentive to provide their services to the
Company at least through January 6, 2004, and pursuant to the Company's 2003
Stock Incentive Plan, Mr. D. Cohen, the Company's former Chairman and CEO, was
granted 16,667 shares of restricted common stock, and Mr. Patrick Jeffries, the
Company's former Chairman, and External Affairs, Inc. ("EA"), a consulting firm
affiliated with Andrew Brown, the Company's current Chairman and CEO, were each
granted 8,333 shares of restricted common stock, with the Company to pay the
income taxes on the grant and also the income taxes on the payment of the income
taxes. The Company estimates that its liability for such tax and tax on tax
payments will total approximately $278,000, which has been included in accrued
expenses in the accompanying Statement of Operations for fiscal year 2003. In
addition, the Board granted Mr. Cohen a five-year option to purchase 50,000
shares of common stock at $15.00 per share with one third of such shares vesting
quarterly over the next twelve months as long as Mr. Cohen retains his position
of President and Chief Executive Officer of the Company, and the remaining
two-thirds vesting on June 30, 2004 based on the Company achieving targeted
revenues during the twelve months ending June 30, 2004. If revenue does not
reach the target then vesting is reduced pro rata. EA received options with
similar terms for a total of 25,000 shares. Mr. Jeffries received a five-year
option to purchase 8,333 shares at $15.00 each vesting quarterly over the next
twelve months as long as he retains his position as Chairman of the Company. Mr.
Jeffries also received a five-year option to purchase 13,333 shares of common
stock at $15.00 per share based on his continued membership on the Board and
satisfactory performance as Chairman of the Company over the next twelve months.
Messrs. Samuel Havens and Guy Scalzi, two non-employee directors of the Company
at the time, received similar options to Mr. Jeffries' for 3,333 shares each.
The closing price of the common stock on the American Stock Exchange on July 10,
2003 was $20.40.
The Company recognized compensation charges for the restricted stock and
option grants to Mr. D. Cohen, for 3,333 option shares for each of Mr. Jeffries
and the other Board members based on the intrinsic-value method prescribed by
APB No. 25. The Company also recognized compensation charges for the restricted
stock and additional option grants to Mr. Jeffries, given to him in his capacity
as a consultant to the Company, as well as all such grants to EA based on the
fair-value method prescribed by SFAS No. 123 and EITF Issue 96-18, "Accounting
for Equity Instruments that Are Issued to Other Than Employees for Acquiring, or
in Conjunction with, Selling, Goods or Services".
As noted above, at the original grant date, certain options and the
restricted stock grants vested based on performance criteria. On August 19,
2003, these grants were modified to provide for time-based vesting, with
accelerated vesting if specified performance criteria are met. The employee
awards were therefore subject to variable accounting through August 19, 2003,
and all such awards were re-measured and fixed upon the modification.
Concurrently with the resignations of Messrs. Kleinke and Friedensohn as
directors in April 2004, the Company fully vested Mr. Kleinke's and Mr.
Friedensohn's options, each of which option was granted on October 7, 2003, to
purchase 3,333 shares of our common stock at an exercise price of $30.00 per
share, and paid each of them the sum of $40,000 in consideration of the
surrender of such option for cancellation. The resulting charge was recorded in
the second quarter of 2004. On April 14, 2004, Samuel H. Havens resigned as a
director. In connection with his resignation, his stock options were purchased
by the Company for a cash consideration of $90,000.
F-30
On April 25, 2004, Darryl R. Cohen resigned as a director, Chairman and
Chief Executive Officer and Andrew Brown, the Company's then current President,
was appointed Chairman and Chief Executive Officer of the Company. In connection
with Mr. Cohen's resignation, the Company recorded a compensation charge of
approximately $15,000 related to accrued bonus and tax benefit on his restricted
stock awards during the second quarter of 2004. Additionally, in the second
quarter of 2004, the Company recorded a charge of approximately $400,000 with
respect to the benefit Mr. Cohen received upon his termination as a result of
the Company's having earlier accelerated the vesting of his stock-based awards,
pursuant to a promissory note of the Company collateralized by the pledge of
those shares. As a result of the terms of the agreement with Mr. Cohen, because
the Company did not pay him the amounts due by August 30, 2004 the exercise
price of all of his options to purchase 79,000 shares of common stock were
reduced to $0.60. This modification resulted in a charge of $142,000 in the
third quarter of 2004. As a result of the modification the Company will apply
variable accounting to Mr. Cohen's options until they are exercised, cancelled
or expire. As a result, in the fourth quarter of 2004 an additional charge of
$85,000 was made.
In September 2003 Joan Herman and Guy Scalzi resigned as directors of the
Company and the options granted to Mr. Scalzi to purchase 3,333 shares of our
common stock at $15.00 on July 10, 2003, were forfeited with no accounting
impact to the Company. Ms. Herman had declined to accept any options for her
service on the Board. On October 7, 2003 Andrew Brown, David Friedensohn, J. D.
Kleinke and Jeffrey A. Stahl, MD, were elected as directors. Each of them were
granted an option to purchase 3,333 shares of common stock of the Company,
vesting in one year if they are still serving as a director at that time, at an
exercise price of $30.00 per share, the closing price of the Company's common
stock on the American Stock Exchange that day.
On October 9, 2003 Patrick Jeffries resigned as Chairman of the Board of
the Company and the next day the Board elected Darryl Cohen as Chairman in his
place, in addition to Mr. Cohen's duties as the Company's Chief Executive
Officer. At the same meeting the Board elected Andrew Brown, formerly serving
the Company through his consulting firm, EA, to become its President and Chief
Operating Officer. The various options and restricted stock granted to Mr.
Jeffries on July 10, 2003, vested in full upon his resignation. The value of
these options at date of full vesting, in excess of amounts charged to expense
in the third quarter of 2003, was $826,000, and that amount was charged to
expense in the fourth quarter of 2003. The value of the options granted to Mr.
Brown while he was a consultant to the Company, in excess of the amounts charged
to expense in the third quarter of 2003, was charged to expense along with any
amounts he earned as President and Chief Operating Officer during the fourth
quarter of 2003.
In October 2003 the Company issued 10% promissory notes. These notes were
collateralized by the pledge of 16,667 shares of the Company's common stock
owned by Mr. D. Cohen and by 8,333 shares of the Company's common stock owned by
Mr. Brown. In consideration for this pledge, Messrs. Cohen's and Brown's stock
based compensation award became fully vested. As a result of the accelerated
vesting, the Company recognized compensation charges of approximately
$1,811,000.
F-31
At its October 2, 2003 meeting, the Board of Directors awarded six
employees and one consultant options to purchase a total of 18,333 shares of
common stock at exercise prices equal to the closing price of the Company's
common stock on the American Stock Exchange on date of grant. In addition, on
November 17, 2003, the Company granted Mitchell Cohen, the Company's former CFO,
a two year option to purchase 6,667 shares of common stock at $26.40 per share
vesting quarterly equally in eight installments commencing December 31, 2003 as
long as Mr. Cohen retains his position as Chief Financial Officer with the
Company. The closing price of the Company's common stock on that date was
$39.00. The Company recorded $84,000 of deferred compensation in connection with
this award that it is recognizing as compensation expense over the vesting
period. Effective on September 8, 2004, Mr. Cohen resigned his position as the
Company's Chief Financial Officer and his employment agreement was terminated.
The following table presents the activity for options outstanding:
Incentive Non-qualified Weighted Average
Stock Stock Exercise
Options Options Price
------------------------------------------------
Outstanding, December 31, 2001 100,325 6,069 $84.00
Issued 82,800 14,333 $40.20
Forfeited/Canceled (21,913) (4,436) $69.00
Exercised (3,333) (2,633) $24.00
------------------------------------------------
Outstanding, December 31, 2002 157,879 13,333 $63.60
Issued 130,792 67,167 $21.60
Forfeited/Canceled (25,094) (8,000) $37.80
Exercised (1,792) (3,500) $19.20
------------------------------------------------
Outstanding, December 31, 2003 261,785 69,000 $42.00
Issued 4,367,333 639,326 $1.53
Forfeited/Canceled (100,246) (24,082) $33.49
Exercised (8,046) 0 $25.87
------------------------------------------------
Outstanding, December 31, 2004 4,520,826 684,244 $2.81
------------------------------------------------
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Range of Exercise Prices Number Price Life Number Price
-------------------------------------- --------------------------
$.60 - $2.00 4,959,198 $1.31 9.93 1,152,804 $1.10
$2.01 - $5.00 5,833 $4.16 4.57 313 $3.30
$5.01 - $298.20 240,039 $37.47 3.67 179,887 $46.70
------------- ------------
Total- December 31,2004 5,205,070 $2.81 4.11 1,333,004 $7.26
============= ============
* During 2004, the Company awarded a total of 9,716,623 shares of its common
stock to employees and consultants in the form of stock options, restricted
stock awards and stock issued in return for services. Vested and unvested awards
and other uses of stock under the 2005 plan exceed the number of shares
authorized under the plan by 3,144,807 shares. The Company is seeking
shareholder approval to increase the number of shares authorized under the plan.
Should the shareholders not authorize this increase, some shares which vest
under the plan after December 31, 2004 may not be issued. The Company will
record an adjustment to reflect the market price at the time of any such
shareholder approval.
