Exhibit 99.2
EMERGISOFT HOLDING, INC. AND SUBSIDIARIES
FORM 10-SB INFORMATION
Contents
Description of Business...........................................................................................1
Overview.................................................................................................1
Forward-Looking Statements...............................................................................1
Business of Emergisoft...................................................................................2
The Market...............................................................................................3
Industry Trends..........................................................................................4
Competition..............................................................................................5
Physician Advisory Committee.............................................................................6
Government Regulation....................................................................................6
Employees................................................................................................6
Recent Development.......................................................................................6
Management's Discussion and Analysis..............................................................................7
Results of Operation for the Three Months Ended March 31, 2001 Compared to
the Three Months Ended March 31, 2000...............................................................7
Results of Operation for the Year Ended December 31, 2000 Compared to
the Year Ended December 31, 1999....................................................................9
Liquidity and Capital Resources.........................................................................10
Risk Factors............................................................................................10
Description of Property..........................................................................................14
Security Ownership of Certain Beneficial Owners and Management...................................................14
Directors and Executive Officers.................................................................................16
Executive Compensation...........................................................................................19
Summary Compensation Table..............................................................................20
Stock Options Granted in 2000...........................................................................21
Stock Option Exercises and Fiscal Year-End Option Values................................................22
Employment Agreements...................................................................................22
Certain Relationships and Related Transactions...................................................................24
Kropf Share Acquisition.................................................................................24
Woodcrest Consulting Agreement..........................................................................24
InfoSphere Services Agreement...........................................................................24
Common Stock Purchase Agreement.........................................................................24
Berlwood/Woodcrest Financing............................................................................25
Description of Securities........................................................................................25
Common Stock............................................................................................25
Warrants................................................................................................25
10% Convertible Notes...................................................................................26
Options.................................................................................................26
Market Price of and Dividends on Common Equity and Other Stockholder Matters.....................................26
Market Information......................................................................................26
Holders.................................................................................................27
Dividends...............................................................................................27
Legal Proceedings................................................................................................27
Recent Sales of Unregistered Securities..........................................................................28
Indemnification of Directors and Officers........................................................................29
Description of Business
Overview
We were incorporated under the laws of the State of Colorado in 1989 but
became inactive in July 1997. In 2001, we created and later merged with a Nevada
subsidiary and became a Nevada corporation.
In May 2001, we changed our name from Pierce International Discovery, Inc.
to Emergisoft Holding, Inc. In addition, on May 25, 2001, EMS Acquisition Corp.,
a Delaware corporation and our wholly-owned subsidiary, merged with and into
Emergisoft Holding, Inc., a Delaware corporation. In accordance with an
Agreement and Plan of Merger, we issued one share of our common stock in
exchange for each one share of Emergisoft common stock outstanding immediately
prior to the closing of the transaction. Pursuant to a Share Cancellation
Agreement by and between us, Emergisoft and Robert Kropf, our primary
stockholder prior to the merger, 23,364,725 of his shares were canceled
effective upon the consummation of the merger. The former stockholders of
Emergisoft now own approximately 94.6% of our common stock.
As a result of the Merger, we are now a holding company with Emergisoft as
a wholly-owned subsidiary. Emergisoft also has a wholly-owned subsidiary,
Emergisoft Corporation, a Delaware corporation. We and our direct and indirect
subsidiaries operate from our principal offices in Arlington, Texas. In the
remainder of this document the terms "we," "our," and "us" refer to Emergisoft
Holding, Inc., a Nevada corporation, and, where appropriate, to our direct and
indirect subsidiaries. The term "Emergisoft" refers to Emergisoft Holding, Inc.,
a Delaware corporation and its direct subsidiary.
Forward-Looking Statements
This document contains forward-looking statements. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
that are other than statements of historical facts.
Words such as, "expects," "anticipates," "estimates," "believes" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
are set forth below.
Our expectations, beliefs and projections are expressed in good faith and
are believed to have a reasonable basis, including, without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties, but there can be no assurance that our
expectations, beliefs or projections will result, be achieved or be
accomplished.
In addition to other factors and matters discussed elsewhere in this
document, the following are important factors that, in our view, could have
material adverse effects on our financial condition and results of operations:
the risk factors discussed in this document; general economic, market or
business conditions; changes in laws or regulations; acceptance of our principal
software product, CareLyncED (TM), by the marketplace; competition from
developers of software products which perform functions similar to the functions
performed by CareLyncED (TM); the successful implementation of CareLyncED (TM)
in hospital emergency rooms who choose to utilize it; and our ability to raise
capital in sufficient amounts and on acceptable terms.
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Business of Emergisoft
Emergisoft develops and markets software products directly to the emergency
departments of hospitals in the United States. The products automate the
antiquated pen and paper-based process of moving patients through the emergency
department (ED). The software is intuitive and is designed by physicians and
clinicians to emulate the systems currently in use. Additionally, it is designed
to be faster, reduce medical errors, increase hospital revenue through improved
reimbursement and improve patient care due to more accurate charting.
Emergisoft's CareLyncED (TM) product has been under continuous development
for a decade, and will replace Emergisoft's current DOS-based product during
2001 upon completion of final testing early in the third quarter of the year. It
is the only product on the market that originated as a full-function electronic
medical record (EMR), with its ancillary system functions, such as triage,
patient tracking and discharge processing being derived from the EMR. In
contrast, the majority of the vendors in this arena today originated as single
ED process solution products (e.g., triage, tracking or discharge) and are
currently engaged in attempting to reverse engineer themselves into
full-function EMRs. We believe this distinction between CareLyncED (TM) and the
rest of the products currently available is most evident in the sophistication
and cross-integration of the database structure, the embedded Health Care
Finance Administration (HCFA) documentation criteria rules-driven clinical data
collection prompting, the workability of the user interface and the robustness
of CareLyncED (TM)'s management information reporting.
As an additional tool to win the buy-in of physician groups Emergisoft has
developed GroupLyncEM (TM), a companion set of databases linked to CareLyncED
(TM), which assists physician groups in managing their group practice. We
believe GroupLyncEM (TM) (EM for emergency medicine) will enable the provider
group to more efficiently manage its recruiting, credentialing, scheduling,
intra-group communications, patient complaint evaluation and management, ED
provider practice profiling and ED provider Relative Value Unit (RVU) based
productivity compensation. This suite of management tools would typically be
cost-prohibitive for the small EM groups staffing one or two hospitals, and
groups such as this staff more than two-thirds of all EDs.
The CareLyncED (TM) system is based upon a state of the art full-function,
fully relational EMR database. It is configured to use with a stylus pen at the
bedside on a wireless notebook size hand-held computer. Patient care data
collection is driven whenever possible by templates or documentation guides
(DGs). The amount and complexity of the data now required for high quality
patient care processes and optimum reimbursement is such that the best possible
approach in our opinion is one that prompts the provider for the specific pieces
of information needed for the patient in question. It is specifically the lack
of prompting that makes voice dictation a relatively poor ED documentation
solution even in the face of its top dollar cost. For example, within the
CareLyncED (TM) system, when a patient presents with the complaint of chest
pain, most of the nursing questions that are prompted are tailored to the issues
of chest pain. The physician in turn follows a DG that is tailored to the
information that needs to be recorded in the case of a patient with chest pain,
as are the patient orders, the test interpretation notes, the procedure notes
and all other areas of the patient's clinical record. Other DGs can be accessed
when there are multiple problems, but it is the prompting of complete
information that is the core competency of the system.
