SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 1996 Commission File Number 0-14757
MEDMASTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware No. 87-0400472
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification Number)
2072 North Main, Logan Utah 84321
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 753-4101
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value.
Warrants to purchase Common Stock exercisable on or before July 10, 1998.
As of June 21, 1996, 10,844,117 shares of Common Stock were outstanding.
The aggregate market value of the voting stock of the registrant
held by non-affiliates on June 21, 1996 was $163,061 based upon
the average bid and asked prices of such stock on that date.
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 ______
PART I
Item 1. BUSINESS
GENERAL
MedMaster Systems, Inc. (the Company) was incorporated in the State
of Delaware on August 12, 1983, to acquire the outstanding capital
stock of Medac Inc. ("Medac") and Financial Computer Services, Inc.
("FCS"), the successor to a business established by David C. Marx,
the Company's principal officer and largest stockholder. The
Company's executive offices and principal place of business are
located at 2072 North Main, Logan, Utah, 84321, telephone number
(801) 753-4101.
The Company's MedMaster System was introduced in April 1981 in Utah.
The Company factors receivables from Health Care Providers on the
MedMaster System. MedMaster Systems, Inc. provides a computerized and
manual health care financing and office management system (the
"MedMaster System") which permits the financing and billing of health
care services provided to individuals or families ("Patients") by
physicians, dentists, pharmacists and other professionals ("Health
Care Providers") participating in the MedMaster System. Under the
MedMaster System, the Company (i) makes payment to Health Care
Providers against billings to Patients with approved credit, which
payments are made without recourse so that the Company assumes the
risk of collection from the Patient; (ii) undertakes to bill and
collect payment on behalf of Health Care Providers from Patients
without approved credit where monies were not advanced to the Health
Care Provider; and (iii) in some cases provides only a fee-for-
service billing service to the Health Care Provider. In the first
two arrangements, the Company retains a portion of the billing as
compensation for its services, the amount of which depends upon the
services rendered. When MedMaster undertakes to bill and collect
accounts that are not approved for credit, a minimum monthly billing
fee of $2.00 or 1.5%, whichever is greater, is charged to the patient
and 8% of the collected assigned amount is charged to the Health Care
Provider. If additional collection actions are required the fee to
the Health Care Provider is increased to as much as 50% of what is
collected.
The provider customer base for financing and billing consisted of the
following:
CLIENT DESCRIPTION 1996 1995 1994
Dental or Dental Related 46 66 78
Medical 2 5 5
Pharmacy Outlets 21 27 33
Chiropractic 3 3 4
Other (i.e. hospitals, optical, 9 7 7
ambulance, etc.)
Total Active Clients (1) 81 108 127
PART I
Item 1. BUSINESS (continued)
GENERAL (continued)
(1) Clients submitting at least one transaction to the Company during
the fiscal year.
The Company assesses finance charges on amounts owed which are not
paid by a Patient within 30 to 60 days after the statement billing
date. Many patients have insurance that covers some of the services
that they receive and are billed for. The Company provides a minimum
monthly payment option for the patient. This allows the patient to
keep the account current by paying part of the co-pay, or what they
will be responsible for after insurance coverage, while waiting for
their insurance payment. Even though it is policy that assignment of
insurance benefits are made to MedMaster at the time the Health Care
Provider provides services to the patient, the Company considers the
agreement for insurance to be between the patient and the insurance
company and holds the patient responsible for the account. If
patients should receive insurance payments and do not submit them to
be applied to their account the Company does not contact insurance
companies to find out that payment has already been made. By holding
the patient responsible, the Company does not have to get involved
with the insurance companies. The Company finances its operations
principally through internal cash flow and has in the past used bank
loans and the proceeds from its July 1986 public offering.
The decline in participating providers from 1988 to about 1994 was
primarily the result of the elimination by the Company of the
recourse option which allowed a provider to be paid for accounts that
were not credit approved if they provided their own guarantee to pay
the account if the patient did not. Since 1994 the decline in
participating providers has continued due to management's efforts to
de-emphasize providing financing and to redirect the company toward
fee-for-service activities.
A provider can terminate participation by providing 90 day written
notice to the Company. The Company provides services that are not
provided by other health care financing companies. Although the
discount fee varies, it is competitive with other companies that do
not offer many of the services provided by MedMaster. Included as
part of the fee is license to the provider to use proprietary
software developed by MedMaster.
Health insurance pricing has had minimal, if any, impact on the
Company. The major portion of the transactions processed by the
Company have been dental related and/or not covered by insurance.
Although it is possible that future changes in insurance pricing and
coverage may impact the Company, at this point it has not been
determined if it would be detrimental to MedMaster.
PART I
THE MEDMASTER SYSTEM
THE PARTICIPATION AGREEMENT:
Each potential Health Care Provider who wishes to participate in the
MedMaster System completes a profile of his practice, which is
reviewed by the Company. If after such review, including a credit
evaluation, the Company approves the Health Care Provider for
inclusion in the MedMaster System, the Health Care Provider executes
an agreement with the Company and fills out related forms (such
agreement and related forms being collectively referred to as the
"Participation Agreement"). The Participation Agreement provides,
among other things, that the Company will review all Patient
accounts; collect agreed upon pre-existing indebtedness under one of
several plans; code Patient accounts for future billing; set up a
billing system for the Health Care Provider and train personnel in
its use; review the creditworthiness of Patients and issue health
care credit cards to Patients with approved credit; bill Patients
under one of several payment plans; finance at a discount new patient
accounts; provide monthly statements of account to Patients and
weekly, monthly and annual reports to Health Care Providers; and
provides MedMaster with the right of offset on any recourseable
obligations.
After a practice has been sold and accepted on the MedMaster System
the relationship between the practice and MedMaster is monitored on
an ongoing basis. Part of the monitoring of a practice includes the
communication that occurs with the practice, the production trends of
the practice (increasing/decreasing), the volume of credit
adjustments submitted by the practice and the volume of complaints
coming from patients of the practice.
THE CREDIT CARD & CREDIT APPROVAL:
Plastic identification credit cards are issued to Patients with
approved credit which permit them to charge the cost of obtaining
health care services and products from participating Health Care
Providers. Approved credit is determined by previous history with the
MedMaster System and/or examination of previous retail credit
experience based on the patient's retail credit report. When a
Patient receives services from a Health Care Provider, appropriate
entries are made on customized forms which evidence the services
rendered to such Patient, the charges for such services, third-party
reimbursement provisions (i. e. an insurance company) and terms of
payment. These forms are completed by the Health Care Provider for
each incidence of service and copies are sent to the Company and
third-party payors. Billings to a Patient who is not approved to
receive a credit card, while not financed by the Company, are
processed and billed for the practice under the MedMaster System to
the extent that such a Patient utilizes the services of a Health Care
Provider on the MedMaster System. However, no advance payments are
made by the Company to Health Care Providers for billings to Patients
without approved credit. The Company uses various credit rating
services to accredit existing and new Patients of a Health Care
Provider.
PART I
PATIENT PAYMENT AND COLLECTIONS:
Patients retain flexibility in choosing the payment plan financed
through the MedMaster System. Alternatively, a Patient may choose to
pay charges over a period of time, with interest accruing on the
amount of such deferred charges commencing on the 30th day after the
statement billing date. Where extended terms are chosen, minimum
monthly payments are required. Each month the Patient is sent a
statement setting forth all charges and payments made with respect to
the Patient's account. Interest rates vary for some geographical
areas and depend on whether or not the Company uses a third party for
financing. Financing handled internally by the Company accrues
interest on a previous balance basis at an annual rate of eighteen
per cent. Minimum monthly payments are based on the account balance
of an account and are approximately ten per cent of the outstanding
balance.