F-32
In fiscal year 2002, the Company has issued 10,600 stock options to
consultants that have been valued at $260,000 and recorded as consulting
expense, using the Black-Scholes options pricing model. The assumptions used
include lives ranging from 2 to 5 years, exercise prices ranging from $22.80 to
$42.00, volatility of 95%, no dividend payments and a risk free rate of 5.5%.
Warrants
The following table presents the activity for warrants outstanding:
Number of Weighted Average
Warrants Exercise Price
---------- ----------------
Outstanding, December 31, 2001 124,160 $41.40
Issued 291,550 $30.60
Cancelled (13,767) $30.60
Exercised (23,150) $30.00
---------
Outstanding, December 31, 2002 378,793 $34.80
Issued 354,459 $25.20
Cancelled (41,430) $61.80
Exercised (102,215) $27.60
---------
Outstanding, December 31, 2003 589,607 $27.00
Issued 2,160,168 $ 2.01
Cancelled (80,134) $31.91
Exercised (1,212,196) $ 3.30
---------
Outstanding, December 31, 2004 1,457,445 $ 7.98
---------
All of the outstanding warrants are exercisable and have a weighted
average remaining contractual life of 3.51 years.
During 2004, the Company modified certain warrants previously issued in
connection with its Series C Preferred and other financing transactions.
Warrants to exercise approximately 1,386,000 shares were modified to reduce
their exercise prices from a range of $49.20 to $18.00, to a new exercise price
range of $24.00 to $0.06. These modifications were primarily made to increase
the likelihood of the holders exercising such warrants. The Company has applied
the modification principles in SFAS 123, using the Black-Scholes model to
determine the value of these changes in warrants which resulted in recording
deemed dividends totaling $1,034,000 for the year ended December 31, 2004.
During the year ended December 31, 2004, the Company received net proceeds
of $128,000 and $3,744,000, respectively, from the exercise of stock options and
warrants resulting in the issuance of 9,412 shares and 1,187,919 shares,
respectively, of common stock. In the comparable period in 2003, the Company
received proceeds of $70,000 and $1,608,000, respectively, from the exercise of
stock options and warrants resulting in the issuance of 5,292 and 98,486
shares, respectively, of common stock.
F-33
For the year ended December 31, 2004, the Company issued warrants in
connection with various common stock private placement financings, as previously
discussed.
During the year ended December 31, 2004, as discussed elsewhere in these
footnotes to the Company's financial statements, the Company issued to its
officers, directors and employees awards of stock options, warrants and
restricted stock valued at approximately $5.8 million. Included in this amount
is approximately $2.7 million attributable to the employee retention bonus
program and restricted stock awards, $1.2 million relating to the warrant issued
to the Company's CEO in accordance with his employment contract, $0.6 million
relating to the separation agreement with the Company's former CEO, and $0.8
million issued to employees for payment of salaries.
During the first quarter of 2003, the Company modified certain warrants
previously issued in connection with its Series C Preferred and other financing
transactions. Warrants to exercise a total of approximately 57,500 shares were
modified to extend the periods in which they could be exercised. Additionally,
of this group of warrants, those representing approximately 2,867 shares were
modified to reduce their exercise prices from a range of $48.00 - $105.00, to a
new exercise price of $30.00. The Company also exchanged warrants to purchase
25,921 shares for warrants to purchase 21,755 shares of common stock at a lower
exercise price of $30.00. The original convertible equity and debt instruments
with which these warrants were issued had substantially been converted at the
warrant modification dates.
During the third quarter of 2003, the Company modified certain warrants by
reducing the price to purchase a total of approximately 118,650 shares which
were previously issued primarily in connection with the sale of common stock and
to a lesser extent to consultants.
During 2003, the Company granted five-year warrants to purchase a total of
21,875 shares of common stock at exercise prices of $28.00 and $30.00 per share
to parties who had earlier exercised warrants. During the fourth quarter of
2003, the Company reduced the exercise price of certain of these warrants to
$18.00.
These modifications were primarily made to increase the likelihood of the
holders exercising such warrants. Additionally, certain of the above-noted
warrants were modified to compensate investors and consultants who had rendered
non-employee services (which was not contemplated at the original issue dates)
subject to the approval of the Board of Directors, which took place during 2003.
As such, $2,026,000 of the value of these modifications has been accounted for
as a deemed disproportionate dividend to the effected warrant holders and as a
capital transaction with no net value being recorded to equity during 2003. The
portion related to non-employee service, which amounted to $110,000, has been
reflected in operating expenses during 2003. The Company has applied the
modification principles in SFAS No. 123, using the Black-Scholes model to
determine the value of these changes in warrants.
On May 22, 2003, an accredited investor exercised warrants to purchase
units consisting of 20,833 shares of our common stock (which were registered
under a previously filed registration statement) and new warrants to purchase an
additional 20,833 shares of our common stock, which we agreed to register on
this registration statement. The new warrants have an exercise price of $18.00
per share.
F-34
NOTE 8 - RELATED PARTY TRANSACTIONS
The accounts payable - related parties as of December 31, 2003 reflects
$40,000 owed to a former director of the Company.
Until his appointment as our President and Chief Operating Officer in
October 2003, Andrew Brown was employed by External Affairs, Inc. In August
2003, we entered into a consulting agreement with External Affairs for a term
ending June 30, 2004, under which External Affairs agreed to act as our investor
relations and strategy consultant and assist us with our capital raising
efforts. The agreement provided for payments to External Affairs of $328,000,
and a discretionary bonus potential of up to $275,000 based upon our attaining a
specified level of revenue during the term of the agreement. External Affairs
received a cash bonus in July 2003 of $50,000 for its services during the year
ended June 30, 2003. On October 10, 2003, Mr. Brown was appointed as our
President and Chief Operating Officer, and we agreed to reduce the compensation
payable to External Affairs under the August 2003 Consulting Agreement by an
amount equal to the compensation payable to Mr. Brown as President and Chief
Operating Officer. External Affairs was granted 8,333 restricted shares of our
common stock in July 2003, which shares were forfeitable if, by January 6, 2004,
we had not met certain performance goals, which goals were met. Pursuant to the
agreement, External Affairs also received a five-year option to purchase an
aggregate of 25,000 shares of our common stock at $15.00 per share, of which (i)
options to purchase 8,333 shares vest in 25% increments every three months
beginning September 9, 2003 conditioned on Mr. Brown continuing to render
services to us at the end of each three-month period, and (ii) options to
purchase 16,667 shares will vest on July 9, 2008, subject to earlier vesting in
June 2004 based upon a formula contained in the agreement. The agreement
provides that, upon the occurrence of a change in control of our company, all
options described in the agreement will be deemed fully vested and exercisable.
The agreement is terminable by either us or External Affairs for any reason on
ninety days prior written notice, subject to certain offset rights in the event
of termination by External Affairs for other than "good reason". External
Affairs has transferred all of its options and restricted shares to Mr. Brown.
During 2004 and 2003, we paid an aggregate of $102,000 and $310,450 to External
Affairs in consulting fees, respectively.
During 2003, we issued five-year warrants to purchase (i) 2,067 shares
of our common stock at $41.40 per share on April 1, 2003, (ii) 4,133 shares of
our common stock at $41.40 per share on June 24, 2003, and (iii) 3,000 shares of
our common stock at $30.00 per share on July 1, 2003, to Andrew Brown as
compensation for consulting services provided to us under our agreement with
External Affairs.
The brother of Mr. Louis Hyman, our Executive Vice President and Chief
Technology Officer, is the president of TekPerts Technologies, Inc., a
technology consulting firm. On October 1, 2003, we entered into a one-year
consulting agreement with TekPerts Technologies, under which we agreed to pay
TekPerts Technologies a monthly consulting fee of $11,667 and to grant an option
to purchase an aggregate of 1,167 shares of our common stock at an exercise
price of $27.00 per share, the closing price of our common stock on the American
Stock Exchange on such date, which options vest as to 146 shares quarterly
beginning December 31, 2003. The agreement with TekPerts Technologies was
terminated by us as of June 1, 2004.
Andrew Brown's sister is employed by HealthRamp, as a Business Manager,
at an annual base salary of $55,000. In October 2003, she was granted options to
purchase 833 shares of our common stock at an exercise price of $26.40 per
share, the closing price of our common stock on the American Stock Exchange on
the date of grant.
F-35
Until his termination by us, Darryl Cohen's brother was employed by us
as Sales Director, Practice Management System of HealthRamp, at an annual base
salary of $72,500. On December 1, 2003, he was granted options to purchase 833
shares of our common stock at an exercise price of $41.40 per share, the closing
price of our common stock on the American Stock Exchange on the date of grant.
On November 10, 2003, we completed the purchase of substantially all of
the tangible and intangible assets, and assumed certain liabilities of the
Frontline Physicians Exchange and Frontline Communications business of The
Duncan Group, Inc. We paid (a) $1,567,000 in cash at the closing, (b) $500,000
payable through the issuance of our common stock (approximately 15,267 shares)
the resale value of which is guaranteed to the seller under certain conditions,
(c) $1,500,000 payable through the issuance of our common stock (approximately
42,450 shares) that will be delivered to the seller only if the revenue of the
acquired business exceeds $1 million for all of 2003, (d) a royalty equal to 15%
of the gross revenue of the business during 2003 and 2004, (e) up to an
additional $1,500,000 payable through the issuance of our common stock based on
the number of physician offices that are active customers of the seller who
adopt our technology and generate certain revenues to us, and (f) an additional
$1,000,000 payable through the issuance of our common stock if the average
annual revenue of the acquired business for the calendar years 2003 and 2004
equals or exceeds $1,500,000. Our board of directors approved the purchase of
Frontline, which was effectuated as an arm's length transaction, in November
2003. In November 2003, in connection with our acquisition of Frontline, The
Duncan Group, Inc. received an aggregate 61,050 shares of our common stock,
45,788 shares of which were subject to forfeiture if a revenue goal was not met,
which has been attained. Ms. Nancy Duncan, our former executive vice president,
and M. David Duncan, are husband and wife and together own, indirectly, all of
the issued and outstanding stock of The Duncan Group, Inc.