We believe pen or stylus-based systems like CareLyncED (TM) have a
significant edge over all other input approaches currently in use. Studies have
indicated that the average current productivity of voice-activated input is
approximately 65 words per minute, free form dictation 170 words per minute and
pen-based systems 300 words per minute. The CareLyncED (TM) system takes this
measure of productivity to a new level by utilizing an innovative graphic
interface for text capture that dramatically reduces the
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number of system interactions required to generate a given amount of textual
(medical record) information. If, for example, the user wants to say that there
is a 2.5 centimeter laceration on the left upper anterior forearm, most systems
would require the user to separately specify the number of centimeters, the
information that this is a laceration versus an abrasion or something else, that
it is located on the left as opposed to the right forearm, that the location is
on the upper verses the lower part of the left forearm, that the location is
anterior as opposed to posterior, and that the user is finished with his input -
a minimum of six keystrokes. In the CareLyncED (TM) system the same task is
accomplished by selecting an icon whose meaning is laceration and using it to
draw the injury on the appropriate part of the body that is depicted in a
graphic image. As the user drags and draws the laceration, the system
automatically calculates the length of the laceration in centimeters and
captures the text behind the graphic image that indicates that the laceration is
on the left upper anterior forearm. Thus, the user accomplishes in two
keystrokes what takes six in most other systems, and in CareLyncED (TM) the user
also has a permanent drawing of the actual location and extent of the wound. We
believe that no other system vendor has anything approaching this kind of
technological breakthrough.
With all of the patient's clinical information in a single interactive
database it becomes easy to overlay many other functions that are impossible
with a paper record. Examples of this are automatic coding, alerts and cross
checks for medical error prevention and highly sophisticated provider practice
profiling reports.
It is likely that the complexity of ED medical practice will continue to
become more complex. While voice activated technology is being touted by some as
the ultimate ED documentation solution, we do not believe that it is, primarily
because of the lack of prompting. We believe voice activated technology will
continue to fall short of its promise and will likely never work well in the
noisy chaotic environment that is the ED most of the time. At this point we see
no new technology on the horizon that will materially alter the possible
solutions to the unique problems addressed by CareLyncED (TM).
The Market
There are roughly 5,000 EDs in the United States and approximately the same
number of convenience care/urgent care facilities. Whereas the former are almost
all hospital-based, the latter are primarily located at some distance from the
hospital and many are designed to function as feeder facilities through some
type of loose hospital affiliation. The similarities in these two types of
facilities primarily center on the unscheduled, episodic nature of their
patients' problems, while they differ in that convenience care/urgent care
facilities typically take no true emergencies or ambulance cases.
Of these 10,000 facilities nationwide, fewer than one hundred currently
operate with anything approaching comprehensive computerization of the ED/urgent
care medical care process. Most of these one hundred have developed their own
proprietary systems over years of effort and at significant institutional cost.
No commercially available product yet has won the support of a significant
number of these facilities.
Any ED or convenience care/urgent care facility seeing 25,000 or more
patients per year is a prime candidate to benefit from the CareLyncED (TM)
legacy system. Legacy system means a client-server intranet system wherein the
primary server is co-located with the facility using it. There are presently
5,000 EDs and convenience care/urgent care facilities with patient volumes in
excess of 25,000 per year, and these represent the primary market for CareLyncED
(TM).
As the primary CareLyncED (TM) market is penetrated, we intend to migrate
the Emergisoft product to a web-based application service provider (ASP) format.
In an ASP product, the server is remote from the clients and it is typically
accessed over the web and bought based on a per-transaction fee. Such an
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ASP format would make the EDs and convenience care/urgent care centers with
lower patient volumes potential CareLyncED (TM) customers as well. Beyond this
we see an opportunity to provide a similar system to a variety of primary care
office-based practices.
Industry Trends
The coming release of CareLyncED (TM) is timed to enter the market at the
intersection of eight major healthcare industry trends. Whereas ED practice
information and management systems may have been viewed as optional in the past,
we believe that the eight trends will mandate such a system for the future.
These eight trends are the following:
o All-time record ED patient volumes. ED resources are increasingly
becoming overwhelmed by all-time record patient demand. To our
knowledge, never before has there been greater pressure to accomplish
more with less. We believe CareLyncED (TM) can provide the robust
management information reporting that is necessary to bring greater
efficiency to the operation of all EDs.
o Hospital and physician document driven reimbursement. With the advent
of federal healthcare program outpatient prospective payment via
Ambulatory Payer Classifications (APC) in August of 2000,
reimbursement for hospital outpatient services (such as those in the
ED) is determined by the content of the medical record. Emergency
physicians have confronted this reality since 1995 when the HCFA
instituted its Resource Based Relative Value System (RBRVS) for
managing physician reimbursement. This new alignment of interests
centered on the content of the medical record is expected to make it
much easier to sell the value of the CareLyncED (TM)system to both the
hospital and the physicians engaged in the delivery of ED services.
o Cost reduction over revenue enhancement. The net effect of both the
movement toward managed care and the government's outpatient
prospective payment system is to further fix the revenue side of the
ED profitability equation. When the revenue per visit is relatively
fixed, cost reduction management efforts are more immediate in their
effect and of much greater value than would be similar efforts aimed
at revenue enhancement strategies. Relatively fixed revenues are
currently one of the biggest challenges confronting EDs.
o The need for evidence-based medical decision-making. Medical
decision-making has historically been unstructured, leaving the
majority of spending decisions in the hands of each individual
practitioner to practice his art as he sees fit. Increasingly,
however, studies in this area have indicated that many spending
decisions are made based upon incomplete data, individual
misunderstanding or perceived risk. Evidence-based medical
decision-making reduces spending by interposing a standard
decision-making methodology between the provider's decision to order a
given medical test or therapy and the actual spending action itself.
These standard decision-making methodologies are increasingly evident
in the medical literature and they often carry the added bonus of some
degree of malpractice liability protection due to their general
acceptance as practice standards. CareLyncED (TM) can provide the
real-time interactivity with the provider's actions to interpose a
decision-making standard prior to the execution of spending decision
orders.
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o The increasing complexity of the reimbursement system. The average ED
interacts with more than seventy different payers, each of whom have
multiple medical plan products. Paper-based systems have been
overwhelmed for some time now in trying to cope with this degree of
complexity. CareLyncED (TM) facilitates improved management of the
profusion of information. Many managed care plans are willing to pay a
bonus or premium for high quality care, but only if the hospital's
systems can measure it and report it.
o Rule-based diagnosis and procedure coding. With the advent of APC
there is now a plethora of rules governing how the hospital and the
physician group is to code for the resources they expend on the care
of each patient. In an electronic medical record environment these
rules can be arithmetically expressed and the proper codes derived
automatically. We believe CareLyncED (TM) provides the added advantage
of a continuous compliance audit trail so there is never a question of
billing fraud and abuse exposure.
o The need for a real-time practice information system to significantly
impact medical error prevention. The recent Institute of Medicine
report alleging over 100,000 patient deaths per year due to medical
errors has received wide press coverage. The public is demanding
action. At the same time, most ED practitioners know that little
progress is possible in this area without harnessing the decision
support and continuous error checking powers of a computerized system.
Paper-based systems are overwhelmed and fraught with deficiencies that
no amount of management intensity can possibly correct.
o The increasing computer literacy of healthcare professionals. As
recently as five years ago a majority of healthcare professionals were
unfamiliar with computers. With the advent of the web, e-mail and
various other advances, this is no longer true today. We believe
healthcare professionals are more open than ever before to the power
of computers and to the possibility that they might improve the
quality of their medical practice.