If a Patient is consistently delinquent or review of their credit
report confirms the Patient to be a credit risk based on their track
record with other creditors, the account is flagged as an "exception
account." The Health Care Providers are thereafter paid with respect
to such accounts only after the Company actually collects the amounts
billed. Collection procedures range from past due reminders and
letters to legal proceedings. Additional fees are assessed against a
patient for expenses incurred in enforcing collection for amounts
due.
Fees to the Company for collections from Patients without approved
credit or pre-existing indebtedness are earned upon actual collection
of the billings and are at the same discount as the approved credit
financing unless additional collection actions beyond monthly billing
are required. If additional collection actions are required, the
discount fee is increased to a fee comparable to what is charged by
collection bureaus.
HEALTH CARE PROVIDER FINANCING AND REPORTS:
MedMaster provides participating Health Care Providers with different
methods of receiving payment from MedMaster. Initially, all funds
collected from patients are deposited into the Company's operating
account. The Company then either writes a check out of the operating
account to remit the amount of funds due to the providers, net of the
factoring commissions and fees, or retains the funds in the operating
account to remit to the provider at a later date, also net of
commissions and fees, upon demand with interest. The providers
receive interest on funds owed them by the Company at variable
graduated rates based on the amount of funds owed to them.
Historically, these rates have ranged from 5.68% to 10.5%. The funds
retained in the operating account are available to finance the
Company's operations. The funds due providers at March 31, 1996
exceed cash held by $276,298.
An enrolling Health Care Provider is given several options with
respect to pre-existing unpaid patient accounts, ranging from
outright sale to the Company of the accounts at graduated, negotiated
discounts, to payment from the Company, as collected, at the current
discount. The Health Care Providers also have complete flexibility
in the operation of their office procedures, including the amount of
fees billed to Patients, the methods offered for payment and whether
terms or discounts are granted.
PART I
PRINTING SERVICES
The Company initially organized its own print shop for the purpose of
reducing its own printing costs and to provide quicker turn around
time for insurance claim forms for participating practices.
Subsequently, the Company began providing printing services beyond
its own needs. Management has determined that the printing business
can increase revenues and help the Company become profitable and have
begun to place more efforts in promoting the printing business.
Printing revenues of $21,035 comprised less than 1% of total revenues
during the year ended March 31, 1996.
TRAVEL SERVICES
The Company owns a retail travel agency. It was originally purchased
during December 1987 to reduce the travel costs required by MedMaster
personnel in supporting Health Care Providers; in presenting
workshops and seminars; and to generate revenues by providing travel
services to the public and small businesses. Management has
determined that this is another part of the Company that can increase
revenues and help the Company become profitable and have begun to
place more effort into promoting the travel business. Travel service
revenues were $726,106 or 65% of total revenues during the year ended
March 31, 1996.
EMPLOYEES
Including officers, the Company employs a total of 17 employees, 12
full-time and 5 part-time, who are responsible for the
administration, billing, and collection functions of the MedMaster
System and all other Company activities. This compares to March 31,
1995 and 1994, respectively, when the Company had a total of 17 and
19 employees, respectively. None of the Company's employees are
members of any collective bargaining unit and the Company believes
that its relations with its employees are satisfactory.
COMPETITION
There are a number of large, well-established companies including
banks, factors, savings and loan associations, credit card companies,
insurance companies and the like, with substantially greater capital
resources and facilities than the Company, which the Company believes
either provide some of the services provided by the Company or are in
a position to establish systems similar to the MedMaster System. The
Company is only a minor element in the administrative and financing
servicing industries.
Item 2. PROPERTIES
The Company leases its facilities in Logan, Utah (approximately 8,000
square feet) for an annual rental of $53,220, under a lease expiring
December 31, 2000. Rental payments under the lease are subject to
increase in the event of increases in real estate taxes or operating
costs with respect to the premises. The lessor is a partnership
consisting of David C. Marx and Ronald G. Case. Mr. Marx is Chairman
of the Board, President and Chief Executive Officer of the Company.
Mr. Case is Senior Vice President and a Director of the Company.
PART I
ITEM 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
On July 10, 1986, Units, each consisting of two shares of Common
Stock and a Warrant to purchase one additional share of Common Stock
of the Company, commenced trading on NASDAQ under the symbol MMSTU.
Prior to that time, there was no public market for the Company's
securities. The Common Stock and Warrants included in the Units
became separately transferable on November 4, 1986 and commenced
trading on NASDAQ under the symbols MMST and MMSTW. On December 29,
1987, the Company's Board of Directors and shareholders approved a
three-for-one stock split in the form of a dividend. Pursuant to the
stock split, on January 12, 1988, the transfer agent issued to each
shareholder of record at the close of business on November 6, 1987,
two additional shares of common stock of the Company for each share
held by each such shareholder. Each warrant now entitles the holder
to purchase a total of three shares of the Company's common stock at
the original exercise price. The high and low quarterly bid
quotations for the Common Stock during the fiscal years ending March
31, 1996 and 1995 adjusted to reflect the three-for-one stock split
are as follows:
COMMON STOCK
1996 1995
High Low High Low
First Quarter (4/1 - 6/30) 1/32 1/32 1/32 1/32
Second Quarter (7/1 - 9/30) 1/32 1/32 1/32 1/32
Third Quarter (10/1 - 12/31) 1/32 1/32 1/32 1/32
Fourth Quarter (1/1 - 3/31) 1/32 1/32 1/32 1/32
Such over-the-counter quotations reflect inter-dealer prices, without
retail markup, markdown or commission and may not necessarily reflect
actual transactions.
HOLDERS
As of June 21, 1996, there were 172 record holders of the Company's
Common Stock.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock.
Payment of dividends is within the discretion of the Company's Board
of Directors and will depend upon the earnings, capital requirements
and financial condition of the Company, among other factors. The
Company anticipates that for the foreseeable future it will follow a
policy of using capital generated from operations to finance the
expansion and development of its business.
PART II
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data
of the Company for the five years ended March 31, 1996. Such
financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements for each of the
years in the three-year period ended March 31, 1996 and related notes
thereto included elsewhere in this Form 10-K.
1996 1995 1994 1993 1992
Income Statement data:
Gross transactions
from continuing
operations (1) $3,495,567 $4,249,838 $4,858,612 $6,194,674 $5,730,891
Factoring Commissions
& Fees $ 342,257 $ 537,141 $ 532,134 $ 692,558 $ 662,799
Printing and travel
fees $ 77,209 $ 57,994 $ 48,577 $ 44,489 $ 33,576
Credit Reporting Fees$ 24,331 $ 12,744 $ - $ - $ -
Net Revenues From
Continuing
Operations $ 443,797 $ 607,879 $ 580,711 $ 737,047 $ 696,375
Operating Expenses:
Bad debt expense $ 52,036 $ 68,325 $ 77,540 $ 83,624 $ 179,036
Other - net $ 718,299 $ 997,634 $1,271,760 $1,072,137 $1,117,895
(Loss) from
continuing
operations $ (326,538) $ (458,080) $ (768,589) $ (418,714) $ (600,556)
Extraordinary item -
Gain on debt
settlement $2,854,831 $ - $ - $ - $ -
Net Income(Loss) $2,528,293 $ (458,080) $ (768,589) $ (418,714) $ (600,556)
Income(Loss) per share:
Before extraordinary
item $ (.03) $ (.04) $ (.07) $ (.04) $ (.06)
After extraordinary
item $ .26 $ - $ - $ - $ -
Net income(loss) per
share $ .23 $ (.04) $ (.07) $ (.04) $ (.06)
Balance sheet data:
Total assets $ 670,636 $ 927,200 $ 1,135,789 $1,389,949 $1,684,455
Working Capital
(Deficit) $ (355,258) $(3,167,496)$(2,729,643)$(1,974,324)$(1,607,627)
Long-term debt less
current maturity - - - - -
Shareholders' equity
(Deficit $ (271,794) $(2,800,087)$(2,342,007)$(1,573,418)$(1,154,704)
(1) Represents full face amount of receivables purchased from or
collected on behalf of Health Care Providers, as well as a income
from other operations.