On September 30, 2004, we closed the transaction pursuant to that
certain Asset Purchase Agreement, dated as of September 29, 2004, by and among
us, The Duncan Group, Inc., M. David Duncan and Nancy L. Duncan, to sell the
assets previously acquired from The Duncan Group, Inc. on November 10, 2003
related to the business of Duncan known as Frontline Physicians Exchange and
Frontline Communications. In accordance with the Asset Purchase Agreement, we
agreed to sell all of the assets of our Frontline division, now known as the
OnRamp division, to The Duncan Group, Inc. in consideration of (i) our receipt
of $500,000 in cash paid at closing; (ii) termination of the employment
agreement between us and each of M. David Duncan and Nancy L. Duncan; (iii)
release and discharge of our obligations to Duncan under that certain Asset
Purchase Agreement dated as of November 7, 2003, between the Company and Duncan
(the "2003 Purchase Agreement"), to issue to Duncan up to an additional
$2,500,000 through the issuance of shares of our common stock upon the
achievement of certain financial milestones; (iv) release and discharge of our
obligations to Duncan under the 2003 Purchase Agreement to pay Duncan a royalty
equal to 15% of the gross revenue of the OnRamp business during 2003 and 2004;
and (v) release and discharge of our obligations under the 2003 Purchase
Agreement to pay Duncan any shortfall amount following the sale of certain
shares of our common stock by Duncan. Our board of directors approved the sale
of OnRamp, which was effectuated as an arm's length transaction, on September
29, 2004.
In connection with our sale of OnRamp, Nancy Duncan's two-year
employment agreement with us which provided that Ms. Duncan will be compensated
at an annual salary of $140,000 was terminated. In connection with our sale of
OnRamp, our employment relationship with M. David Duncan, previously employed by
us at an annual salary of $90,000, was terminated.
F-36
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company is involved in claims and litigation that
arise out of the normal course of business. Currently, other than as discussed
below, there are no pending matters that in management's judgment are expected
to have a material impact on the Company's financial statements.
On June 3, 2003 two former executive officers, John Prufeta and Patricia
Minicucci commenced an action against the Company by filing a Complaint in the
Supreme Court of the State of New York for Nassau County (Index No. 03-008576)
in which they alleged that the Company breached separation agreements entered
into in December 2002 with each of them, and that the Company failed to repay
amounts loaned by Mr. Prufeta to the Company. Mr. Prufeta sought approximately
$395,000 (including a loan of $120,000) and Ms. Minicucci sought approximately
$222,000. The Complaint was served on July 23, 2003. On July 15, 2003, the
Company paid in full the $120,000 so loaned together with interest, without
admitting the claimed default. On February 2, 2004, the Supreme Court of the
State of New York for Nassau County issued an order for partial summary judgment
in favor of Ms. Minicucci for the unpaid severance obligations of $138,064. The
Company made severance payments to both former executives through May 2004 but
due to capital constraints has not made any payments since then. The Company is
continuing negotiations with the plaintiffs to settle the dispute amicably. The
amounts payable to M. Prufeta and Minicucci are included in accrued expenses in
the accompanying balance sheet as of December 31, 2004.
On August 19, 2003, we commenced an action in the Federal District
Court for the Southern District of Ohio (Case No. C-02-585) against
PocketScript, LLC for $154,000, representing the unpaid principal amount of a
note payable to us for advances made to PocketScript while we were performing
due diligence leading to a potential purchase of PocketScript, which did not
occur. On September 15, 2003 the individuals who were owners of an entity that
was an owner of PocketScript filed an action against us and against Darryl
Cohen, our former chief executive officer, personally, in the Court of Common
Pleas, Hamilton County, Ohio (Case No. A0306937). We were served on October 27,
2003. This action alleges breach of contract and claims $850,000 of damages, and
also alleges fraud and claims $1 million of compensatory damages and $3 million
of punitive damages. On March 4 2004, we entered into a settlement agreement
with PocketScript and its principal and exchanged general releases. Under the
terms of the settlement, PocketScript agreed to pay us $75,000. All parties to
the settlement agreement reserved their rights in the pending state court
litigation between certain members of PocketScript and us. On March 23, 2005, in
connection with the settlement of the dispute with the individuals, we entered
into a settlement agreement in principle. Under the settlement agreement, we
agreed to issue to such individuals an aggregate of 41,667 restricted shares of
our common stock, par value $.001 per share. In order to secure the obligations,
the registrant agreed to deposit the amount of $75,000 due and owing to it from
Pocketscript in an escrow account to satisfy any amounts still due and owing to
the individuals following the sale of the Shares, less an amount of $25,000
payable from the escrow account to such individuals. Following all disbursements
from the escrow account, the parties will execute mutual releases and file
stipulations to dismiss any pending action with prejudice.
In early March 2004, we were effectively served with a Demand for
Arbitration by Mark W. Lerner, a former officer, with respect to his claim that
we improperly terminated his employment agreement, thereby resulting in claimed
damages of as much as $350,000 plus prejudgment interest, statutory penalties
relating to unpaid wages of 25% and legal fees. In 2004 the arbitrator awarded
$204,330 to Mr., Lerner, which amount has been accrued in the financial
statements as of December 31, 2004.
F-37
In February 2004 the Company relocated its executive offices (under a
sublease that expires on June 29, 2008) to 33 Maiden Lane, New York, New York.
By stipulation the Company has surrendered the premises located at 420 Lexington
Avenue. In connection with this lease abandonment, the Company recorded an
accrual for expected losses on the lease equal to the present value of the
remaining lease payments, net of reasonable sublease income in selling, general
and administrative expenses in the accompanying statements of operations. In
addition, the Company's landlord agreed to offset the Company's security deposit
of $130,000 in satisfaction of a portion of the amounts due under the lease. The
remaining obligation to the landlord is included in accrued expenses in the
Company's balance sheet as of December 31, 2004. The Company received a summons
and verified complaint from the landlord for alleged damages against the Company
in the amount of $83,828, plus interest, costs and expenses in connection with
the alleged breach of the lease agreement, dated January 2002, by and between
the landlord and the Company. The Company has filed an answer to the complaint
and intends to vigorously defend against the litigation.
In June 2004, the Company's former law firm commenced an action against
the Company by filing a complaint in the Supreme Court of the State of New York
for the county of New York (Index No. 108499/04) in which they alleged we
breached our retainer agreement by failing to pay $435,280 for legal services
allegedly performed. The Company believes it has valid defenses and/or counter
claims which the Company intends to vigorously pursue.
Employment Agreements
On June 1, 2004, the Company entered into an employment agreement with
Andrew Brown. During the employment period, which will end on June 30, 2006, Mr.
Brown will be paid a base salary at an annual rate of $240,000 per year;
provided that, during the six-month period ending November 30, 2004, Mr. Brown
will be paid a base salary at the rate of $120,000 per year and receive a
retention bonus of three times the amount of his reduction in pay payable in the
form of shares of the Company's common stock, but only if he remains employed as
Chief Executive Officer on November 30, 2004, is terminated before that date
without "cause" or resigns before that date for "good reason". On December 2,
2004 Mr. Brown agreed to relinquish his retention bonus in return for an award
of options to purchase 1,353,383 shares of common stock at an exercise price of
$1.14, the fair market value of the Company's common stock on the date of grant.
The employment agreement also provides for the payment of performance-based
bonuses tied to the growth of the Company's gross revenues, the grant of up to
100,000 options under the 2004 Stock Incentive Plan, with an exercise price of
$10.80 per share, and the issuance to Mr. Brown of a warrant whereby he will be
entitled to purchase up to one-nineteenth of the outstanding shares of the
Company, at an exercise price of $1.14. A compensation expense of approximately
$1.2 million was expensed in 2004 relating to this warrant. The employment
agreement also provides that in the event that Mr. Brown's employment is
terminated for good reason within six months or his employment is terminated
within one year without cause after any person or group acquires more than 25%
of the combined voting power of the Company's then outstanding Common Stock, all
of Mr. Brown's options will become fully vested and immediately exercisable and
Mr. Brown will be paid an amount equal to twice his annual base salary and twice
his bonus compensation received during the twelve months immediately preceding
the date of termination of Mr. Brown's employment; provided that if the change
in control resulted from the sale of the Company for less than $31 million, the
payments to Mr. Brown will be in amounts as described above in this paragraph as
if the word "twice" had been deleted.