Competition
While there are perhaps fifty competitors offering ED products that deal
with some aspect of the ED medical care process, there are no more than a
handful of vendors attempting to field a full-function system such as CareLyncED
(TM). MedHost has perhaps one hundred installations of its system but currently
lacks physician documentation capability. CyberPlus has approximately the same
number of customers and is in the process of beta testing some parts of its
physician documentation solution. Our current market intelligence shows that no
one has more full-function installations than does Emergisoft (TM) with its
original DOS-based product. The field remains wide open for an industry standard
setter and we intend for that to be CareLyncED (TM).
Emergisoft currently has installations of its original DOS-based product at
several high profile and prestigious hospitals, such as: Mt. Sinai and St
Vincent's in New York City; The Oakwood System in Detroit; and The Riverside
System in Newport News.
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Physician Advisory Committee
Emergisoft has an established physician advisory committee. This committee
of well-known, respected national doctors will assist Emergisoft in future
product development, offering the perspectives of ED physicians across the
country. The group is composed of Dr. Ron Hellstern, founder of PrimaCare and
MEPA, Dallas, Texas; Dr. Michael Bain, TriHealth Emergency Services, a
four-hospital group in Cincinnati, Ohio; Dr. Eduardo Gonzales, Medical Director
of St. Vincents Hospital in Manhattan, New York; Dr. Paul Jordan, Medical
Director at St. Elizabeth Hospital in Elizabeth, New Jersey; and Dr. Michael
Bourland of Summit Medical Services in Atlanta, Georgia.
Government Regulation
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. For example, the recently issued
rules under the Health Information Portability and Accountability Act of 1996
(HIPAA) will have a direct impact on the healthcare industry by requiring
identifiers and standardized transactions/code sets and necessary security and
privacy measures in order to ensure the protection of patient health
information. These factors affect the purchasing practices and operation of
healthcare organizations. Federal and state legislatures have periodically
considered programs to reform or amend the U.S. healthcare system at both the
federal and state level and to change healthcare financing and reimbursement
systems. These programs may contain proposals to increase governmental
involvement in healthcare, lower reimbursement rates or otherwise change the
environment in which healthcare industry participants operate. Healthcare
industry participants may respond by reducing their investments or postponing
investment decisions, including investments in Emergisoft's products and
services. We cannot predict with any certainty what impact, if any, such
proposals or healthcare reforms might have on our results of operations,
financial condition or business.
Employees
Emergisoft currently employs thirty individuals. The majority of the
employees perform their functions from the corporate headquarters, except for
our regional sales staff. Administration is made up of six full-time employees.
Sales and marketing currently has five full-time employees with several openings
for regional representatives to be filled. Client services includes the clinical
support and help-desk staff and is made up of ten people. Technical services/
development, which includes all technical engineers, is comprised of nine
people.
Recent Development
In a continuing effort to expand our operations throughout the United
States, on July 23, 2001, we signed a letter of intent to acquire Austin,
Texas-based EmSTAT Corporation, a subsidiary of CyberPlus. We believe an
acquisition of EmSTAT and its "Total Solution" program, combined with the
technologically advanced CareLyncED (TM) solution, will further enhance our
ongoing effort to increase our market share, build on our growing number of
strategic alliances, expand our vertical marketing capabilities and establish
ourselves as the leader in emergency department patient management automation.
In the acquisition, which is subject to a number of contingencies, including
satisfactory completion of due diligence, we would acquire all the assets,
properties, contract rights, and the entire business and goodwill of EmSTAT.
6
Management's Discussion and Analysis
Results of Operations for the Three Months Ended March 31, 2001 Compared to the
Three Months Ended March 31, 2000
Revenues
We recognize software license revenues consistent with Financial Accounting
Standards Board (FASB) Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION
and Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
These statements provide guidance on applying generally accepted accounting
principles in recognizing revenue.
During 1999, 2000 and the first quarter of 2001 our revenues were generated
by license fees, maintenance fees and equipment sales pertaining to our ICUS
based product. We will replace the ICUS based product called Emergisoft with a
newly developed product called CareLyncED (TM) and no longer sell the ICUS based
product. We continue to provide software support to our existing customer base
using the ICUS based product. In the future, we expect to generate revenue
through the sale of the newly developed product called CareLyncED (TM) and
license and professional fees pertaining to GroupLyncEM (TM). We expect that the
majority of future revenues will be generated from license and professional fees
pertaining to CareLyncED (TM).
We plan to aggressively market the CareLyncED (TM) and GroupLyncEM (TM)
products through the addition of a national sales staff, advertising campaigns
and attendance at tradeshows for emergency department physicians, nurses and
hospital information technology professionals. No assurances can be given that
any of the marketing efforts will result in revenue.
Revenues related to license fees and maintenance revenues for the quarter
ended March 31, 2001 were $109,441, compared to $279,837 in the same period last
year. The decrease in revenues of $170,396 is due to lower license revenues
recognized in 2001 offset by an increase of $14,546 in maintenance revenue. In
the first quarter of 2000, we recognized $212,000 in license revenue from one
customer, which had been deferred from a previous year. The remainder of our
revenue results from monthly maintenance fees. We currently support seven
clients.
Cost of Revenues
Cost of revenues include salaries, commissions, cost of hardware, licensing
fees paid to third party vendors, product duplication, manuals and miscellaneous
costs related to the actual installation of the product at a client site.
We did not record any costs related to revenue in the first quarter of 2001
compared to $57,411 recognized in the same period of 2000. The cost of revenue
in the first quarter of 2000 was related to revenue deferred from previous
years.
We expect cost of revenues to increase in the future as we develop a
comprehensive customer service department, which will manage installations of
CareLyncED (TM) and GroupLyncEM (TM), and support existing and new clients under
support and maintenance agreements. We will provide a twenty-four hour, seven
day a week support for clients. These expenses primarily will consist of the
costs of additional personnel.
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General and Administrative Expenses
General and administrative expenses include salaries and benefits,
professional services fees, facilities costs, advertising, and other expenses
related to operations of our executive, sales and financial functions.
General and administrative expenses for the first quarter 2001 were
$973,748 compared to $1,114,754 in 2000. The reduction in 2001 was due, mainly,
to lower attorney fees. We expect general and administrative expenses to
increase in the future as we add personnel in administrative support roles as
well as sales and marketing positions.
Development Expenses
Development expenses consist of costs related to the development of
CareLyncED (TM) and GroupLyncEM (TM). Product development expenses increased in
the first quarter 2001 to $953,379 from $47,182 in the first quarter of 2000 due
to accelerated efforts to complete the CareLyncED (TM) product and the use of
outside contractors.
We believe that continued investment in the development of our products is
critical to attaining our strategic objectives and as a result we expect to
continue to incur development costs related to enhancements and testing of our
current products. To date, all software development costs have been expensed as
incurred.
Legal Proceedings
In December 1999, a stockholder and former officer of Emergisoft filed suit
in federal court alleging that we were infringing on a copyright for the ICUS
database and tool set that he claims to own personally. Our current service
offering uses ICUS at all current customer sites. We believe we have an existing
license to use and sublicense ICUS.
In January 2000, the court issued a preliminary injunction allowing us to
keep one copy of the ICUS source code for purposes of providing support to our
current customers, but prohibiting us from selling and/or marketing the current
ICUS-based product.