PART II
Item 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the past several years, the gross transactions volume has been
at a level which has been supported by the Company's internal cash
flow. To increase volume would require additional financing. Until
the Company came to a settlement agreement with the Resolution Trust
Corporation which finally occurred on September 25, 1995, it was not
in a position to obtain additional financing. Subsequent to the
settlement, the Company has worked on improving it's financial
condition and future by providing more services for fees; less
factoring & financing; and considered areas of focus other than
Health Care given that industry's uncertain future. Management is
reviewing all options and sources of revenue available to the Company
at this time and believes that a re-direction of the Company focus is
imperative to provide a viable future for the Company. There is no
plan to discontinue all of the services the Company has provided in
the past. However, some services which require substantial up-front
capital, such as factoring, will be discontinued. Services, such as
providing credit reports, collection letters and collection services
will be expanded on a fee for service basis. In addition, the Company
is considering the opportunities that are available for its' printing
and travel services. There can be no assurance that the Company will
be successful in these efforts.
Gross transactions (the total amount of billings submitted by Health
Care Providers during the period, as well as a portion of income from
other operations) decreased in 1996 as compared to 1995 and 1994 from
$4,249,838 and $4,858,612 to $3,495,567 or 18% and 28%, respectively.
Year Ended March 31, 1996 as Compared to Year Ended March 31, 1995
FACTORING COMMISSIONS AND FEES
Factoring commissions and fees decreased $194,884 or 36% from
$537,141 for the year ended March 31, 1995 to $342,257 for the year
ended March 31, 1996. The decrease in factoring commissions and fees
is due primarily to a redirection of the Company's focus. In an
effort to improve its financial condition, the Company has determined
that it will provide more services for fees and less factoring and
financing services, as the factoring and financing require
significant amounts of up-front capital with a relatively small rate
of return.
PRINTING AND TRAVEL EXPENSE
Printing and travel fee revenues have increased $201,854 or 37% from
$545,287 for the year ended March 31, 1995 to $747,141 for the year
ended March 31, 1996. As discussed above, the increase is related to
the Company's plans to provide more services for fees. Both the
printing and travel services were initially organized for the
Company's own needs. Subsequently, the Company began providing
outside services and has implemented a plan to expand these services
and become more profitable. The cost of printing and travel fees
increased $182,639 or 37% from $487,293 for the year ended March 31,
1995 to $669,932 for the year ended March 31, 1996. This increase is
directly related to the increase in printing and travel fee revenues.
PART II
PROVISION FOR CREDIT LOSSES
The net credit loss provision (recoveries) are comprised of the
following:
Year Ended March 31,
1996 1995 1994
Provision for credit
losses $52,036 $69,062 $77,796
Recoveries of credit
losses (83,006) (81,035) (32,400)
$(30,970) $(11,973) $45,396
The Company determined its provision for bad debts by evaluating its
accounts receivable portfolio and the provider originating the
receivables that become delinquent. The allowance for doubtful
accounts is a valuation reserve for accounts receivable which
management believes may become uncollectible. An allowance is
established for receivables as they are determined to be
uncollectible. The Company's allowance for doubtful accounts at
March 31, 1996 and 1995 was $40,000 and $75,000, respectively.
The Company has provided a provision for credit losses based on a
historical default rate of 12% to 15% of the outstanding receivables.
Accordingly, the decrease in the provision for credit losses of
$17,026 or 25% from fiscal 1995 to fiscal 1996, is directly related
to the corresponding decrease in outstanding receivables. The bad
debt recoveries have remained fairly constant from the year ended
March 31, 1995 as compared to the year ended March 31, 1996. The
Company has implemented the policy of charging off receivables when
they are sent to a collection agency or to an attorney. However, the
Company continues to service these accounts and has been successful
in recovering these losses through judgments obtained and liens on
property.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $151,187 or 19% from
$777,576 during the year ended March 31, 1995 to $626,389 for the
year ended March 31, 1996. The decrease in general and
administrative expenses is due primarily to a decrease in payroll and
related benefits as a result of scaling back the Company's factoring
operations.
INTEREST EXPENSE
Interest expense-other decreased $125,983 or 49% from $259,538 during
the year ended March 31, 1995 to $133,555 during the year ended March
31, 1996. The decrease in interest expense is related primarily to
the settlement of debt of $1,362,087 with the Resolution Trust
Corporation during fiscal 1996. Interest expense from bank debt was
$95,434 and $229,065 during the years ended March 31, 1996 and 1995,
respectively. Interest expense from funds due health care providers
was $38,121 and $30,473 during the years ended March 31, 1996 and
1995, respectively.
PART II
LOSS FROM CONTINUING OPERATIONS
The Company incurred a consolidated net loss from continuing
operations of $326,538 for fiscal year ending March 31, 1996 compared
to a net loss of $458,080 in 1995. As a result of the Resolution
Trust Corporation settlement, the Company realized a one-time
extraordinary gain of $2,854,831 which resulted in a gain of $.23 per
share in fiscal 1996.
Year Ending March 31, 1995 as Compared to March 31, 1994
FACTORING COMMISSIONS AND FEES
There was little change in factoring commissions and fees from fiscal
1994 to fiscal 1995. The Company was unable to expand its factoring
operations in fiscal 1995 pending the settlement of a bank note with
the Resolution Trust Corporation.
PRINTING AND TRAVEL FEES
Printing and travel fees increased $95,296 or 21% from $449,991
during the year ended March 31, 1994 to $545,287 during the year
ended March 31, 1995. The increase in printing and travel fees is a
result of the Company expanding these operations and providing less
factoring services due to the amount of up-front capital required.
The related costs of printing and travel fees increased $85,882 or
21% which was directly attributable to the increase in printing and
travel revenues.
PROVISION FOR CREDIT LOSSES
The Company determined its provision for bad debts by evaluating its
accounts receivable portfolio and the provider originating the
receivables that become delinquent. The allowance for doubtful
accounts is a valuation reserve for accounts receivable which
management believes may become uncollectible. An allowance is
established for receivables as they are determined to be
uncollectible. The Company's allowance for doubtful accounts at
March 31, 1995 and 1994 was $75,000 and $86,233, respectively. The
Company has provided a provision for credit losses based on a
historical default rate of 12% to 15% of the outstanding receivables.
Accordingly, the decrease in the provision for credit losses of
$8,734 or 11% is directly related to the corresponding decrease in
outstanding receivables. Bad debt recoveries have increased $48,635
or 150% from fiscal 1994 to fiscal 1995 due to the Company changing
its policy on charge-offs. In fiscal 1995, the Company implemented
more stringent credit policies which resulted in earlier charge offs
and a larger amount of recoveries than anticipated.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $33,176 or 4% from
fiscal 1994 to fiscal 1995 due primarily to a bonus accrued by the
Company in 1994 for David Marx as partial consideration to enter into
an employment agreement.
PART II
INTEREST EXPENSE
In fiscal 1995, the Company incurred $19,046 of interest expense due
to the creation of a note payable from a related partnership of
$165,000 during fiscal 1995. Interest expense from bank debt was
$229,065 and $229,069 during the years ended March 31, 1995 and 1994,
respectively. Interest from funds due health care providers was
$30,473 and $29,038 for the years ended March 31, 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital for the fiscal year ended March 31,
1996 of a negative ($355,258) is down from the 1995 negative level of
($2,882,574) and 1994 negative level of ($2,729,643). The change is
a result of the Resolution Trust Corporation settlement and
realization of a one-time extraordinary gain of $2,854,831 by the
Company.