F-38
In June 2004, the Company entered into amendments of its employment
agreements with Louis Hyman, Chief Technology Officer, and Mitchell M. Cohen,
former Chief Financial Officer, which provide that in the event that Mr. Hyman's
or Mr. Cohen's employment is terminated within one year without cause after any
person or group acquires more than 25% of the combined voting power of the
Company's then outstanding Common Stock, all of his options will become fully
vested and immediately exercisable and he will be paid an amount equal to twice
his annual base salary and twice his bonus compensation received during the
twelve months immediately preceding the date of termination of his employment;
provided that if the change in control resulted from the sale of the Company for
less than $31 million, the payments to Mr. Hyman and/or Mr. Cohen will be in
amounts as described above in this paragraph as if the word "twice" had been
deleted. Effective on September 8, 2004, Mr. Cohen resigned his position as the
Company's Chief Financial Officer and his employment agreement was terminated.
On October 12, 2004, the Company entered into an employment agreement with
Ronald C. Munkittrick, Chief Financial Officer. Mr. Munkittrick will be paid an
annual base salary of $195,000 provided, however, that Mr. Munkittrick has
agreed to a salary reduction to $120,000 per annum through December 31, 2004 and
a salary reduction to $150,000 per annum from January 1, 2005 through March 31,
2005. The employment agreement also provides that in the event that Mr.
Munkittrick's employment is terminated within one year without cause after any
person or group acquires more than 25% of the combined voting power of the
Company's then outstanding Common Stock, all of his options and/or restricted
stock awards will become fully vested and immediately exercisable and he will be
paid an amount equal to twice his annual base salary and twice his bonus
compensation that he was entitled to receive during the twelve months
immediately preceding the date of termination of his employment; provided that
if the change in control resulted from the sale of the Company for less than $31
million, the payments to Mr. Munkittrick will be in amounts as described above
in this paragraph as if the word "twice" had been deleted.
On May 25, 2004, the Company entered into retainer agreements with Steven
Berger and Jeffrey Stahl, M.D., two independent directors. Pursuant to these
agreements, each independent director was granted a five-year option to purchase
3,333 shares of the Company's common stock at an exercise price of $11.40 per
share, and will be paid a quarterly fee of $7,500 in arrears, except that in the
case of Dr. Stahl the quarterly payments due on August 25, 2004 and November 25,
2004 were paid in advance in the form of 1,316 performance shares of common
stock, which will vest as to 50% on each of such dates. The Company has retainer
agreements with Anthony Soich and Steven Shorr whereby each has been awarded
options and will be paid quarterly fees on substantially similar terms as Mr.
Berger and Dr. Stahl. Each of the directors has agreed to waive their quarterly
fees in return for the grant to each of options to purchase 140,978 shares of
common stock at an exercise price of $1.14, the fair market value on December 2,
2004, the date of grant.
Leases
The Company leases office facilities in New York, Utah, Florida and Texas
and various equipment under non-cancelable operating leases. In February 2004,
the Company relocated its executive offices from 420 Lexington Avenue, New York,
New York to 33 Maiden Lane, New York, New York.
F-39
Future minimum lease payments under these leases as of December 31,
2004 are approximately as follows:
Year Ending December 31,
------------------------
2005 $ 614,000
2006 580,000
2007 490,000
2008 255,000
2009 and thereafter --
-----------
Total $ 1,939,000
===========
Total rental expense under these leases was $1,415,000, $567,000, and
$610,000 in fiscal 2004, 2003, and 2002, respectively. The expense for 2004
includes $510,000 relating to the accrual for rent payable as a result of the
Company's abandonment of its office facilities in Florida and its former office
space in New York City. The expense for 2004 also includes $343,000 relating to
a settlement with a landlord for premises located at 55 Water Street, New York,
NY that the Company intended to occupy but did not.
F-40
NOTE 10 - INCOME TAXES
As of December 31, 2004, the Company has net operating loss (NOL) carry
forwards of approximately $60.6 million, which expire in the years 2005 through
2020. The utilization of the NOL carry forward is significantly limited on an
annual basis for net operating loss carry forwards generated prior to September
1996, due to an effective change in control, which occurred as a result of the
1996 private placement. As a result of the significant sale of securities during
1999, the company's net operating loss carry forwards will be further limited in
the future due to those changes in control. The Company also has a deferred tax
liability of approximately $855,000 related to intangibles being amortized for
tax but not for book purposes. The Company has concluded it is currently more
likely than not that it will not realize its net deferred tax asset and
accordingly has established a valuation allowance of approximately $34 million
at December 31, 2004. The change in the valuation allowance for 2004 was
approximately $14.8 million.
NOTE 11 - EMPLOYEE BENEFIT PLAN
Employees are eligible to participate in the company's 401(k) retirement.
Payroll deductions are taken out of payroll checks and are considered "pre-tax"
dollars. Employees may elect (in writing) at any time that their participation
be "suspended", however, they may only apply for re-enrollment quarterly.
Employees may elect up to a 15% contribution. There currently is no employer
match policy.
F-41
NOTE 12- SUMMARIZED QUARTERLY RESULTS (Unaudited)
The following table presents unaudited operating results for each quarter within
the two most recent years. The Company believes that all necessary adjustments
consisting only of normal recurring adjustments have been included in the
amounts stated below to present fairly the following quarterly results when read
in conjunction with the financial statements. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full fiscal year. (amounts in thousands except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------
Year ended December 31, 2004
Revenues $ 39 $ 61 $ 94 $ 70
Operating expenses (6,472) (8,061) (7,260) (5,781)
Interest & other financing costs (11) (525) (8,589) (9,202)
Loss from discontinued operations (78) (67) (3,949) --
Disproportionate deemed dividends (143) (698) (149) (44)
Beneficial conversion feature discount
Net loss applicable --------------------------------------------
to common stockholders $ (6,665) $ (9,290) $(19,853) $(14,957)
============================================
Basic and diluted loss per share (1) (2.65) (3.25) (5.89) (2.96)
Year ended December 31, 2003
Revenues $ 173 $ -- $ 1 $ 17
Operating expenses (2,625) (2,473) (4,923) (7,370)
Interest & other financing costs 5 (131) (502) (9,202)
Loss from discontinued operations -- -- -- (109)
Disproportionate deemed dividends (1,133) -- (113) (780)
Beneficial conversion feature discount (2,156)
Net loss applicable --------------------------------------------
to common stockholders $ (3,580) $ (2,604) $ (5,537) $(19,600)
============================================
Basic and diluted loss per share (1) (2.71) (1.90) (3.65) (10.84)
(1) Earnings per share are computed independently for each quarter and the full
year based upon respective average shares outstanding. Therefore, the sum
of the quarterly net earnings per share amounts may not equal the annual
amounts reported.
F-42
NOTE 13 - SUBSEQUENT EVENTS
On January 12, 2005, the Company entered into a securities purchase
agreement with DKR Soundshore Oasis Holding Fund Ltd., Harborview Master Fund,
L.P. and Platinum Partners Value Arbitrage Fund, L.P., each an institutional
investor, pursuant to which the Company agreed to sell, and the investors agreed
to purchase, 8% convertible redeemable debentures in the aggregate amount of up
to $4,000,000 and five-year warrants to purchase up to 1,666,667 shares of
common stock at an exercise price of $2.40. The debentures are convertible into
common stock of the Company at an initial conversion price of $2.40. A first
closing of $2,000,000 occurred on January 13, 2005 and a second closing of
$2,000,000 shall occur upon the completion of certain closing conditions set
forth in the securities purchase agreement. The Company is obligated to redeem
one-fifth of the principal and interest amount on the debentures in cash or, at
the option of the Company, shares of common stock, on the first day of each
month, commencing on the earlier of (a) May 12, 2005, and (b) the first date
following the 20th day after the effective date of the registration statement
registering for resale the securities issuable upon conversion of the
debentures, and ending upon the full redemption of the debentures. If the
Company elects to make redemption payments in shares of common stock, the
principal amount is convertible based upon a conversion price equal to the
lesser of the initial conversion price or 85% of the average of the three lowest
closing bid prices for the Company's common stock during the 20 trading days
immediately prior to the monthly redemption date. The Company is also obligated
to pay 8% in interest on the outstanding principal on the debentures (i) on the
effective date on which the debentures are converted into shares of common stock
of the Company, (ii) on each monthly redemption date or (iii) on the maturity
date, at the interest conversion rate.
Assuming the maximum amount of $4,000,000 is purchased, the Company has
agreed to issue to the investors additional investment rights to purchase
additional debentures in the aggregate principal amount of up to $1,320,000
along with five year warrants to purchase an aggregate of 550,000 shares of the
Company's common stock, on the same terms and conditions as the original
debentures and warrants. The debentures and warrants are subject to customary
protection against dilution.
As a result of the first closing, previously issued and outstanding notes
of the Company in the aggregate principal amount of $452,000, plus interest, are
automatically convertible into one hundred and twenty percent of principal
amount of debentures, together with warrants, of the Company having the same
terms and conditions as set forth above. In addition, upon each closing, the
Company's financial advisor is entitled to receive a warrant to purchase seven
percent of the shares of common stock issued or issuable upon conversion or
exercise of the debentures and warrants at an exercise price of $2.40.
The sale of the debentures and warrants, the issuance of debentures and
warrants to the outstanding noteholders, and the issuance of warrants to the
financial advisor, was made in accordance with the exemptions from registration
provided for under Section 4(2) of the Securities Act of 1933, as amended, and
Rule 506 of Regulation D promulgated thereunder. The Company has agreed to
register with the SEC 125% of the shares of common stock issuable upon
conversion of principal and interest under the debentures and upon exercise of
the warrants. In the event that the Company fails to file a registration
statement with the SEC by February 3, 2005, or in the event such registration
statement is filed but is not declared effective by the SEC by April 30, 2005,
then the Company will be obligated to pay the holders of the registrable
securities liquidated damages equal to 1.5% of their total investment for each
30 day period until the registration statement is filed or declared effective.