On January 8, 2001, the federal court granted our motion for summary
judgment, dismissing all of the former officer's claims and dissolving the
preliminary injunction. The court is now reviewing the plaintiff's motion to set
aside that summary judgment and our motion for attorney's fees.
The former officer also has made us a party in his divorce action, which is
pending in a Tarrant County, Texas district court. Many of the claims asserted
in this action are the same or essentially the same as the claims which were
dismissed by the federal court. We will seek dismissal of those claims at the
appropriate time and contest the remainder of the plaintiff's claims vigorously.
In February 1999, a settlement agreement was entered into with a customer
involving a claim for refund of license fees paid to the Company whereby the
Company is required to pay the customer a total of $342,000 plus interest of 6%
on a portion of the outstanding balance and is required to assist the customer
in re-selling the hardware component sold by the Company to the customer. The
lesser of the proceeds, or $60,000, was to be applied directly to the
outstanding settlement balance due to the customer by May 31, 1999. The balance
of the settlement was to be repaid at a rate of $4,000 monthly, to be
8
applied to interest first, at a rate of 6%, then to the outstanding principal
balance. A balloon payment for the remaining outstanding balance is due December
1, 2003.
Results of Operations for the Year Ended December 31, 2000 Compared to the Year
Ended December 31, 1999
Revenues
Revenue for the year ended December 31, 2000 was $920,428 compared to
$1,416,402 for the year ended December 31, 1999, a decrease of 35 %. The
decrease was due to a court order prohibiting Emergisoft from the sale or
marketing of its ICUS based product. See "Legal Proceedings" above. Revenue in
2000 consisted of license revenue of $645,075 which had been deferred in 1999
pending customer acceptance. In addition, $262,949 was earned in 2000 from
software maintenance agreements with our existing customers.
Cost of Revenues
Cost of revenue in 2000 was $184,268 compared to $565,262 in 1999,
reflecting the reduced sales of our ICUS based product.
In the future, we expect additional costs of revenue related to client
support and maintenance agreements as we build a customer base that will be
using our new products CareLyncED (TM) and GroupLyncEM (TM). Most of these costs
will be related to increased headcount to staff customer support positions.
General and Administrative Expenses
Our general and administrative expenses increased to $6,390,406 in 2000
from $3,379,935 in 1999. This increase was primarily due to stock based
compensation expense. The stock based compensation expense for 2000 was
$4,502,220 compared to $1,273,000 in 1999. In 2000, additional headcount was
added in anticipation of the product launch of CareLyncED (TM) and GroupLyncEM
(TM), new promotional marketing efforts also were implemented in the fourth
quarter of 2000. Professional fees also increased due to the merger completed in
May 2001. See "Description of Business; Overview."
Development Expenses
Development expenses consist of costs related to the development of
CareLyncED (TM) and GroupLyncEM (TM). Product development expenses increased in
2000 to $2,500,311 from $405,075 in 1999. The increase is due to the increased
use of outside contractors and our effort to accelerate the completion of
CareLyncED (TM) and GroupLyncEM (TM). In 2000, $2,451,000 was paid to outside
contractors for development expenses, $1,217,000 of this amount was paid through
the issuance of common stock. In 1999, $80,560 was paid to outside contractors
for development and of this amount $18,000 was paid through the issuance of
common stock. We use our own personnel as well as outside contractors in the
development efforts of our new products CareLyncED (TM) and GroupLyncEM (TM). We
expect the general release of CareLyncED (TM) and GroupLyncEM (TM) early in the
third quarter of 2001. We will continue to incur development costs related to
enhancements to our current products. There is no assurance that the general
release of CareLyncED (TM) and GroupLyncEM (TM) will occur. General release is
dependent on satisfactory completion of ongoing functionality and performance
testing of the products.
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Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of our common stock and advances from stockholders. In 2000, we
issued 20,437,237 shares of common stock in a private placement for proceeds of
approximately $6,920,000. In addition, we issued 1,314,376 shares of common
stock in exchange for conversion of related party notes and advances totaling
$341,862. In 2000, we also issued 6,880,479 shares of common stock to a
stockholder for anti-dilution protection granted in connection with an
investment the stockholder made in 1999. In 1999, we issued 1,975,147 shares of
common stock in a private placement of common stock and approximately 3,250,000
shares of common stock to employees and related parties for proceeds of
approximately $909,000. As of March 31, 2001 we had approximately $2,000,000 in
cash and cash equivalents.
We have also historically issued common stock and stock options to vendors
as consideration for goods and services received. In 2000 we issued 2,417,692
shares of common stock and options to acquire 746,000 shares of common stock to
third party vendors. In addition, we issued 6,875,000 shares of common stock to
a shareholder in return for a consulting agreement. We recorded charges totaling
approximately $4.1 million in 2000 related to stock for services transactions.
In 1999, we issued 45,000 shares of common stock and options to acquire 171,976
shares of common stock to vendors and recorded charges totaling $65,457 related
to stock for services transactions.
Other than funding our ongoing operations, including the development of our
software products, our primary uses of cash have been to acquire fixed assets
and repay our indebtedness. We acquired fixed assets in the amount of $22,730
and $56,690 in 2000 and 1999 respectively. We repaid $295,848 and $113,499 of
our indebtedness in 2000 and 1999, respectively.
We have available lines of credit totaling $1.5 million that were provided
by two of our stockholders. Advances, if any, can be converted to common stock
at the option of the stockholders' with a conversion price of $0.25 per share.
We utilize significant capital to design, develop and commercialize our
products. During the remainder of 2001, we intend to fund the marketing of our
products and related operational activities by utilizing our lines of credit and
cash contributed from operations. We may need additional capital to further
develop or enhance our current planned product offerings, introduce new products
and services, and to address unanticipated competitive threats, technical
problems, economic conditions or for other requirements. We anticipate that if
additional capital is required such financing may include the issuance of
convertible debt, convertible preferred stock, common stock or other equity
securities in exchange for a cash investment in us. There can be no assurance
that any such additional financing will be available to us on acceptable terms,
or at all. Additional equity financing may involve substantial dilution to our
then existing stockholders. In the event we are unable to raise additional
capital, we may be required to substantially reduce or curtail our activities.
At March 31, 2001, we had no material commitments for capital expenditures.
Risk Factors
History of Losses
For our fiscal year ended December 31, 2000, we incurred net losses of
$8,405,545. We had net losses of $3,298,359 in 1999. We have incurred net losses
of $1,800,984 for the three months ended March 31, 2001 and, as of March 31,
2001, we have an accumulated deficit of $15,251,197. These continuing losses may
increase from current levels. If our revenues do not increase substantially, we
may
10
never become profitable. Even if we do achieve profitability, we may not sustain
profitability on a quarterly or annual basis in the future.
Dependence on Principal Product
We will derive a significant percentage of our revenue from sales of our
core system, CareLyncED (TM). As a result, any event adversely affecting sales
of the product could have a material adverse effect on our results of
operations, financial condition or business. Revenue associated with CareLyncED
(TM) could fail to materialize as a result of several factors, including price
competition and sales practices. There can be no assurance that we will be
successful in marketing our current products or any new or enhanced products.
Dependence on Proprietary Software
Our success is dependent to a significant extent on our ability to protect
the proprietary and confidential aspects of our software technology. Our
software technology is not patented and existing copyright laws offer only
limited practical protection. We rely on a combination of trade secret,
copyright and trademark laws, license agreements, nondisclosure and other
contractual provisions and technical measures to establish and protect our
proprietary rights in our products. There can be no assurance that the legal
protections afforded to us or the steps taken by us will be adequate to prevent
misappropriation of our technology. In addition, these protections do not
prevent independent third-party development of competitive products or services.