Year Ended March 31,
1996 1995 1994
Cash provided (used) by
operating activities $(50,952) $19,205 $(99,270)
Cash provided (used) by
investing activities 7,553 (24,937) (28,797)
Cash provided (used) by
financing activities 232,836 (7,520) 44,846
$189,437 $(13,252) $(83,221)
The Company is currently working on improving it's financial
condition and future by providing more services for fees; less
factoring & financing; and considered areas of focus other than
Health Care given that industry's uncertain future. Management is
reviewing all options and sources of revenue available to the Company
at this time and believes that a re-direction of the Company focus is
imperative to provide a viable future for the Company. There is no
plan to discontinue all of the services the Company has provided in
the past. However, some services which require substantial up-front
capital, such as factoring, will be minimized. Services, such as
providing credit reports, collection letters and collection services
will be expanded on a fee for service basis. In addition, the Company
is considering the opportunities that are available for its' printing
and travel services. There can be no assurance that the Company will
be successful in these efforts.
Cash provided by operating activities decreased $70,157 from fiscal
1994 to fiscal 1995 primarily as a result of a significant decrease
in factoring commissions and fees. Cash provided by operating
activities increased $118,475 from fiscal 1994 to fiscal 1995 due
primarily to the accrual of an officer's bonus of approximately
$220,000 in fiscal 1994.
Cash provided by investing activities has increased in fiscal 1996 as
compared to fiscal 1995 and 1994 as a result of payments received in
fiscal 1996 on a note receivable from a related partnership and fewer
capital expenditures in 1996 as a result of the Company scaling back
operations and monitoring expenditures.
PART II
Cash provided from financing activities increased significantly in
fiscal 1996 as compared to 1995 and 1994 due to a large increase in
funds due to providers which is comprised of collections on Type 2
accounts which were retained by the Company and used to fund
operations.
The Company has an employment agreement with David C. Marx, an
officer and director of the Company, and has accrued but deferred a
substantial portion of the compensation owed him according to the
agreement. The total amount owed Mr. Marx as of March 31, 1996 was
$374,395 and is collateralized by all of the assets of the Company.
Management has previously implemented cost cutting actions including:
staff reductions; reducing, freezing, & deferring wages; eliminating
physical facilities used. To date, these actions have not been
sufficient to allow the Company to be profitable. Although
management continues to develop new revenue generating services and
products, there can be no assurance that the Company will be
successful in these endeavors.
INFLATION
The Company is not significantly affected by inflation. The Company
has no manufacturing operations and does not require large
investments in tangible assets. However, the rate of inflation would
affect certain of the Company's expenses, such as employee
compensation, rent and interest costs. The Company believes
increases in its operating expenses that result from inflation will
be generally recoverable in the prices of services offered by the
Company. However, the additional interest costs may not be totally
recoverable and may negatively impact Company results.
ADOPTION OF NEW ACCOUNTING RULES
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Asset to be Disposed of," which requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed
of. The Company adopted Statement 121 in fiscal 1996. There was no
material effect on the financial statements from adoption.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). FAS 123 established financial
accounting and reporting standards for stock-based employee
compensation plans. FAS 123 is effective for transactions entered
into in fiscal years beginning after December 15, 1995. The Company
currently accounts for stock-based compensation awards under the
provisions of Accounting Principles Board Opinion No. 25, as
permitted by FAS 123, and intends to continue to do so.
PART II
The foregoing discussion contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which are
intended to be covered by the safe harbors created thereby. These
statements include the plans and objectives of management for future
operations, including plans and objectives relating to the
development. The forward-looking statements included herein are
based on current expectations that involve numerous risk and
uncertainties. 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 the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be
inaccurate, therefore, there can be no assurance that the forward-
looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company
or any other person that the objectives and plans of the Company will
be achieved.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary
Financial Data
Page No.
Independent Auditors' Reports F-1
Financial Statements:
Consolidated Balance Sheets, March 31, 1996 and 1995 F-2
Consolidated Statements of Operations Years Ended March 31,
1996, 1995 and 1994 F-3
Consolidated Statements of Shareholders' (Deficiency), Years
Ended March 31, 1996, 1995, and 1994 F-4
Consolidated Statements of Cash Flows, Years Ended March 31,
1996, 1995, and 1994 F-5
Notes to Consolidated Financial Statements F-6
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Account F-16
Table of Contents
Page
Independent Auditors' Report F - 1
Financial Statements
Consolidated Balance Sheets, March 31, 1996 and 1995 F - 2
Consolidated Statements of Operations, Years Ended March 31,
1996, 1995 and 1994 F - 3
Consolidated Statements of Stockholders' Deficiency, Years Ended
March 31, 1996, 1995 and 1994 F - 4
Consolidated Statements of Cash Flows, Years Ended March 31,
1996, 1995 and 1994 F - 5
Notes to Consolidated Financial Statements F - 6
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Account F - 16
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
MedMaster Systems, Inc.
Logan, Utah
We have audited the accompanying consolidated balance sheets of
MedMaster Systems, Inc. and subsidiaries as of March 31, 1996 and
1995, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for each of the years in the
three-year period ended March 31, 1996. These 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of MedMaster Systems, Inc. and subsidiaries as of
March 31, 1996 and 1995, and the consolidated results of their
operations and cash flows for each of the years in the three-year
period ended March 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has a working capital and stockholders' deficiency of
$355,258 and $271,794, respectively at March 31, 1996, and has
suffered recurring losses from operations. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plan in regard to this matter is also
discussed in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
June 3, 1996
Denver, Colorado
Consolidated Balance Sheets
March 31,
1996 1995
Assets
Current assets (Note 9)
Cash $206,463 $ 17,026
Restricted certificate of deposit 10,000 10,000
Factor receivable - net of allowance for
credit loss of $40,000 (1996) and $75,000
(1995) 303,121 512,627
Prepaid expenses 20,821 20,138
Note receivable - related party (Note 3) 46,767 284,922
Total current assets 587,172 844,713
Property and equipment (Note 9)
Furniture and equipment 226,665 293,670
Less accumulated depreciation (207,068) (257,950)
19,597 35,720
Other assets (Note 9)
Note receivable - related party (Note 3) - 46,767
Cash surrender value of life insurance 63,867 -
63,867 46,767
$670,636 $927,200
Liabilities and Stockholders' Deficiency
Current liabilities
Notes payable (Note 4) $ - $1,362,087
Note payable - related party (Note 5) - 165,000
Accounts payable 54,659 43,353
Funds due to providers (Note 6) 482,761 244,946
Accrued expenses
Interest (Note 4) - 1,517,410
Interest - related parties - 19,046
Officer compensation (Note 9) 374,395 375,445
Other 30,615 -
Total current liabilities 942,430 3,727,287
Commitments and contingencies (Notes 2,
7, 8 and 9)
Stockholders' deficiency (Note 7)
Preferred stock, $.01 par; authorized
500,000 shares; none issued and
outstanding - -
Common stock, $.01 par; authorized
30,000,000 shares; issued and outstanding
10,844,117 shares in 1996 and 1995 108,441 108,441
Additional paid-in capital 3,140,825 3,140,825
Accumulated deficit (3,521,060) (6,049,353)
(271,794) (2,800,087)
$ 670,636 $ 927,200
Consolidated Statements of Operations
Year Ended March 31,
1996 1995 1994
Revenues
Factoring commissions and
fees $342,257 $ 537,141 $ 532,134
Printing and travel fees 747,141 545,287 449,991
Credit report fees 24,331 12,744 -
1,113,729 1,095,172 982,125
Cost and expenses
Cost of printing and travel
fees 669,932 487,293 401,414
Net (recoveries) provision
for credit losses (30,970) (11,973) 45,396