The Company expects to file the registration statement in early April 2005 and
will accrue its obligation to the investors in its financial statements. The
Company has agreed to keep the registration statement effective until the
earlier of (i) the date upon which all shares covered by the registration
statement have been sold, or (ii) the date when all such shares are eligible to
be sold without volume restrictions under Rule 144(k) of the Securities Act of
1933.
F-43
On January 12, 2005, the Company entered into a securities purchase
agreement (the "Equity Line Agreement") with each of Yokuzuna Holdings and
Harborview Master Fund, L.P., two institutional investors, whereby, subject to
certain closing conditions and other criteria being met, such investors agreed
to provide an equity line of credit to the Company (the "Equity Line Financing")
to purchase from the Company an aggregate amount of up to $25,000,000 through
the issuance of shares of common stock by the Company to the investors. Since at
least one of the investors which is a party to the Equity Line Agreement also
owns Convertible debentures issued by the company with a fluctuating conversion
or redemption price, the investor could potentially affect the terms on which
the investor could purchase the shares of common stock underlying the Equity
Line Financing through conversion or redemption of Convertible debentures and
the sale of shares of common stock acquired following conversion or redemption
of the Convertible debentures into the public marketplace. Therefore, the
investor is considered not to be irrevocably bound to purchase shares of common
stock and the Equity Line Financing does not constitute a viable means for the
Company to obtain capital under current interpretations of the federal
securities laws by the SEC relating to "equity line" financing arrangements. As
a result, the Company will not be able to register the shares of common stock
underlying the Equity Line Financing or draw down under the line of credit.
Therefore the Company has determined not to seek stockholder approval of the
Equity Line Financing on its definitive proxy statement filed with the SEC on
March 16, 2005. Although there can be no assurances that this will occur, the
Company may determine to seek stockholder approval of the Equity Line Financing
in the future in the event the investors who own the Convertible debentures no
longer own any of these securities or if a new investor unaffiliated with the
current investors agrees to participate in the Equity Line Financing.
In 2003, the Company formed a wholly-owned subsidiary, LifeRamp Family
Financial, Inc. ("LifeRamp"), in Utah that has not yet commenced business
operations. LifeRamp's business purpose is the making of non-recourse loans to
terminally ill cancer patients secured by their life insurance policies. In July
2004, the Company decided to indefinitely delay the commencement of business
operations of LifeRamp while exploring financing and other possible
alternatives. Subsequently in October 2004, the Company ceased all operations at
LifeRamp and is actively pursuing alternatives for its LifeRamp investment. In
January 2005, the Company began exploring options for capitalizing the LifeRamp
business separately from the Company or spinning off all or a portion of
LifeRamp. In February 2005, LifeRamp received $300,000 in bridge financing from
investors in contemplation of such a transaction. The LifeRamp business is using
the proceeds from the bridge financing to fund operations while it pursues the
strategic recapitalization. This bridge financing is solely an obligation of
LifeRamp and the Company is neither an obligor nor guarantor of the debt. The
$300,000 bridge financing was in the form of convertible notes sold to three
entities. There can be no assurance that the Company will complete a transaction
that will recoup its initial investment or any portion thereof.
F-44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RAMP CORPORATION
By: /s/ Andrew Brown
---------------------------------------
Andrew Brown
Chairman, Chief Executive Officer
and President
Dated: March 30, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
---------- ------ -----
/s/ Andrew Brown Chairman, Chief Executive Officer, March 30, 2005
---------------- President and Director
Andrew Brown (Principal Executive Officer)
/s/ Ron Munkittrick Principal Financial and March 30, 2005
------------------- Accounting Officer
Ron Munkittrick
/s Steven A. Berger Director March 30, 2005
-------------------
Steven A. Berger
/s/ Steve Shorr Director March 30, 2005
---------------
Steve Shorr
/s/ Tony Soich Director March 30, 2005
--------------
Tony Soich
/s/ Jeffrey A. Stahl Director March 30, 2005
--------------------
Jeffrey A. Stahl
INDEX TO EXHIBITS
Exhibit
No. Description
------- ------------
2.1 Agreement and Plan of Merger, dated December 17, 2003 of Medix
Resources, Inc., a Colorado corporation, into Ramp Corporation, a
Delaware corporation (the "Company"), incorporated by reference to
Annex A to the Company's definitive Proxy Statement on Schedule 14A
filed with the SEC on November 6, 2003.
3.1.1 Restated Certificate of Incorporation of the Company, incorporated
by reference to Annex B to the Company's Definitive Proxy Statement
on Schedule 14A filed with the SEC on November 6, 2003.
3.1.2 Certificate of Designation of Series A Convertible Preferred Stock,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-3, filed with the SEC on January
30, 2004.
3.1.3 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company.*
3.2 By-Laws of the Company, incorporated by reference to Annex C to the
Company's definitive Proxy Statement on Schedule 14A filed with the
SEC on November 6, 2003.
4.1 Form of specimen certificate for common stock of the Company,
incorporated by reference to Exhibit 4.1 to the Company's Form 10-K
filed with the SEC on April 14, 2004.
4.2 Form of 1996 Unit Warrant, incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Registration Statement of the Company on
Form S-3 filed with the SEC on October 10, 1996.
4.3 Form of Warrant issued with the 1999 Series A, B, and C Convertible
Preferred Stock, incorporated by reference to Exhibit 4.7 to the
Company's Form 10-KSB, filed with the SEC on March 30, 2000.
4.4 Amended and Restated Warrant to Purchase Common Stock issued to
WellPoint Pharmacy Management, dated September 8, 1999 and amended
February 18, 2002, incorporated by reference to Exhibit 10.7 to the
Company's Amendment No.1 to Registration Statement on Form S-2 (Reg.
No. 333-73572), filed with the SEC on February 28, 2002.
4.5 Form of Warrant issued with the 2002 private placement of stock with
warrants, incorporated by reference to Exhibit 4.5 to the Company's
Form 10-K, filed with the SEC on March 27, 2003.
4.6 Registration Rights Agreement, dated as of November 7, 2003, between
Medix Resources, Inc. and The Duncan Group, Inc., incorporated by
reference to Exhibit 4.1 to the Company's Form 8-K filed with the
SEC on November 19, 2003.
4.7 Form of Warrant Modification Agreement, dated as of April 21, 2003,
incorporated by reference to Exhibit 4.7 to the Company's Form 10-K
filed with the SEC on April 14, 2004.
4.8 Form of Warrant Amendment, dated as of October 1, 2002, incorporated
by reference to Exhibit 4.8 to the Company's Form 10-K filed with
the SEC on April 14, 2004.
4.9 Securities Purchase Agreement, dated April 11, 2003 relating to the
7% Convertible Debentures Series 03 Due October 11, 2004 (including
Annex I (form of Debenture), Annex IV (form of Registration Rights
Agreement) Annex V (Company disclosure Materials) ands Annex VI
(form of Warrant), incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3, filed with the SEC on
June 23, 2003.
4.10 Securities Purchase Agreement, dated May 12, 2003 relating to the 7%
Convertible Debentures Series 03-2 Due November 12, 2004 (including
Annex I (form of Debenture), Annex IV (form of Registration Rights
Agreement) and Annex V (Company disclosure Materials), incorporated
by reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-3, filed with the SEC on June 23, 2003.
4.11 Securities Purchase Agreement, dated June 12, 2003 relating to the
7% Convertible Debentures Series 03-3 Due December 12, 2004
(including Annex I (form of Debenture), Annex IV (form of
Registration Rights Agreement) and Annex V (Company disclosure
Materials), incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-3, filed with the SEC on
June 23, 2003.
4.12 Form of Warrants issued to the placement agent of the Series 03-2
Debentures or its designees, incorporated by reference to Exhibit
4.4 to the Company's Registration Statement on Form S-3, filed with
the SEC on June 23, 2003.
4.13 Form of Warrants issued to the placement agent of the Series 03-3
Debentures or its designees, incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-3, filed with
the SEC on June 23, 2003.
4.14 Warrant, dated October 2, 2003, issued to Heather Urich at an
exercise price of $0.50, incorporated by reference to Exhibit 4.14
to the Company's Form 10-K filed with the SEC on April 14, 2004.
4.15 Warrant, dated October 2, 2003, issued to Heather Urich at an
exercise price of $0.01, incorporated by reference to Exhibit 4.15
to the Company's Form 10-K filed with the SEC on April 14, 2004.
4.16 Form of Series 03 7% Convertible Debenture, incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-3, filed with the SEC on November 26, 2003.
4.17 Note and Warrant Purchase Agreement, dated as of October 28, 2003
relating to the 7% Convertible Promissory Notes by and among the
Company and the Purchasers named therein, incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement on Form S-3,
filed with the SEC on November 26, 2003.
4.18 Form of Convertible Promissory Note, dated October 28, 2003, due
March 27, 2005 incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-3, filed with the SEC on
November 26, 2003.
4.19 Form of Warrant, dated October 28, 2003, incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement on Form S-3,
filed with the SEC on November 26, 2003.
4.20 Registration Rights Agreement, dated October 28, 2003 by and among
the Company and the Purchasers named therein, incorporated by
reference to Exhibit 4.5 to the Company's Registration Statement on
Form S-3, filed with the SEC on November 26, 2003.