We believe that our products, trademarks and other proprietary rights do not
infringe upon the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against us in the future or that any such assertion will not require us to enter
into a license agreement or royalty arrangement with the party asserting the
claim. As competing healthcare information systems increase in complexity and
overall capabilities and the functionality of these systems further overlap,
providers of such systems may become increasingly subject to infringement
claims. Responding to and defending any such claims may distract the attention
of our management and otherwise have a material adverse effect on our results of
operations, financial condition or business.
Risks Related to Technological Change and New Product Development
The market for our products is characterized by rapid change and
technological advances requiring ongoing expenditures for research and
development and the timely introduction of new products and enhancements of
existing products. Our future success will depend in part upon the ability to
enhance our current products, to respond effectively to technological changes,
to sell additional products to our existing client base and to introduce new
products and technologies that address the increasingly sophisticated needs of
our clients. We will devote significant resources to the development of
enhancements to our existing products and the migration of existing products to
new software platforms. There can be no assurance that we will successfully
complete the development of new products or the migration of products to new
platforms or that our current or future products will satisfy the needs of the
market for ED software systems. Further, there can be no assurance that products
or technologies developed by others will not adversely affect our competitive
position or render our products or technologies noncompetitive or obsolete.
Quality Assurance and Product Acceptance Concerns
Healthcare providers demand the highest level of reliability and quality
from their information systems. Although we devote substantial resources to
meeting these demands, our products may, from
11
time to time, contain errors. Such errors may result in loss of, or delay in,
market acceptance of our products. Delays or difficulties associated with new
product introductions or product enhancements could have a material adverse
effect on our results of operations, financial condition or business.
Many healthcare providers are consolidating to create integrated healthcare
delivery systems with greater market power. These providers may try to use their
market power to negotiate price reductions for our products and services. As the
healthcare industry consolidates, our client base could be eroded, competition
for clients could become more intense and the importance of acquiring each
client is likely to become greater.
Risk of Product-Related Claims
Certain of our products provide applications that relate to patient medical
records and treatment plans. Any failure of the products to provide accurate,
confidential and timely information could result in product liability or breach
of contract claims against us by our clients, their patients or others. We
intend to maintain insurance to protect against claims associated with the use
of our products, but there can be no assurance that such insurance coverage will
be available at a reasonable cost or, if available, will 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 or business. Even unsuccessful claims could
result in the expenditure of funds in litigation, as well as diversion of
management time and resources. There can be no assurance that we will not be
subject to product liability or breach of contract claims, that such claims will
not result in liability in excess of our insurance coverage, that our insurance
will cover such claims or that appropriate insurance will continue to be
available to us in the future at commercially reasonable rates. Emergisoft has
had actual claims related to the premature release of its Windows based product
in 1997. These claims have currently been settled; however, we can give no
assurance that we will not have similar or other product related claims, or that
we could settle other similar product related claims.
Risks Associated with Government Regulation
The healthcare industry in the United States is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of healthcare organizations. During the past several years, the
healthcare industry has been subject to increasing levels of government
regulation of, among other things, reimbursement rates and certain capital
expenditures. From time to time, certain proposals to reform the healthcare
system have been considered by Congress. These proposals, if enacted, may
increase government involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for our clients. Healthcare
organizations may react to these proposals and the uncertainty surrounding such
proposals by curtailing or deferring investments, including those for our
products and services. We cannot predict with any certainty what impact, if any,
such proposals or healthcare reforms might have on our results of operations,
financial condition or business.
Control by Existing Management and Stockholders
Our directors, executive officers and holders of more than 5% of our shares
beneficially own approximately 64.56% of the outstanding shares of our common
stock. An agreement or understanding to act in concert would allow them to
continue to exercise control over our affairs, to elect the entire Board of
Directors and to control the disposition of any matter submitted to a vote of
stockholders.
12
Reliance on Management and Key Personnel
Management decisions of our business will be made exclusively by our
directors and officers. Our stockholders will have no right or power to take
part in management other than their right to vote for the election of our
directors. Our operations are dependent on the continued efforts of our
executive officers and senior management. Furthermore, we will likely be
dependent on the senior management of any businesses acquired in the future. If
any of these persons becomes unable or unwilling to continue in his or her role
with us, or if we are unable to attract and retain other qualified employees,
our business or prospects could be adversely affected. Although we have entered
into an employment agreement, which includes confidentiality and non-compete
provisions, with each of our key executive officers, there can be no assurance
that any individual will continue in his present capacity with us for any
particular period of time. Our success is also dependent to a significant degree
on our ability to attract, motivate and retain highly skilled sales, marketing
and technical personnel, including software programmers and systems architects
skilled in the computer language with which our products operate. 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. Although we have been successful to date in attracting and retaining
skilled personnel, there can be no assurance that we will continue to be
successful in attracting and retaining the personnel we require to successfully
develop new and enhanced products and to continue to grow and operate
profitably.
Possible Volatility of Stock Price
The market price of our common stock may be subject to significant
fluctuations in response to numerous factors, including variations in our annual
or quarterly financial results or our competitors, changes by financial research
analysts in their estimates of our earnings, conditions in the economy in
general or in the healthcare or technology sectors in particular, announcements
of technological innovations or new products or services by us or our
competitors, proprietary rights development, unfavorable publicity or changes in
applicable laws and regulations (or judicial or administrative interpretations
thereof) affecting us or the healthcare or technology sectors. Moreover, from
time to time, the stock market experiences significant price and volume
volatility that may affect the market price of the common stock for reasons
unrelated to our performance.
Reliance on Third Party Vendors
We depend on third-party vendors to provide software consulting and
development services. We currently obtain most software consulting and
development services from InfoSphere Incorporated. We cannot be certain that
InfoSphere Incorporated will continue to provide its services to us at
commercially reasonable prices or at all. Difficulties in obtaining alternative
sources of services, if required, could adversely affect our business, future
financial condition or operating results. Moreover, failure of InfoSphere
Incorporated to provide to us the requested software consulting and development
services for any reason would cause interruption in our ability to update,
support and maintain our products, which may materially and adversely affect our
business, financial condition and operating results.
Competition
We experience significant competition in conducting our business, and we
expect such competition to continue to increase. A number of our competitors
offer a broader variety of services and products and may have done so for longer
periods of time. Our current and prospective competitors include large
companies, some of which may be better known than us and may have greater
financial, technical and marketing resources than we do.
13
As a result of increased competition in our industry, we expect to
encounter significant pricing pressure. We cannot be certain that we will be
able to offset the effects of any required price reductions through an increase
in the volume of our sales, higher revenues from other business services, cost
reduction or otherwise, or that we will have the resources to continue to
compete successfully. You should read "Description of Business; Competition" for
further discussion of the competitors in our industry and competing products.
Description of Property
We occupy a 10,000 square-foot facility built in 1988 located in Arlington,
Texas, where Emergisoft has been located since October 31, 1998. We have entered
into a triple net lease that controls our costs for the next two years. The
current rate is $10,833 per month plus common area maintenance, tax and
insurance charges that are estimated to be approximately $2,793 per month. The
facility has approximately 3,000 square-feet of space devoted to training
facilities. The training facilities provide clients with the advantage of
interfacing in person with our key employees while they are on site.