General and administrative 626,389 777,576 810,752
Rent - related party (Notes
8 and 9) 53,220 53,220 53,220
Other - related party - - 220,305
1,318,571 1,306,116 1,531,087
Loss from operations (204,842) (210,944) (548,962)
Other income (expense)
Interest income -
Related parties (Note 3) 19,515 30,412 30,000
Other - 1,036 8,480
Interest expense -
Related parties (Note 5) (7,656) (19,046) -
Other (133,555) (259,538) (258,107)
(121,696) (247,136) (219,627)
Loss before extraordinary item (326,538) (458,080) (768,589)
Extraordinary item
Gain on settlement of debt 2,854,831 - -
Net income (loss) $2,528,293 $(458,080) $(768,589)
Income (loss) per common share
Loss before extraordinary item (.03) (.04) (.07)
Extraordinary item .26 - -
Net income (loss) per common
share .23 (.04) (.07)
Weighted average common shares
outstanding 10,844,117 10,844,117 10,844,117
Consolidated Statements of Stockholders' Deficiency
Years Ended March 31, 1996, 1995, and 1994
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficiency
Balance -
March 31,
1993 10,844,117 $108,441 $3,140,825 $(4,822,684 $(1,573,418)
Net loss - - - (768,589) (768,589)
Balance -
March 31,
1994 10,844,117 108,441 3,140,825 (5,591,273 (2,342,007)
Net loss - - - (458,080) (458,080)
Balance -
March 31,
1995 10,844,117 108,441 3,140,825 (6,049,353) (2,800,087)
Net income - - - 2,528,293 2,528,293
Balance -
March 31,
1996 10,844,117 $108,441 $3,140,82 $(3,521,060 $(271,794)
Consolidated Statements of Cash Flows
Year Ended March 31,
1996 1995 1994
Cash flows from operating
activities
Net income (loss) $2,528,293 $(458,080) $(768,589)
Adjustments to reconcile net
income (loss) to net cash (used)
provided by operating activities
Depreciation 20,529 22,356 20,601
Rent expense applied as
payments on note receivable
- related party 53,220 53,220 53,220
Loss of disposal equipment - - 30,646
Interest applied to note
receivable - related party (17,974) (30,412) (30,000)
Gain on settlement of debt (2,854,831) - -
Interest applied to note
payable - related party 7,651 - -
Change in assets and
liabilities -
Restricted certificate of
deposit - - 19,126
Accounts receivable 209,506 169,105 112,376
Prepaid expenses (683) 6,005 (6,233)
Accounts payable 11,306 (17,198) (407)
Cash surrender value of
life insurance (63,867) - -
Accrued expenses 55,898 274,209 469,990
(2,579,245) 477,285 669,319
Net cash (used in)
provided operating
activities (50,952) 19,205 (99,270)
Cash flows from investing
activities
Loan to related party - note
receivable (18,041) - -
Payments received from related
party - note receivable 30,000 - -
Capital expenditures (4,406) (24,937) (28,797)
Net cash provided by
(used in) investing
activities 7,553 (24,937) (28,797)
Cash flows from financing
activities
Payment on note payable -
related party (44,979) - -
Proceeds from note payable -
related party 40,000 165,000 -
Funds due to providers 237,815 (172,520) 44,846
Net cash provided by
(used in) financing
activites 232,836 (7,520) 44,846
Net increase (decrease) in cash 189,437 (13,252) (83,221)
Cash at beginning of year 17,026 30,278 113,499
Cash at end of year $206,463 $17,026 $ 30,278
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $38,121 in 1996,
$30,496 in 1995, and $29,066 in 1994.
During 1996 note payable - related party in the amount of
$167,672 was offset against the note receivable - related party.
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
MedMaster Systems, Inc. provides an accounts receivable factoring
service to health care providers participating in the MedMaster
System. The Company grants credit to customers who are located
primarily in the western part of the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of
MedMaster Systems, Inc. and its wholly owned subsidiaries: Medac,
Inc., Ink, Inc., and Sunrise Travel, Inc. All material intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company charges an average commission of 8% on factored
receivables it collects on behalf of its subscribers. The Company
classifies receivables as either Type 1 or Type 2 based on the
assessed credit worthiness of the customer. Commissions on type 1
nonrecourse receivables are nonrefundable and are immediately
recognized as income. Collections on Type 2 receivables are remitted
to subscribers as collected, net of the Company's commission, which
is recognized as income when collected. The factoring commissions
are recognized when purchased rather than over the period of service
because the differences between the effects of such allocations and
the effects of immediate recognition is immaterial. Printing, credit
reporting and travel service revenues are recognized as income when
earned.
Depreciation
Depreciation is provided on the straight-line basis over the
estimated useful asset lives of the underlying assets ranging from
three to seven years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Note 1 - Organization and Summary of Significant Accounting Policies
(continued)
Gross Transactions
The total amount of billings submitted to the Company by health care
providers during the year is presented in the following table:
For the Year Ended March 31,
1996 1995 1994
Gross billings submitted by
health care providers $ 2,492,440 $ 3,480,564 $ 4,189,863
Finance charges 135,573 163,607 149,047
Late fees 13,677 23,908 41,897
Miscellaneous 24,666 25,819 27,843
$ 2,666,356 $ 3,693,898 $ 4,408,650
Income Taxes
The Company records deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statements and tax basis of assets and
liabilities using the enacted tax rates in effect for the year in
which the differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any
tax benefits that, based on available evidence, are not expected to
be realized.
Concentration of Credit Risk
The Company maintains cash balances in excess of federally insured
limits at certain financial institutions.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to
1996 presentation.
Note 1 - Organization and Summary of Significant Accounting Policies
(continued)
Accounting Standards Not Yet Adopted
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed
of. The Company elected to adopt Statement 121 for the 1995
financial statements, the adoption of which did not have an effect on
the Company's financial statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). FAS 123 establishes financial
accounting and reporting standards for stock-based employee
compensation plans. FAS 123 is effective for transactions entered
into in fiscal years beginning after December 15, 1995. The Company
currently accounts for stock-based compensation awards under the
provisions of Accounting Principles Board Opinion No. 25, as
permitted by FAS 123, and intends to continue to do so.
Note 2 - Continued Operations
The Company has suffered recurring losses from operations, and as of
March 31, 1996, the Company had working capital and stockholders'
deficiencies of $355,258 and $271,794, respectively, which is funded
through participating health care providers and related parties.
Cash currently generated from operations and the Company's current
cash position are not adequate to retire its current liabilities,
thus raising substantial doubt about the Company's ability to
continue as a going concern. Management is considering all options
and sources of revenue available to the Company and believes that a
redirection of the Company focus is imperative to provide a viable
future. Management is in the process of developing a plan to expand
fee for service activities such as providing credit reports and to
reduce factoring services due to the up-front cash flow required. In
addition, the Company plans to expand operations of its printing and
travel segments. There can be no assurances that the Company will be
successful in these endeavors. The accompanying financial statements
do not include any adjustments relating to this uncertainty.
Note 3 - Note Receivable
March 31,
1996 1995
Note receivable - related party, a
partnership owned by certain officers and
directors of the Company. Originally due
in monthly installments of $1,400
including interest at 9%, until paid in
full. Currently, monthly rental payments
to the related partnership of $4,435 are
offset against the note balance (See Note
8). The note is without collateral. $46,767 $331,689
The Company advanced funds to this partnership pursuant to a
promissory note dated February 1, 1985. Approximately $167,000 was
loaned to the partnership during the years ended March 31, 1986 and
1985, which was to be used by the partnership to develop the building
currently occupied by the Company and for other investment purposes.
In addition, $200,000 was loaned to the partnership during the year
ended March 31, 1987, and was used by the partnership to acquire a 5%
interest in the Company's underwriter, Beuret & Company, which has
ceased doing business. Interest income on this note was
approximately $18,000, $30,000 and $30,000 for the years ended
March 31, 1996, 1995 and 1994, respectively, and has been added to
the principal balance.