4.21 Form of Warrant issued to the placement agent or its designees,
incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-3, filed with the SEC on November
26, 2003.
4.22 Form of Exchange Agreement, dated November 15, 2003, incorporated by
reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-3, filed with the SEC on November 26, 2003.
4.23 Series A Convertible Preferred Stock Purchase Agreement, dated
December 31, 2003, relating to the sale of Series A Convertible
Preferred Stock between the Company and Canon Ventures Limited
("Canon"), incorporated by reference to the Exhibit 4.1 to the
Company's Registration Statement on Form S-3, filed with the SEC on
January 30, 2004.
4.24 Form of Warrant issued to Canon at an exercise price of $0.70,
incorporated by reference to the Exhibit 4.2 to the Company's
Registration Statement on Form S-3, filed with the SEC on January
30, 2004.
4.25 Form of Warrant issued to Canon at an exercise price of $0.61,
incorporated by reference to the Exhibit 4.3 to the Company's
Registration Statement on Form S-3, filed with the SEC on January
30, 2004.
4.26 Form of Warrant issued to vFinance Investments, Inc. at an exercise
price of $0.61, incorporated by reference to the Exhibit 4.4 to the
Company's Registration Statement on Form S-3, filed with the SEC on
January 30, 2004.
4.27 Form of Warrant issued to David Stefansky at an exercise price of
$0.61, incorporated by reference to the Exhibit 5 to the Company's
Registration Statement on Form S-3, filed with the SEC on January
30, 2004.
4.28 Form of Warrant issued to Richard Rosenblum at an exercise price of
$0.61, incorporated by reference to the Exhibit 6 to the Company's
Registration Statement on Form S-3, filed with the SEC on January
30, 2004.
4.29 Registration Rights Agreement, dated December 31, 2003, between the
Company and Canon, incorporated by reference to the Exhibit 9 to the
Company's Registration Statement on Form S-3, filed with the SEC on
January 30, 2004.
4.30 Consulting Agreement, dated as of October 1, 2002, between the
Company and Mr. Benjamin Mayer, as amended on December 4, 2003
incorporated by reference to the Exhibit 10 to the Company's
Registration Statement on Form S-3, filed with the SEC on January
30, 2004.
4.31 Form of Warrant issued to Mayer & Associates LLC at an exercise
price of $0.61, incorporated by reference to the Exhibit 11 to the
Company's Registration Statement on Form S-3, filed with the SEC on
January 30, 2004.
4.32 Form of Warrant issued to Mayer & Associates LLC at an exercise
price of $0.30, incorporated by reference to the Exhibit 12 to the
Company's Registration Statement on Form S-3, filed with the SEC on
January 30, 2004.
4.33 Form of Stock Purchase Agreement and Warrant issued to each of the
investors in connection with the private placement incorporated by
reference to the Exhibit 13 to the Company's Registration Statement
on Form S-3, filed with the SEC on January 30, 2004.
4.34 Form of Common Stock and Warrant Purchase Agreement dated March 4,
2004 issued to each of the investors in connection with the private
placement of the Company's securities ("March 2004 Offering"),
incorporated by reference to Exhibit 4.34 to the Company's Form 10-K
filed with the SEC on April 14, 2004.
4.35 Form of Registration Rights Agreement between Ramp Corporation
vFinance Investments, Inc. and each of the investors in connection
with the March 2004 Offering, incorporated by reference to Exhibit
4.35 to the Company's Form 10-K filed with the SEC on April 14,
2004.
4.36 Form of Warrant issued March 5, 2004 to investors and the
distributor in connection with the March 2004 Offering, incorporated
by reference to Exhibit 4.36 to the Company's Form 10-K filed with
the SEC on April 14, 2004.
4.37 Note and Warrant Purchase Agreement, dated as of July 14, 2004,
relating to the sale of convertible promissory notes by and between
the Company, Cottonwood Ltd. and Willow Bend Management Ltd.,
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 filed with the SEC on September
24, 2004.
4.38 Convertible Promissory Note dated July 14, 2004 issued to Cottonwood
Ltd. in the aggregate principal amount of $2,100,000, incorporated
by reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-3 filed with the SEC on September 24, 2004.
4.39 Convertible Promissory Note dated July 14, 2004 issued to Willow
Bend Management Ltd. in the aggregate principal amount of
$2,100,000, incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-3 filed with the SEC on
September 24, 2004.
4.40 Convertible Promissory Note dated July 14, 2004 issued to Hilltop
Services, Ltd. in the aggregate principal amount of $1,920,000,
incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-3 filed with the SEC on September
24, 2004.
4.41 Warrant dated July 14, 2004 issued to each of Cottonwood Ltd. and
Willow Bend Management Ltd. at an exercise price of $0.11 cents. ,
incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-3 filed with the SEC on September
24, 2004.
4.42 Warrant dated July 14, 2004 issued to each of Cottonwood Ltd. and
Willow Bend Management Ltd. at an exercise price of $0.15 cents,
incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-3 filed with the SEC on September
24, 2004.
4.43 Warrant dated July 14, 2004 issued to each of Cottonwood Ltd. and
Willow Bend Management Ltd. at an exercise price of $0.35 cents,
incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-3 filed with the SEC on September
24, 2004.
4.44 Warrant dated July 14, 2004 issued to each of Cottonwood Ltd. and
Willow Bend Management Ltd. at an exercise price of $0.40 cents,
incorporated by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-3 filed with the SEC on September
24, 2004.
4.45 Warrant dated July 14, 2004 issued to Hilltop Services, Ltd. at an
exercise price of $0.11 cents, incorporated by reference to Exhibit
4.9 to the Company's Registration Statement on Form S-3 filed with
the SEC on September 24, 2004.
4.46 Warrant dated July 14, 2004 issued to Hilltop Services, Ltd. at an
exercise price of $0.15 cents, incorporated by reference to Exhibit
4.10 to the Company's Registration Statement on Form S-3 filed with
the SEC on September 24, 2004.
4.47 Warrant dated July 14, 2004 issued to Hilltop Services, Ltd. at an
exercise price of $0.35 cents, incorporated by reference to Exhibit
4.11 to the Company's Registration Statement on Form S-3 filed with
the SEC on September 24, 2004.
4.48 Warrant dated July 14, 2004 issued to Hilltop Services, Ltd. at an
exercise price of $0.40 cents, incorporated by reference to Exhibit
4.12 to the Company's Registration Statement on Form S-3 filed with
the SEC on September 24, 2004.
4.49 Warrant dated July 14, 2004 issued to Redwood Capital Partners, Inc.
at an exercise price of $0.11 cents, incorporated by reference to
Exhibit 4.13 to the Company's Registration Statement on Form S-3
filed with the SEC on September 24, 2004.
4.50 Warrant dated July 14, 2004 issued to Redwood Capital Partners, Inc.
at an exercise price of $0.15 cents, incorporated by reference to
Exhibit 4.14 to the Company's Registration Statement on Form S-3
filed with the SEC on September 24, 2004.
4.51 Warrant dated July 14, 2004 issued to Redwood Capital Partners, Inc.
at an exercise price of $0.35 cents, incorporated by reference to
Exhibit 4.15 to the Company's Registration Statement on Form S-3
filed with the SEC on September 24, 2004.
4.52 Warrant dated July 14, 2004 issued to Redwood Capital Partners, Inc.
at an exercise price of $0.40 cents, incorporated by reference to
Exhibit 4.16 to the Company's Registration Statement on Form S-3
filed with the SEC on September 24, 2004.
4.53 Warrants dated August 18, 2004 issued to Mr. Richard Rosenblum at an
exercise price of $0.18 cents, incorporated by reference to Exhibit
4.17 to the Company's Registration Statement on Form S-3 filed with
the SEC on September 24, 2004.
4.54 Warrants dated August 18, 2004 issued to Mr. David Stefansky at an
exercise price of $0.18 cents, incorporated by reference to Exhibit
4.18 to the Company's Registration Statement on Form S-3 filed with
the SEC on September 24, 2004.
4.55 Letter Agreement, dated as of July 14, 2004, by and between the
Company and Hilltop Services, Ltd., incorporated by reference to
Exhibit 4.19 to the Company's Registration Statement on Form S-3
filed with the SEC on September 24, 2004.
4.56 Settlement Agreement and Release, dated as of August 20, 2004, by
and between the Company and Clinton Group, Inc., incorporated by
reference to Exhibit 4.25 to the Company's Registration Statement on
Form S-3 filed with the SEC on September 24, 2004.
10.1 Incentive Stock Option Plan, adopted May 5, 1988, incorporated by
reference to Exhibit No. 10.2.1 of the Registration Statement on
Form SB-2 (Reg. No. 33-81582-D), filed with the SEC on July 14, 1994
(the "1994 Registration Statement").
10.2 Omnibus Stock Option Plan, adopted effective January 1, 1994,
incorporated by reference to Exhibit No. 10.2.2 of the 1994
Registration Statement.
10.3 1996 Stock Incentive Plan, adopted by the Company's Board of
Directors on November 27, 1996, incorporated by reference to Exhibit
10.2.3 to the Company's Form 10-KSB filed with the SEC on March 30,
1998.
10.4 1999 Stock Option Plan, adopted by the Company's Board of Directors
on August 16, 1999, as amended, incorporated by reference to Exhibit
10.2.4 to the Company's Form 10-KSB filed with the SEC on March 21,
2001.