Security Ownership of Certain Beneficial Owners and Management
The following table presents information regarding beneficial ownership of
our common stock, as of June 30, 2001, by each of our directors and executive
officers, all of our directors and executive officers as a group and each person
who we know beneficially owns more than 5% of our common stock.
Unless otherwise indicated in the footnotes, each person has sole voting
and dispositive power over the shares indicated as owned by that person, and the
address of each person is the same as our address.
14
Directors, Executive Officers and 5% Beneficial Share Ownership
--------------------------
Stockholders
------------
Percent
Directors Number of Shares of Class
--------- ---------------- --------
Richard Manley (1)(2) 1,039,063 2.08%
Dan Witte (3) 962,500 1.93%
Ron Hellstern (4) 602,595 1.22%
Kenna Bridgmon (5) 1,981,250 4.05%
Ash Huzenlaub 1,329,549 2.72%
Jason Sear - -
Cameron Ware (6) 2,386,048 4.88%
Executive Officers Not Named Above
----------------------------------
Joe Eppes (7) 541,250 1.10%
James Williams - -
Directors and executive officers as a group 8,842,255 17.09%
Holders of 5% or More Not Named Above
-------------------------------------
James A. Ryffel (8)(9) (10) 9,097,013 18.44%
3113 South University Drive, Suite 600
Fort Worth, TX 76109-5617
Berlwood V, L.P. (10) 15,767,550 32.26%
1201 North Watson Road, Suite 100
Arlington, TX 76006
- ------------------------------------------------------------------------------
(1) Includes 39,063 shares issued to the RSM Family Limited Partnership.
Richard Manley is the control person for the RSM Family Limited
Partnership.
(2) Includes 1,000,000 shares of common stock issuable upon exercise of
options.
(3) Includes 900,000 shares of common stock issuable upon exercise
of options.
(4) Includes 550,000 shares of common stock issuable upon
exercise of options.
(5) Includes 1,025,000 shares issued to the Benjamin
George Bridgmon 1999 Trust. Kenna Bridgmon is a control person of the
Benjamin George Bridgmon 1999 Trust.
(6) All shares of common stock are
issued to InfoSphere Incorporated. Cameron Ware, a director, is a control
person of InfoSphere Incorporated.
(7) Includes 428,750 shares of common
stock issuable upon exercise of options.
(8) James A. Ryffel is a control
person of Woodcrest Capital, L.L.C.
(9) Includes 462,355 shares of common
stock issuable upon exercise of a warrant
15
(10) Subject to an Agreement
Among Stockholders. See "Certain Relationships and Related Transactions;
Common Stock Purchase Agreement."
Directors and Executive Officers
The following table sets forth information regarding the names, ages as of
June 30, 2001, and position(s) held by our directors and executive officers.
Additional information concerning each individual follows the table.
Name Age Position Director Since Officer Since
- ---- --- -------- -------------- -------------
Richard Manley 47 Chairman of the Board, Chief Executive 5/22/01 5/22/01
Officer and President
Dan Witte 48 Vice President - Operations and Finance, 5/25/01 5/25/01
Chief Operating Officer, Chief Financial
Officer and Director
James Williams 48 Chief Information Officer and Chief - 5/25/01
Technology Officer
Kenna Bridgmon 52 Vice President - Client Services and Director 5/25/01 5/25/01
Ron Hellstern 58 Vice President - Medical Affairs and Director 5/25/01 5/25/01
Joe Eppes 58 Vice President - Administration, Corporate - 5/25/01
Secretary and Treasurer
Ash Huzenlaub 25 Director 5/25/01 5/25/01
Jason Sear 33 Director 5/25/01 5/25/01
Cameron Ware 41 Director 5/25/01 5/25/01
Prior to the merger with Emergisoft in May 2001, our sole officer and
director was Lionel L. Drage. Upon the consummation of the merger, the officers
and directors of Emergisoft became our officers and directors.
RICHARD MANLEY has been Chief Executive Officer of Emergisoft since
September of 2000. Previously, he was President and CEO of Cardio Vascular
Concepts, Inc. (CVC). At CVC, he led the management team that acquired the
company from its founder. He is a respected authority on medical industry sales
and distribution channels and sits on the board and is President-Elect of IMDA,
the Independent Medical Distributors Association. Under his leadership, CVC
re-engineered and grew into a key regional player in the Southwest and Rocky
Mountain markets.
Mr. Manley currently directs the implementation of our forward strategies
including management, e-commerce, product development and the development of a
national marketing and
16
distribution platform. He also has the primary responsibility, because of his
contacts, knowledge and presence in the industry, of acquiring new technologies
to feed our technology innovation introductions.
Mr. Manley has an extensive background in specialty market marketing,
including national and regional sales management with CVC, Ballard Medical
Products and American Hospital Supply. He is a graduate of Vanderbilt
University, where he played varsity baseball. After graduation, he served with
distinction as an Artillery and Intelligence Officer in the United States Marine
Corps.
DAN WITTE has served as the Chief Operating Officer of Emergisoft since
June of 2000, and Vice President-Finance and Chief Financial Officer since June
of 1998. He joined the Emergisoft Board of Directors in June of 2000, at which
time he served as Chairman of the Board.
Mr. Witte is an accomplished CPA with over 26 years experience in public
and private practice. He began his career with Ernst & Young LLP and directed
audit engagements for publicly and privately owned companies with revenues
ranging from $30 million to over $1 billion annually. Mr. Witte has been
involved with annual and quarterly filings with the Securities and Exchange
Commission for both New York and American Stock Exchange companies, as well as
reports in connection with various filings for public debt and stock offerings.
Additionally, he has provided management, advisory, financial, tax and
consulting services to various private companies involved in manufacturing, real
estate, management, and medical services. Mr. Witte is a member of the Fort
Worth Chapter of the Texas Society of Certified Public Accountants and American
Institute of Certified Public Accountants.
Mr. Witte served as President and CEO of D. R. Professional Services, Inc.
from 1988 to 1998. From 1975 to 1987 Mr. Witte was employed by Ernst & Young LLP
as a Senior Manager. Mr. Witte graduated from the University of Texas at
Arlington in December of 1975. He attended Texas A&M University in 1971 and 1972
on a baseball scholarship.
JAMES WILLIAMS joined Emergisoft as the Chief Information Officer and Chief
Technology Officer at the end of February 2001. He has a wealth of experiences
in the healthcare and technology industries, where he has held senior management
and executive positions. Prior to joining Emergisoft, he was President,
Strategic Alliances Group, at BTrade.com. His group responsibilities included
OEM alliance business development in the healthcare, energy utilities, EAI, and
government industry sectors for security and data transformation enablement for
other software manufacturers in the B2B world.
Mr. Williams is responsible for both the internal and external technology
direction of Emergisoft. These areas include software development, the internal
infrastructure, the technology support strategies and all technologies used by
Emergisoft for product design and software and hardware support. He will assist
the management team in the analysis of the acquisition of new technology
organizations and in the selection of appropriate organizations with whom to
create strategic alliances.
Mr. Williams has extensive experience in healthcare as the Chief Operating
Officer in five different hospitals where he was also responsible for
information systems security. At Perot Systems his expertise was tapped for
numerous software projects. Mr. Williams is a graduate of Slippery Rock
University, Georgetown University and Yale University, having received degrees
in both technology and business management. He has also continued his military
education and most recently was a member of the U.S. Army War College Class of
2000. He has and continues to serve the United States Marine Corps in the
reserves as a Colonel with 27 total years of active and reserve service.