Note 4 - Note Payable
March 31,
1996 1995
Note payable - bank, settled in October
1995. $ - $1,362,087
On September 25, 1995 the RTC and the Company reached a settlement
agreement. The settlement agreement provided that the terms and
conditions of the settlement remain confidential. In accordance with
the agreement, the applicable parties agreed to a complete dismissal
of all actions pertaining to the Company. All actions were dismissed
in December 1995. The Company sold investments originally purchased
from a related company in order to pay the settlement amount. The
Company sold the investments at a loss approximating $70,000, which
is included in the gain on settlement of debt. A gain in the amount
of $2,854,831 has been reflected as an extraordinary item in the
accompanying consolidated financial statements.
Note 5 - Note Payable - Related Party
March 31,
1996 1995
Note payable - related party, a
partnership owned by certain officers and
directors of the Company; during 1996,
the note balance was offset against the
note receivable to the partnership (Note
3). $ - $165,000
Note 6 - Funds Due to Providers
Upon collection of factored receivables, the health care providers
have the option of receiving payment immediately or receiving payment
at a later date on demand with interest. The Company pays the
interest at graduated rates based on the amount of funds retained by
the Company. The health care providers have access to these funds,
subject to the Company's approval for their withdrawal. The funds
due to providers at March 31, 1996 exceed cash held by $276,298.
Interest expense incurred by the Company relative to these accounts
amounted to $38,121, $30,473 and $29,038, for the years ended March
31, 1996, 1995 and 1994, respectively.
Note 7 - Preferred Stock and Common Stock
On August 17, 1983, the Board of Directors authorized 500,000 shares
of preferred stock at $.01 par value per share, which may be issued
in series with rights and preferences to be determined by the Board
of Directors. As of March 31, 1996, no series had been designated
nor shares issued.
On January 1, 1986, the Company's stockholders approved an incentive
stock option plan wherein options to purchase 451,770 shares of
common stock may be granted to officers and key employees of the
Company. The option price per share is the greater of the fair
market value of the Company's common stock on the date the option is
granted or $1.11. On April 1, 1988, stock options to purchase 76,000
shares were granted to employees at an exercise price of $1.11 per
share. The options expire April 1998. None of the options have been
exercised as of March 31, 1996.
On July 10, 1986, the Company sold 4,830,000 shares of its common
stock in a public offering. The offering consisted of the sale of
805,000 units where a unit consisted of six shares of common stock
and one warrant to purchase three shares of common stock at $.83 per
share. The expiration of the warrants was extended to July 10, 1998.
As March 31, 1996, none of these warrants have been exercised.
Note 7 - Preferred Stock and Common Stock (continued)
In connection with the public offering, the Company also issued
warrants to the underwriters to purchase 70,000 units where a unit
consists of six shares of common stock and one warrant for the
purchase of three shares at $1.16 per share. The warrants expire
July 10, 1996. The exercise price for each unit is $6.67. As of
March 31, 1996, none of these warrants have been exercised.
On November 16, 1987, the Board of Directors authorized a stock
option grant to an officer of the Company to purchase 450,000 shares
of the Company's common stock. The options were granted on November
16, 1988, at an option price of $.09375 per share. These underlying
options can be exercised anytime and expire in November 1998. As of
March 31, 1996, there were no options exercised under this agreement.
At March 31, 1996, outstanding options and warrants, all of which are
exercisable, to purchase shares of the Company's common stock are
summarized as follows:
Expiration Number of Exercise
Date Shares Price
Stock warrants issued in
connection with a public July 1996-J
offering uly 1998 2,625,000 $.83 to $6.67
Officer and employee stock April and
options Nov-ember 526,000 $.09 to 1998 $1.11
3,151,000 $.09 to $6.67
Note 8 - Obligations Under Leases
On January 1, 1986, the Company entered into a lease agreement for
its operating facilities with the DARO Group, a partnership owned by
certain officers and directors of the Company. This lease expires on
December 31, 2000. Rent expense to this partnership totaled
approximately $53,200 for each of the years ended March 31, 1996,
1995, and 1994.
Note 8 - Obligations Under Leases (continued)
The future minimum lease commitments as of March 31, 1996, are as
follows:
Year Ending March 31,
Amount
1997 $ 53,220
1998 53,220
1999 53,220
2000 39,915
$199,575
The real estate lease contains certain escalation clauses which
provide for additional rents for increases in real estate taxes and
other charges. The partnership's indebtedness at March 31, 1996 on
this property was approximately $140,000 with quarterly installments
of approximately $9,000 including interest at 85% of the bank's prime
rate.
Rent expense for all leases, including equipment, was $62,711,
$59,600 and $60,434 for the years ended March 31, 1996, 1995 and
1994, respectively.
Note 9 - Commitments and Contingencies
Employment Agreement
Effective April 1, 1994, an officer and director of the Company
entered into a three year employment agreement, whereby the officer
is entitled to receive approximately $110,000 per year through the
fiscal year ending March 31, 1997. As partial consideration to enter
into the agreement, the officer received a bonus of approximately
$220,000, which has been accrued as of March 31, 1995. The $220,000
approximates the consideration pursuant to a former employment
agreement that has been forgone by the officer over the past several
years due to the financial condition of the Company.
Note 10 - Income Taxes
Following is a reconciliation between the Company's effective income
tax rate and the United States statutory rate:
For the Years Ended
March 31,
1996 1995 1994
Federal statutory income tax 34% (15)% (15)%
(benefit) rate
State income taxes 5 (5) (5)
Permanent differences 1 1 1
Federal net operating losses (40) - -
utilized
0% (19)% (19)%
The components of deferred taxes are as follows:
March 31,
1996 1995
Net operating loss carryforwards $703,501 $926,244
Cash basis income tax reporting 84,493 348,946
Capital loss carryforwards 19,682 5,474
Depreciation 7,080 7,078
Tax credits 6,796 6,796
Deferred tax asset 821,552 1,294,538
Valuation allowance (821,552) (1,294,538)
$ - $ -
The Company has impaired its deferred tax asset because it has
determined that due to the existence of losses it is more likely than
not that the tax asset will not be utilized.
At March 31, 1996, the Company has approximately $3,518,000 of net
operating loss carryforwards which expire in 2004 through 2010.
During the year ended March 31, 1996, the Company utilized net
operating loss carryforwards of approximately $1,113,000.
Note 10 - Income Taxes (continued)
The net operating losses expire in the following years:
Year Ending March 31,
2004 $ 905,000
2005 1,013,000
2006 354,000
2007 576,000
2008 224,000
2009 285,000
2010 161,000
$3,518,000
Note 11 - Industry Segment Information
The Company operates in two significant industry segments, as
outlined below. The following is industry segment information for
1996, 1995, and 1994:
Factoring
Commission
and Travel
Fees Fees Corporate Consolidated
Year ended March 31, 1996
Revenue $ 342,257 $ 735,427 $36,045 $1,113,729
Income (loss) from
operations $(306,384) $ 69,360 $32,182 $(204,842)
Depreciation and
amortization $ 18,434 $ 2,095 $ - $ -
Identifiable assets $ 668,636 $ 2,000 $ - $ 670,636
Year Ended March 31, 1995
Revenue $ 536,403 $ 540,582 $18,187 $1,095,172
Income (loss) from
operations $ (282,419) $ 53,888 $17,587 $ (210,944)
Depreciation and
amortization $ 19,794 $ 2,562 $ - $ 22,356
Identifiable assets $ 923,105 $ 4,095 $ - $ 927,200
Year Ended March 31, 1994
Revenue $ 532,134 $ 438,190 $11,801 $ 982,125
Income (loss) from
operations $ (601,053) $ 42,903 $ 9,188 $ (548,962)
Depreciation and
amortization $ 16,463 $ 4,138 $ - $ -
Identifiable assets $1,129,132 $ 6,657 $ - $1,135,789
Note 12 - Disclosure About Fair Value of Financial Instruments
At March 31, 1996, the fair values of the factor receivables
approximated carrying values because of the short-term nature of
these instruments.