10.5 2003 Stock Incentive Plan, adopted by the Company's Board of
Directors on February 10, 2003, incorporated by reference to Annex D
to the Company's definitive Proxy Statement on Schedule 14A filed
with the SEC on April 11, 2003.
10.6 2004 Stock Incentive Plan, adopted by the Company's Board of
Directors on October 7, 2003, incorporated by reference to Exhibit F
to the Company's definitive Proxy Statement on Schedule 14A filed
with the SEC on November 6, 2003.
10.7 2003 Consultants Stock Option, Stock Warrant and Stock Award Plan,
adopted by the Company's Board of Directors on October 31, 2003,
incorporated by reference to Exhibit G to the Company's definitive
Proxy Statement on Schedule 14A filed with the SEC on November 6,
2003.
10.8 Form of Non-Plan Option Agreement issued to five directors on
November 20, 2002, incorporated by reference to Exhibit 10.1.5 to
the Company's Form 10-K, filed with the SEC on March 27, 2003.
10.9 Form of Incentive Stock Option Agreement issued to employees under
the 1999 Stock Option Plan, incorporated by reference to Exhibit
10.9 to the Company's Form 10-K filed with the SEC on April 14,
2004.
10.10 Form of Incentive Stock Option Agreement issued to employees under
the 2003 Stock Incentive Plan, incorporated by reference to Exhibit
10.10 to the Company's Form 10-K filed with the SEC on April 14,
2004.
10.11 Form of Non-Qualified Stock Option Agreement issued to employees, a
consultant and directors under the 2003 Stock Incentive Plan,
incorporated by reference to Exhibit 10.11 to the Company's Form
10-K filed with the SEC on April 14, 2004.
10.12 Employment Agreement between the Company and James Q. Gamble, dated
as of December 9, 2002, incorporated by reference to Exhibit 10.3 to
the Company's Form 10-K, filed with the SEC on March 27, 2003.
10.13 Employment Agreement between the Company and Mark W. Lerner, dated
as of July 1, 2002, incorporated by reference to Exhibit 10.3 to the
Company's Form 10-Q, filed with the SEC on August 20, 2002.
10.14 Employment Agreement between the Company and Bryan R. Ellacott,
dated as of March 1, 2002, incorporated by reference to Exhibit 10.6
to the Company's Form 10-Q, filed with the SEC on August 20, 2002.
10.15 Employment Agreement between the Company and John R. Prufeta, dated
as of February 1, 2002, incorporated by reference to Exhibit 10.5 to
the Company's Form 10-K filed with the SEC on March 31, 2002.
10.16 Separation Agreement between the Company and John R. Prufeta, dated
December 20, 2002, incorporated by reference to Exhibit 10.8 to the
Company's Form 10-K, filed with the SEC on March 27, 2003.
10.17 Employment Agreement between the Company and Patricia A. Minicucci
dated as of February 15, 2002, incorporated by reference to Exhibit
10.4 to the Company's Form 10-Q, filed with the SEC on August 20,
2002.
10.18 Employment Agreement between the Company and Louis Hyman, dated as
of October 1, 2003, incorporated by reference to Exhibit 10.18 to
the Company's Form 10-K filed with the SEC on April 14, 2004.
10.19 Employment Agreement between the Company and Paul Hessinger, dated
as of June 1, 2003, incorporated by reference to Exhibit 10.19 to
the Company's Form 10-K filed with the SEC on April 14, 2004.
10.20 Employment Agreement between the Company and Mitchell M. Cohen,
dated as of November 17, 2003, incorporated by reference to Exhibit
10.20 to the Company's Form 10-K filed with the SEC on April 14,
2004.
10.21 Employment Agreement between the Company and Darryl R. Cohen, dated
as of July 11, 2003, incorporated by reference to Exhibit 10.21 to
the Company's Form 10-K filed with the SEC on April 14, 2004.
10.22 Employment Agreement between the Company and External Affairs, Inc.,
dated as of July 1, 2003, incorporated by reference to Exhibit 10.22
to the Company's Form 10-K filed with the SEC on April 14, 2004.
10.23 Employment Agreement between the Company and Nancy L. Duncan, dated
as of November 7, 2003, incorporated by reference to Exhibit 10.23
to the Company's Form 10-K filed with the SEC on April 14, 2004.
10.24 Separation Agreement between the Company and Patricia Minicucci,
dated December 12, 2002, incorporated by reference to Exhibit 10.10
to the Company's Form 10-K, filed with the SEC on March 27, 2003.
10.25 Employment Agreement between the Company and Ronald C. Munkittrick,
dated as of October 12, 2004, incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q, filed with the SEC on November 15,
2004.
10.26 Asset Purchase Agreement among Ramp Corporation and Berdy Medical
Systems, Inc., dated October 18, 2004, incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q, filed with the SEC on
November 15, 2004.
10.27 Securities Purchase Agreement, dated February 19, 2002, between
Medix Resources, Inc. and WellPoint Health Networks Inc.,
incorporated by reference to Exhibit 10.8 to the Company's Amendment
No.1 to Registration Statement on Form S-2 (Reg. No. 333-73572),
filed with the SEC on February 28, 2002.
10.28 General Security Agreement, dated February 19, 2002, among Medix
Resources, Inc., Cymedix and WellPoint Health Networks Inc.,
incorporated by reference to Exhibit 10.9 to the Company's Amendment
No.1 to Registration Statement on Form S-2 (Reg. No. 333-73572)
filed with the SEC on February 28, 2002.
10.29 Agreement, dated as of October 18, 2001, between Medix Resources,
Inc. and Merck-Medco Managed Care, L.L.C., incorporated by reference
to Exhibit 10.2 to the Company's Amendment No.1 to Registration
Statement on Form S-2 (Reg. No. 333-73572), filed with the SEC on
February 28, 2002. (Portions of this Exhibit have been omitted
pursuant to a request for confidential treatment filed with the
Office of the Secretary of the SEC).
10.30 Vendor Services Agreement, dated as of September 28, 2001, between
Medix Resources, Inc. and Express Scripts, Inc., incorporated by
reference to Exhibit 10.3 to the Company's Amendment No.1 to
Registration Statement on Form S-2 (Reg. No. 333-73572), filed with
the SEC on February 28, 2002. (Portions of this Exhibit have been
omitted pursuant to a request for confidential treatment filed with
the SEC).
10.31 Binding Letter of Intent for Pilot and Production Programs, dated
September 8, 1999, between Medix Resources, Inc., Cymedix and
Professional Claims Services, Inc. (d/b/a WellPoint Pharmacy
Management), incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q filed with the SEC on August 20, 2002.
10.32 Pilot Agreement, dated as of December 28, 1999, between Cymedix and
Professional Claims Services, Inc. (d/b/a WellPoint Pharmacy
Management), incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q filed with the SEC on August 20, 2002.
10.33 Registration Rights Agreement, dated March 4, 2003, between T3
Group, LLC and Medix Resources, Inc., incorporated by reference to
Exhibit 10.22 to the Company's Form 10-K, filed with the SEC on
March 27, 2003.
10.34 Asset Purchase Agreement among Medix Resources, Inc., Comdisco
Ventures, Inc. and T3 Group, LLC, dated March 4, 2003, incorporated
by reference to Exhibit 10.23 to the Company's Form 10-K filed with
the SEC on March 27, 2003.
10.35 Lease between SLG Graybar Sublease, LLC and the Company, dated
January 17, 2002, incorporated by reference to Exhibit 10.25 to the
Company's Form 10-K filed with the SEC on March 31, 2002.
10.36 Sublease between International Business Machines Corporation and
Ramp Corporation, dated December 31, 2003, incorporated by reference
to Exhibit 10.34 to the Company's Form 10-K filed with the SEC on
April 14, 2004.
10.37 Assignment and Assumption of Lease, dated as of November 7, 2003,
between Medix Resources, Inc. and The Duncan Group, Inc,
incorporated by reference to Exhibit 10.35 to the Company's Form
10-K filed with the SEC on April 14, 2004.
10.38 Agreement of Sublease, dated May 5, 2003 between PNC Bank, National
Association and Medix Resources, Inc, incorporated by reference to
Exhibit 10.36 to the Company's Form 10-K filed with the SEC on April
14, 2004.
10.39 Office/Showroom/Warehouse Lease Agreement, dated September 23, 2003,
between LifeRamp Family Financial, Inc. and Drybern VI, Ltd. and
Guaranty of Lease, dated October 1, 2003, between LifeRamp and
Drybern VI, Ltd. (Exhibit C), incorporated by reference to Exhibit
10.37 to the Company's Form 10-K filed with the SEC on April 14,
2004.
10.40 Merger Agreement, dated as of December 19, 2002 among PS Purchase
Corp., Medix Resources, Inc., PocketScript, LLC and Stephen S.
Burns, incorporated by reference to Exhibit 99.1 to the Company's
Form 8-K, filed with the SEC on February 6, 2003.
10.41 Securities Purchase Agreement, dated April 11, 2003 between Medix
Resources, Inc. and Bertrand Overseas Ltd., incorporated by
reference to Exhibit 10.25 to the Company's 8-K, filed with the SEC
on April 15, 2003.
10.42 Agreement, dated as of July 25, 2003 between Medix Resources, Inc.
and Laboratory Corporation of America Holdings, incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K filed with the
SEC on July 28, 2003.