KENNA BRIDGMON is one of the founders of Emergisoft and has overseen all
aspects of the clinical content and design of Emergisoft's product since the
inception of the product in 1989. She has over thirty years of experience in
healthcare, with twenty-five of those in the healthcare information
17
systems environment. Prior to starting Emergisoft, Ms. Bridgmon was the Director
of Client Services for Continental Healthcare Systems, Inc., the leading
provider of hospital pharmacy and materials management systems. From 1985 to
1992, Ms. Bridgmon served as an independent healthcare consultant handling
project management, system evaluations and recommendations for various hospitals
and healthcare facilities. From 1984 to 1985, Continental Healthcare employed
Ms. Bridgmon as the Director of Client Services. From 1979 to 1984, Ms. Bridgmon
was the Director of Clinical Systems for Jewish Hospital in St. Louis,
responsible for all computerization of patient care information systems. From
1975 to 1979, Ms. Bridgmon served as Senior Clinical Installer for Technicon
Data Systems.
DR. RON HELLSTERN is our Vice President overseeing Medical Affairs. He is
currently Chairman of Medical Edge Healthcare Group, Inc., a principal and
President of Medical Practice Productivity Consultants, Executive / Medical
Director of Metrocrest Medical Services Inc., and is a member of the Faculty for
the American College of Emergency Physicians. Dr. Hellstern served as CEO for
Metroplex Emergency Physicians Associates, P.A. from 1978 to 1997; President,
Medtrust Healthcare Services, Inc. from 1988 to 1996; and Chairman of the
Department of Emergency Medicine, RHD and Trinity Medical Centers from 1979 to
1989. Dr. Hellstern has held a number of additional directorships surrounding
the health industry.
JOE EPPES is our Vice President of Administration. He has been an active
officer of Emergisoft for over ten years. His experience in management,
marketing and sales has been invaluable in developing and maintaining the
infrastructure of Emergisoft. Through constant evaluation and recommendations,
he has remained a significant contributor in various positions within
Emergisoft, including Human Resources, hospital evaluations and
investor-relations and has the distinction of making the first sale of
Emergisoft's product.
Mr. Eppes was the founder of Tarver & Eppes, Inc., a multi-office real
estate company in the Dallas-Fort Worth area. As a commercial real estate
broker/investor, Mr. Eppes was responsible for several developments, such as the
900-acre Walnut Creek Addition and Country Club in Mansfield, Texas. The Western
Company of North America (Eddie Chiles) selected Mr. Eppes to oversee their
nationwide expansion of sites and facilities (1979-1985). He was responsible for
an annual budget of $10 million. His involvement with Mr. Chiles led to many
interesting projects and assignments, several involving the Texas Rangers
Baseball Club.
ASH HUZENLAUB is a principal and partner of Woodcrest Capital, a Fort
Worth, Texas, based diversified venture finance firm. In March 1999, Mr.
Huzenlaub co-founded an Internet-based public relations industry Application
Service Provider. Mr. Huzenlaub serves as Public Relations and Web Development
Strategy Director to Hispanic Television Network, Inc., the third largest
Spanish-language television broadcaster in the United States. In 1997, Mr.
Huzenlaub created the "Independent Study for Entrepreneurship" with sponsorship
from Apple Computer Company and Southwest Airlines. The study led to what is now
the Ryffel Center for Entrepreneurial Studies at Texas Christian University. In
1998, Mr. Huzenlaub served as President of TCU's Financial Management
Association. Mr. Huzenlaub is on the Board of Advisors for web development firm
Interactive Associates, TCU's Ryffel Entrepreneurship Center, and serves as
Chairman of the North Texas Run to the Cross Road Race, benefiting youth
ministries. Mr. Huzenlaub holds a B.B.A. Degree in Finance and Marketing, 1998,
from Texas Christian University. He participated in the Leadership Studies
program at Regents College, London, England. He also attended the Caruth
Entrepreneurship Center program at Southern Methodist University.
JASON SEAR, a partner of Berlwood V, L.P., is involved in several local and
nationwide business enterprises as an investor and executive team member.
Educated in economics at the University of St. Thomas, Mr. Sear sits on several
boards and oversees the financial management of a variety of
18
partnerships and corporations, primarily related to real estate investment,
corporate development and business finance.
CAMERON WARE began his career as an engineer at General Dynamics. Several
years later, he left the aerospace industry to pursue an interest in software
customization. Mr. Ware realized a unique opportunity existed in applying
engineering principles and skills to solve business problems, which led him and
his co-founders, Wendy Ware and James Nikirk, to establish InfoSphere
Incorporated in 1994. Cameron is the President of InfoSphere. With technology
demand shifting, Mr. Ware began repositioning InfoSphere in 1998 for eBusiness
consulting. Under his leadership, InfoSphere, including its Monterrey, Mexico
subsidiary, has grown from three employees in 1994 to more than one hundred
today. Mr. Ware is a graduate of the University of Texas at Arlington with a
B.S. in Mechanical Engineering.
Executive Compensation
Summary Compensation Table
The following Summary Compensation Table sets forth the annual and long
term compensation during our previous three fiscal years for our Chief Executive
Officer, our two most highly-compensated executive officers other than the Chief
Executive Officer and one additional executive officer who was not elected until
February 2001. The compensation of all of the officers other than Mr. Kropf and
Mr. Drage was paid to them by Emergisoft prior to our acquisition of Emergisoft.
19
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Other Annual Restricted Securities
Name and Principal Bonus Compensation Stock Underlying
Position Year Salary ($) ($) ($) Awards ($) Options (#)
--------- ---- ----------- ---- ------------- ---------- -----------
Robert Kropf (1) 1998 - - - - -
President and Chief Executive 1999 - - 25,000 (2) - -
Officer 2000 - - - - -
Lionel L. Drage (3) 1998 - - - - -
President 1999 - - - - -
2000 - - - - -
George A. Bridgmon (4) 1998 12,000 - - - -
Chief Executive Officer 1999 - - - - -
2000 - - - - -
Harold O. Branson (5) 1998 10,000 - - - 663,000
Chief Executive Officer, 1999 132,000 - - - -
President 2000 120,000 - - - 37,500
and Chief Operating Officer
Richard Manley (6) 1998 - - - - -
Chairman of the Board, 1999 - - - - -
Chief Executive Officer and 2000 41,833 - - - 2,000,000
President
Dan Witte (7) 1998 6,000 - - - 200,000
Vice President - Operations 1999 119,000 - - - 1,650,000
and Finance, Chief Financial 2000 128,500 - - - 1,000,000
Officer and Chief Operating Officer
Ron Hellstern (8) 1998 - - - - -
Vice President - Medical Affairs 1999 - - - - -
2000 67,500 - - - 1,550,000
James Williams (9) 1998 - - - - -
Chief Information Officer and 1999 - - - - -
Chief Technology Officer 2000 - - - - 150,000
- --------------------------------
(1) Robert Kropf was our President and CEO prior to the Emergisoft merger on
May 25, 2001. He was elected on April 30, 1999 and resigned on December 4,
1999.
(2) For his service as sole officer and director, we issued to Mr. Kropf
25,000,000 shares of common stock, which were valued at $25,000.00.
(3) Lionel L. Drage was elected as our President on December 4, 1999 and served
in this capacity until he resigned on May 22, 2001.
20
(4) George A. Bridgmon was elected Chief Executive Officer of Emergisoft on May
20, 1998 and served in this capacity until his resignation on July 20,
1998.