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTAL SCHEDULES
Board of Directors
MedMaster Systems, Inc.
Logan, Utah
We have audited the consolidated financial statements of MedMaster
Systems, Inc. and subsidiaries as of March 31, 1996 and 1995, and for
each of the years in the three-year period ended March 31, 1996, and
have issued our report thereon dated June 3, 1996. Our audits also
included the financial statement schedule of MedMaster Systems, Inc.
and subsidiaries. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, such financial statement
schedule taken as a whole, presents fairly, in all material respects,
the information set forth herein.
Ehrhardt Keefe Steiner & Hottman PC
Denver, Colorado
June 3, 1996
Valuation and Qualifying Account
Column A Column B Column C Column D Column F
Balance at Charged to Balance at
Beginning of Costs and End
Description Period Expenses Deduction Period
Year ended March 31, 1996
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 75,000 $52,036 $(87,036)(a) $ 40,000
Year ended March 31, 1995
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 86,233 $69,062 $(80,295)(a) $ 75,000
(a) Write-off of uncollectible accounts against the allowance
account.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements on accounting and financial
disclosure with their accountants.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
TERM AS DIRECTOR
NAME AGE OFFICE TO EXPIRE
David C. 47 Chairman of the Board,
Marx(1)(3) President and Chief
Executive Officer 1996
Ronald G. 44 Senior Vice President and
Case(1)(3) Director 1996
Wm. Kevin 42 Vice President - Customer
Johnson Services
Bradley Seamons 40 Vice President - Operations
Dorothy Marx(2) 69 Controller, Treasurer and
Director 1996
Frank E. 45 Secretary 1996
Ashcroft
Reed M. 47 Director 1996
Baldwin(1)(2)
(1) Member of the Executive Committee of the Company. (2) Member of
the Audit Committee of the Company. (3) Member of the Stock Option
Committee of the Company.
The Company is authorized to have a classified Board of Directors
under which the directors are divided into three classes with the
term of office of each director in a given class (other than the
initial members of the Board of Directors whose initial term is
staggered) expiring at the third annual meeting of shareholders
following his election.
The Certificate of Incorporation of the Company provides that the
Board of Directors may increase the number of directors constituting
the entire Board. Each of the Company's officers is elected annually
by the Board of Directors and serve for a term of one year.
MANAGEMENT
David C. Marx, age 47, founded the Company in December 1977 and has
been Chairman of the Board and President since its' inception.
Ronald G. Case, age 44, is one of the original founders of the
Company and has been its Senior Vice President since July 1983.
PART III
Frank E. Ashcroft, age 45, is one of the founders and has been
Secretary of the Company since inception.
Wm. Kevin Johnson, age 42, has been Vice President of Credit &
Customer Services since July 1986 and an employee of the Company
since July 1982.
Bradley H. Seamons, age 40, has been Vice President of Operations
since July 1986 and an employee of the Company or its predecessor
since February 1978.
Dorothy Marx, age 69, has been the Controller and Treasurer of the
Company since its inception.
Mrs. Marx is the mother of David C. Marx, the Company's founder,
principal officer and largest stockholder. None of the Company's
other directors and executive officers are related nor are they or
any of the organizations with which they were previously associated
(other than Medac and FCS) a "parent," "Subsidiary" or other
"affiliate" of the Company.
Item 11. EXECUTIVE COMPENSATION
The following table, and its accompanying explanatory footnotes,
includes annual and long-term compensation information on the
Company's Chief Executive Officer for services rendered in all
capacities during the fiscal years ended March 31, 1996, 1995 and
1994.
SUMMARY COMPENSATION TABLE
Long-term
Compensation
Name and Principal Annual Compensation Options
Position Fiscal Year Salary(4) Bonus(5) Granted Compensation
David C. Marx,
Chief Executive
Officer 1996 $110,000 - - $1,630(1)(2)(3)
1995 $110,000 - - $1,630(1)(2)(3)
1994 $ 75,000 - 220,305 $1,630(1)(2)(3)
(1) This amount reflects the premium paid by the Company for a
$1,000,000 term life insurance policy for the benefit of Mr. Marx.
(2) Does not include rental payments made to the Daro Group, a
partnership consisting of David C. Marx and Ronald G. Case, of
$53,220 under the lease for the Company's premises in Logan, Utah for
the year ended March 31, 1995. See "Certain Relationships and Related
Transactions". (3) Officers and key employees participate in medical,
group life insurance and disability insurance plans provided to all
employees. The Company pays an automobile allowance for certain of
its executive officers. These automobiles may be used for personal
as well as business purposes. The aggregate annual amount of the
personal benefits derived from the automobiles is not included in the
above table insofar as it is not possible to determine the specific
amount of personal benefit derived by an individual. The Company
believes, however, that the value of the personal benefit derived
does not exceed the lesser of $25,000 or 10% of the cash compensation
payable to any individual. (4)Includes total amount accrued by the
Company. Actual cash compensation paid during 1996, 1995 and 1994 was
$60,000. (5)Includes total bonus amount accrued by the Company. Total
amount has been deferred and no cash has yet been paid.
PART III
Employment Contracts, Termination of Employment and Change-in-control
Arrangements.
The Board of Directors approved a three year employment agreement
with David C. Marx at an initial salary of $110,000 subject to yearly
increases equal to the greater of 10% or the percentage increase in
the Consumer Price Index. The terms & conditions are the same as the
five-year employment agreement Mr. Marx entered into with the Company
in 1986. The Company accrued a bonus to Mr. Marx of $220,305 as of
March 31, 1994 as partial consideration to enter into the employment
agreement. The bonus approximates the consideration pursuant to the
former employment agreement which had been forgone by Mr. Marx over
the past several years due to the Company's cash position. The term
of the three-year agreement commenced on April 1, 1994. In the event
that the Company discharges Mr. Marx other than for cause as defined
in the agreement, the Company will be required to pay Mr. Marx the
sum of $1,000,000. The agreement generally prohibits Mr. Marx from
competing with the Company for a period of two years after
termination of employment and provides for a Company provided
automobile, certain insurance benefits and the like. All unpaid
compensation accrued as of March 31, 1994 and future deferred
compensation under the new employment agreement are collateralized by
substantially all of the assets of the Company.
The Company also entered into non-disclosure and non-competition
agreements on August 17, 1983 with each Messrs. Case, Ashcroft and
Mrs. Marx. Such agreements provide that such employees will not
directly or indirectly, during the term of their employment and for a
period of two years thereafter, engage within the United States in
the same business as that in which the Company is engaged, and will
not disclose, either during their employment or thereafter, any trade
secrets or other confidential information concerning the business of
the Company. Further, each of them has agreed to assign to the
Company any and all inventions or developments resulting from his
efforts while employed by the Company, giving the Company the
exclusive right, title and interest in and to any such inventions or
developments and the exclusive right to procure patents or copyrights
thereon.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the record and beneficial ownership of
Common Stock by the officers and directors of the Company and each
person owning of record or known by the Company to own beneficially
more than five (5%) percent thereof.