10.43 Vendor Services Agreement effective as of July 17, 2003 between
Medix Resources, Inc. and Express Scripts, Inc., incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K, filed with the
SEC on August 12, 2003.
10.44 Asset Purchase Agreement, dated as of November 7, 2003 between Medix
Resources, Inc. and The Duncan Group, Inc. d/b/a Frontline
Physicians Exchange and Frontline Communications, incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K, filed with the
SEC on November 19, 2003.
10.45 Nursing Home Licensing Agreement, dated as of May 1, 2004, between
HealthRamp, Inc. and Agawam Nursing LLC., incorporated by reference
to Exhibit 10.43 to the Company's Form 10-K filed with the SEC on
April 14, 2004.
10.46 Settlement and Termination Agreement, dated April 25, 2004, between
the Company and Darryl R. Cohen, incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q filed with the SEC on April
14, 2004.
10.47 Amendment No. 1 dated as of June 1, 2004 to Executive Employment
Agreement dated as of November 17, 2003 between the Company and
Mitchell M. Cohen, incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q filed with the SEC on August 16, 2004.
10.48 Amendment No. 1 dated as of June 1, 2004 to Executive Employment
Agreement dated as of October 1, 2003 between the Company and Louis
Hyman, incorporated by reference to Exhibit 10.2 to the Company's
Form 10-Q filed with the SEC on August 16, 2004.
10.49 Executive Employment Agreement dated as of June 1, 2004 between the
Company and Andrew Brown, incorporated by reference to Exhibit 10.3
to the Company's Form 10-Q filed with the SEC on August 16, 2004.
10.50 Promissory Note dated May 19, 2004 in the principal amount of
$1,000,000 issued by the Company in favor of Canon Ventures Limited,
incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q
filed with the SEC on August 16, 2004.
10.51 Promissory Note dated June 14, 2004 in the principal amount of
$400,000 issued by the Company in favor of Canon Ventures Limited,
incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q
filed with the SEC on August 16, 2004.
10.52 Promissory Note dated June 28, 2004 in the principal amount of
$250,000 issued by the Company in favor of Canon Ventures Limited,
incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q
filed with the SEC on August 16, 2004.
10.53 Asset Purchase Agreement, by and among the Company and The Duncan
Group, Inc., M. David Duncan and Nancy L. Duncan, dated as of
September 29, 2004, incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed with the SEC on October 5, 2004.
10.54 2005 Stock Incentive Plan, adopted by the Company's Board of
Directors on September 15, 2004, incorporated by reference to
Appendix B to the Company's definitive Proxy Statement on Schedule
14A filed with the SEC on October 18, 2004.
10.55 Letter Agreement, dated October 6, 2004, by and between the Company
and Willow Bend Management Ltd., , incorporated by reference to
Exhibit 99.1 to the Company's Form 8-K filed with the SEC on October
19, 2004.
10.56 Letter Agreement, dated October 6, 2004, by and between the Company
and Cottonwood Ltd., incorporated by reference to Exhibit 99.2 to
the Company's Form 8-K filed with the SEC on October 19, 2004.
10.57 Letter Agreement, dated October 12, 2004, by and between the Company
and Hilltop Services Ltd., incorporated by reference to Exhibit 99.3
to the Company's Form 8-K filed with the SEC on October 19, 2004.
10.58 Letter Agreement, dated November 16, 2004, by and between the
Company and Willow Bend Management Ltd.*
10.59 Letter Agreement, dated November 16, 2004, by and between the
Company and Cottonwood Ltd.*
10.60 Letter Agreement, dated November 16, 2004, by and between the
Company and Hilltop Services Ltd.*
10.61 Convertible Promissory Note, dated October 29, 2004, by and between
the Company and Oakwood Financial Services, LLC., incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K filed with the
SEC on November 4, 2004.
10.62 Warrant, dated October 29, 2004, issued by the Company to Oakwood
Financial Services, LLC, incorporated by reference to Exhibit 99.2
to the Company's Form 8-K filed with the SEC on November 4, 2004.
10.63 Note Purchase Agreement, dated as of November 22, 2004, by and among
the Company, Platinum Partners Value Arbitrage Fund L.P., Briarwood
Investments and Design Investments, Ltd.*
10.64 Convertible Promissory Note dated November 22, 2004 in the principal
amount of $250,000 issued by the Company in favor of Platinum
Partners Value Arbitrage Fund L.P.*
10.65 Convertible Promissory Note dated December 1, 2004 in the principal
amount of $52,000 issued by the Company in favor of Harborview
Capital Management LLC.*
10.66 Convertible Promissory Note dated December 1, 2004 in the principal
amount of $100,000 issued by the Company in favor of Briarwood
Investments.*
10.67 Convertible Promissory Note dated December 1, 2004 in the principal
amount of $50,000 issued by the Company in favor of Design
Investments Ltd.*
10.68 Promissory Note dated as of December 1, 2004 in the principal amount
of $1,147,288.76 issued by the Company in favor of Cherryblossom
Ltd.*
10.69 Promissory Note dated as of December 1, 2004 in the principal amount
of $1,029,935.81 issued by the Company in favor of Blue Valley Ltd.*
10.70 Promissory Note dated as of December 1, 2004 in the principal amount
of $1,025,445.44 issued by the Company in favor of Norfolk Ltd.*
10.71 Promissory Note dated as of December 1, 2004 in the principal amount
of $833,180.99 issued by the Company in favor of Forum Managers
Ltd.*
10.72 Promissory Note dated as of December 1, 2004 in the principal amount
of $833,180.99 issued by the Company in favor of Lakeview Properties
Ltd.*
10.73 Securities Exchange Agreement by and between the Company and
Cherryblossom Ltd.*
10.74 Securities Exchange Agreement by and between the Company and Blue
Valley Ltd.*
10.75 Securities Exchange Agreement by and between the Company and Norfolk
Ltd.*
10.76 Securities Exchange Agreement by and between the Company and Forum
Managers Ltd.*
10.77 Securities Exchange Agreement by and between the Company and
Lakeview Properties Ltd.*
10.78 Warrant, dated December 3, 2004, issued by the Company to
Cherryblossom Ltd.*
10.79 Warrant, dated December 3, 2004, issued by the Company to Blue
Valley Ltd.*
10.80 Warrant, dated December 3, 2004, issued by the Company to Norfolk
Ltd.*
10.81 Warrant, dated December 3, 2004, issued by the Company to Forum
Managers Ltd.*
10.82 Warrant, dated December 3, 2004, issued by the Company to Lakeview
Properties Ltd.*
10.83 Securities Purchase Agreement, dated as of January 12, 2005, among
Ramp Corporation and each of DKR Soundshore Oasis Holding Fund Ltd.,
Harborview Master Fund, L.P. and Platinum Partners Value Arbitrage
Fund, L.P., together with schedules attached thereto, incorporated
by reference to Exhibit 10.1 to the Company's Form 8-K filed with
the SEC on January 14, 2005.
10.84 8% Convertible Debenture, dated January 12, 2005, issued to each of
DKR Soundshore Oasis Holding Fund Ltd., Harborview Master Fund, L.P.
and Platinum Partners Value Arbitrage Fund, L.P., incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K filed with the
SEC on January 14, 2005.
10.85 Common Stock Purchase Warrant, dated January 12, 2005, issued to
each of DKR Soundshore Oasis Holding Fund Ltd., Harborview Master
Fund, L.P. and Platinum Partners Value Arbitrage Fund, L.P.,
incorporated by reference to Exhibit 10.3 to the Company's Form 8-K
filed with the SEC on January 14, 2005.
10.86 Additional Investment Right, dated January 12, 2005, issued to each
of DKR Soundshore Oasis Holding Fund Ltd., Harborview Master Fund,
L.P. and Platinum Partners Value Arbitrage Fund, L.P., incorporated
by reference to Exhibit 10.4 to the Company's Form 8-K filed with
the SEC on January 14, 2005
10.87 Registration Rights Agreement, dated as of January 12, 2005, among
Ramp Corporation and each of DKR Soundshore Oasis Holding Fund Ltd.,
Harborview Master Fund, L.P. and Platinum Partners Value Arbitrage
Fund, L.P., incorporated by reference to Exhibit 10.5 to the
Company's Form 8-K filed with the SEC on January 14, 2005.
14 Code of Ethics dated October 7, 2003.*
16 Letter from Ehrhardt Keefe Steiner & Hottman, PC, dated June 20,
2003 to the SEC, incorporated by reference to Exhibit 16.1 to the
Company's Form 8-K, filed with the SEC on June 26, 2003.
21 Subsidiaries of the Company, incorporated by reference to Exhibit 21
to the Company's Form 10-K filed with the SEC on April 24, 2004.
23.1 Consent of Ehrhardt Keefe Steiner & Hottman PC, Independent
Registered Public Accounting Firm for the Company's 1999, 2000, 2001
and 2002 fiscal years, to the incorporation by reference of its
report dated February 14, 2003, appearing elsewhere in this Form
10-K into the Company's designated Registration Statements on Form
S-3 and Form S-8.*
23.2 Consent of BDO Seidman, LLP, Independent Registered Public
Accounting Firm for the Company's 2003 and 2004 fiscal years, to the
incorporation by reference of its report dated March 16, 2005,
appearing elsewhere in this Form 10-K into the Company's designated
Registration Statements on Form S-3 and Form S-8.*
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
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*Filed herewith