PART III
Amount of
Beneficial
Ownership of
Name of Beneficial Owner Common Stock as Percent of as
of March 31, 1996 Class (5) (5)
David C. Marx 2,852,820 25.2
Ronald G. Case 1,075,377 9.5
Dorothy Marx (1) 46,082 0.4
Frank E. Ashcroft 734,070 6.5
Bradley Seamons (2) 27,590 .2
Wm. Kevin Johnson (2) 5,000 -
David E. Whipple (3) 897,618 7.9
Reed M. Baldwin (4) 450,000 4.0
Above Beneficial Owners as a
Group (8 persons) 6,088,557 53.7
(1) Assumes the exercise of warrants and options to purchase 7,400
shares of Common Stock. (2) Assumes the exercise of options to
purchase 5,000 shares of Common Stock. (3)Assumes the payment of a
note payable to David Marx, Ronald Case & Frank Ashcroft
collateralized by the stock. (4) Assumes the exercise of options to
purchase 450,000 shares of Common Stock. (5) Percentages have been
determined by adding the exercisable warrants and options of the
parties listed, including any which may be exercisable within 60 days
following the record date, to the total shares outstanding.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Marx and Case are partners in the Daro Group, which owns the
premises leased by the Company for its operations in Logan, Utah.
Mr. Marx is Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Case is Senior Vice President and a
Director of the Company. The Daro Group leases premises of
approximately 8,000 square feet to the Company at an annual rental of
approximately $53,220 pursuant to a lease which terminates on
December 31, 2000. Rental payments due under the lease are subject
to increase in the event of increases in real estate taxes or
operating costs with respect to the premises. The Company is also
responsible for the cost of utilities. The Company believes that the
lease terms are as favorable to the Company as those which could have
been secured from nonaffiliated third parties. During the fiscal
year ended March 31, 1996, the Company paid the Daro Group $53,220
pursuant to the terms of the lease.
The Company advanced funds from it's excess working capital to the
Daro Group pursuant to a promissory note dated February 1, 1985.
Approximately $167,000 was loaned to the partnership during the years
ended March 31, 1986 and 1985, which was used by the partnership to
develop the building currently occupied by the Company and for other
investment purposes. This portion of the obligation from the Daro
Group to the Company bears interest at nine percent per annum and
requires monthly installments of $1400 per month.
PART III
An additional $200,000 was loaned to the Daro Group from excess
working capital during the year ended March 31, 1987, which was used
by the Daro Group to acquire a 5% interest in Beuret & Company, the
Company's underwriter and one of its market makers, which ceased
doing business during the Company's year ended March 31, 1988. These
amounts were advanced on the premise that they would be added to the
amounts earlier advanced pursuant to the promissory note referenced
above.
For the period ending March 31, 1996, the Daro Group paid the Company
a total of $53,220 which was applied to principal on the loan. The
balance of the note receivable at March 31, 1996 and 1995 was $46,767
and $284,922, respectively.
During fiscal 1996, a related partnership contributed investments to
the Company to provide needed working capital and funds to pay the
settlement with Resolution Trust Corporation. At the time of the
settlement with the Resolution Trust Corporation, the Company was
forced to liquidate the investments at a loss of approximately
$70,000 which is included in the gain on settlement of debt in the
Company's consolidated financial statements.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) The following financial statements are included in
Part II Item 8:
Independent Auditors' Report F-1
Financial Statements:
Consolidated Balance Sheets - March 31, 1996 and 1995 F-2
Consolidated Statements of Operations- Years ended March 31,
1996, 1995 and 1994 F-3
Consolidated Statements of Shareholders' (Deficiency),
Years Ended March 31, 1996, 1995, and 1994 F-4
Consolidated Statements of Cash Flows, Years ended
March 31, 1996, 1995, and 1994 F-5
Notes to Consolidated Financial Statements F-6
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Account F-14
(a) (2) Not applicable.
(a) (3) List of Exhibits:
The following exhibits which are marked with an asterisk are filed as
part of this Report and the other exhibits set forth below are
incorporated by reference (utilizing the same exhibit numbers) from
the Company's Registration Statement on Form S-1 under the Securities
Act of 1933 (Registration No. 33-5873) filed May 21, 1986 and
declared effective July 10, 1986:
(a) Exhibits
3.1 Certificate of Incorporation.
3.2 By-laws.
4.4 Form of Underwriter's Warrants.
4.5 Form of Warrant Agreement between Registrant and
American Stock Transfer Company
PART IV
10.1 Officers' Non-Disclosure and Non Competition Agreements.
(a) Agreement with David C. Marx.
(b) Agreement with Bradley H. Seamons.
(c) Agreement with Dorothy Marx.
(d) Agreement with Frank E. Ashcroft.
(e) Agreement with Ronald G. Case.
(f) Agreement with David E. Whipple.
10.2 Incentive Stock Option Plan dated August 17, 1983
and form of Incentive Stock Option Certificate.
10.3 Form of Escrow Agreement among the Company, David C.
Marx, Ronald G. Case, David E. Whipple,
Frank E. Ashcroft and American Stock Transfer Company, as
Escrow Agent.
10.4 (a) Sample form of Participation Agreement between the
Registrant and participating Health Care Providers.
(b) Sample form Patient Disclosure Statement.
10.7 County Savings Bank Documents.
(a) Loan Agreement dated August 17, 1984 between
County Savings Bank, a California savings and loan
corporation ("County Savings Bank"), and Registrant.
(b) Warrant Agreement dated August 17, 1984
between County Savings Bank and Registrant.
(c) Secured Promissory Note dated August 17, 1984
issued by Registrant to County Savings Bank.
(d) Letter Agreement dated August 17, 1984
between County Savings Bank and Registrant.
(e) Pledge Agreement - bank Accounts/Deposits
dated August 17, 1984 between County Savings Bank and
Registrant.
(f) Security Agreement dated August 17, 1984
between County Savings Bank and registrant.
(g) Security Interest in Trademarks dated October
12, 1984 granted by Registrant to County Savings Bank.
(h) Assignment of Life Insurance Policy No. J83
298 941 as Collateral dated October 22, 1984 by David
C. Marx to County Savings Bank.
(i) Letter Agreement dated August 17, 1984
between County Savings Bank and Registrant.
(j) Notice of Assignment of Security Deposit in
favor of Bartlett Schlumberger Capital Corporation to
Registrant.
(k) Promissory Note dated February 1, 1985 issued
by Bartlett Schlumberger Capital Corporation and
Registrant.
(l) Guaranty dated February 1, 1985 by Bartlett
Schlumberger & Company, Inc. of obligations of Bartlett
Schlumberger Capital Corporation to Registrant.
PART IV
(m) Guaranty dated February 1, 1985 by County
Savings Service Corporation of obligations of Bartlett,
Schlumberger Capital Corporation to Registrant.
(n) Form of Letter Agreement dated May 19, 1986
between Bartlett Schlumberger Capital Corporation and
Registrant.
10.8 Lease dated December 16, 1985 between Daro Group and Registrant.
10.9 Promissory Note dated February 1, 1985 issued by
Daro Group to Registrant.
10.10 Form of employment agreement between David C. Marx and Registrant.
*22. List of subsidiaries of Registrant. E-1
(b) Reports on Form 8-K
During the last quarter of the period covered by this report,
the registrant did not file any report on Form 8-K.
EXHIBIT 22
MEDMASTER SYSTEMS, INC. AND SUBSIDIARIES
List of Subsidiaries for Years Ended March 31, 1996, 1995, 1994:
1. Medac Inc.
2. Financial Computer Services Inc.
3. Sunrise Travel Inc.
4. Ink Inc.
SIGNATURES
Pursuant to the requirements of Section 13 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.
MEDMASTER SYSTEMS, INC.
/David C. Marx/
By ______________________________
David C. Marx
Chairman of the Board,
President and Chief Executive
Officer
Date: June 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the date indicated.
Signature Title Date
___________ __________________
___________
/David C. Marx/
________________________ Chairman of the Board, June 25, 1996
David C. Marx President and Chief Executive Officer
/Ronald G. Case/
________________________ Sr. Vice President and Director June 25, 1996
Ronald G. Case
/Dorothy Marx/
________________________ Controller and Director June 25, 1996
Dorothy Marx