(5) Harold O. Branson was assigned the authority and responsibilities of Chief
Executive Officer of Emergisoft on July 20, 1998. He resigned on December
1, 2000.
(6) Richard Manley was elected Chief Executive Officer and President of
Emergisoft on October 6, 2000, and Chairman of the Board of Emergisoft on
November 10, 2000.
(7) Dan Witte was elected Vice President - Finance and Chief Financial Officer
of Emergisoft on June 5, 1998. He was elected Chief Operating Officer on
August 24, 2000.
(8) Ron Hellstern was elected Vice President - Medical Affairs of Emergisoft on
October 6, 2000.
(9) James Williams was elected Chief Information Officer and Chief Technology
Officer of Emergisoft on February 28, 2001. Mr. Williams' annual
compensation is $132,000, and he was granted an option to acquire 150,000
shares of common stock on March 31, 2001.
Stock Options Granted in 2000
The following table contains information concerning stock option grants by
Emergisoft made to the executive officers named in the Summary Compensation
Table appearing above during the fiscal year ended December 31, 2000. No stock
appreciation rights were granted to individuals during 2000. Each option has a
maximum term of either 5 or 10 years, as indicated, subject to earlier
termination in the event of the option holder's cessation of employment with us.
Pursuant to the Emergisoft merger agreement, we assumed all of the options
granted by Emergisoft and they now represent options to acquire shares of our
common stock.
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price per Expiration
Name Granted In 2000 (1) Share ($) Date
---- ------- ----------- --------- ----
Robert Kropf(2) - - - -
Lionel L. Drage(2) - - - -
George A. Bridgmon(2) - - - -
Harold O. Branson 37,500(3) 0.67 0.64 04/01/10
Richard Manley 1,000,000(4) 17.77 0.01 09/11/10
1,000,000(5) 17.77 0.64 09/11/10
Dan Witte 1,000,000(6) 17.77 0.64 10/01/10
Ron Hellstern 1,550,000(7) 27.54 0.10 12/01/10
James Williams(8) - - - -
21
- ------------------------
(1) The aggregate number of options granted to employees in 2000 was 5,627,375.
Of these options, 203,125 have expired.
(2) This officer was not granted any stock options in 2000.
(3) These options expired in January 2001, thirty days after Mr. Branson's
resignation as an officer of Emergisoft.
(4) The options vest as to one-half of the option shares on each of September
11, 2001 and March 11, 2002.
(5) The options vest as to one-half of the option shares on each of September
11, 2001 and March 11, 2002.
(6) One-half of the option shares have vested. An additional one-fourth of the
option shares vest on each of October 1, 2001 and April 1, 2002.
(7) The options have vested as to 550,000 of the option shares, and 500,000 of
the option shares vest on each of December 1, 2001 and December 1, 2002.
(8) On March 31, 2001, James Williams was granted an option to purchase 150,000
shares. The options vest as to one-third of the option shares on each of
March 31, 2002, March 31, 2003 and March 31, 2004.
Stock Option Exercises and Fiscal Year-End Option Values
The following table contains certain information concerning the value of
unexercised options at December 31, 2000. None of the named executive officers
exercised any stock options during 2000.
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Option,
at December 31, 2000 At December 31, 2000(1)
-------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Robert Kropf - - - -
Lionel L. Drage - - - -
George A. Bridgmon - - - -
Harold O. Branson - - - -
Richard Manley 500,000 500,000 985,000 985,000
0 1,000,000 0 1,340,000
Dan Witte 400,000 0 768,000 0
500,000 500,000 670,000 670,000
Ron Hellstern 550,000 1,000,000 1,034,000 1,880,000
James Williams(2) - - - -
- ---------------
(1) The fair market value of the options for the year ended December 31, 2000
was $1.98.
(2) James Williams was not granted an option until March 31, 2001.
Employment Agreements
We have assumed Emergisoft employment agreements with each of Richard
Manley, Dan Witte and Ronald Hellstern. Mr. Manley's agreement provides for an
annual base salary of $200,000 during the first year and $250,000 during the
second year plus any bonuses to be determined annually by our Board
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of Directors. The agreement is for a term of two years. Effective as of the
expiration of such initial two-year term and as of each anniversary date
thereof, the term will be extended automatically for an additional 12-month
period on the same terms and conditions existing at the time of renewal unless,
not later than thirty (30) days prior to each such date, we or Mr. Manley give
notice to the other that the term will not be so extended. Mr. Manley's
employment agreement provides that, in the event of a termination of employment
by us without cause (other than upon the death or disability of Mr. Manley) or
by Mr. Manley for good reason (as defined in the agreement, or the non-renewal
of the employment agreement by us), Mr. Manley will be entitled to severance
payments equal to Mr. Manley's base salary as in effect immediately prior to
such termination over the longer of the then-remaining term or 24 months. As
reflected above, Mr. Manley's agreement includes a grant of options to purchase
2,000,000 shares of common stock, 1,000,000 at an exercise price of $.01 and
1,000,000 at an exercise price of $.64, with vesting occurring over the term of
the agreement.
Mr. Witte's agreement provides for an annual base salary of $150,000 during
the first year and $180,000 during the second year plus any bonuses to be
determined annually by our Board of Directors. The agreement is for a term of
two years. Effective as of the expiration of such initial two-year term and as
of each anniversary date thereof, the term will be extended automatically for an
additional 12-month period on the same terms and conditions existing at the time
of renewal unless, not later than thirty (30) days prior to each such date, we
or Mr. Witte give notice to the other that the term will not be so extended. Mr.
Witte's agreement provides that, in the event of a termination of employment by
us without cause (other than upon the death or disability of Mr. Witte) or for
good reason (as defined in the agreement, or the non-renewal of the employment
agreement by us), Mr. Witte will be entitled to severance payments equal to Mr.
Witte's base salary as in effect immediately prior to such termination over the
longer of the then-remaining term or 12 months. As reflected above, Mr. Witte's
agreement includes a grant of options to purchase 1,000,000 shares of common
stock, at an exercise price of $.64, with vesting occurring over the term of the
agreement.
Dr. Hellstern's agreement provides for an annual base salary of $150,000,
plus bonuses to be determined annually by our Board of Directors and a 1-3%
commission on annual license fees collected by us for CareLyncED (TM), not to
exceed $500,000 per year during 2001 through 2003 and $300,000 per year during
2004 through 2006. The agreement is for a term of three years. Effective as of
the expiration of such initial three-year term and as of each anniversary date
thereof, the term will be extended automatically for an additional 12-month
period on the same terms and conditions existing at the time of renewal unless,
not later than thirty (30) days prior to each such date, we or Dr. Hellstern
give notice to the other that the term will not be so extended. Dr. Hellstern's
agreement provides that, in the event of a termination of employment by us
without cause (other than upon the death or disability of Dr. Hellstern) or by
Dr. Hellstern for good reason (as defined in the agreement, or the non-renewal
of the employment agreement by us), Dr. Hellstern will be entitled to severance
payments equal to Dr. Hellstern's base salary as in effect immediately prior to
such termination over the then-remaining term and all earned commissions. As
reflected above, Dr. Hellstern's agreement includes a grant of options to
purchase 1,550,000 shares of common stock, at an exercise price of $.10, with
vesting occurring over the term of the agreement.
Each employment agreement contains a covenant not to compete with us during
the period of employment, as well as during an additional three-year period,
without our prior approval.
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Certain Relationships and Related Transactions
Kropf Share Acquisition
In January 1999, we issued 25,000,000 shares of our common stock to Robert
Kropf, one of our former officers and directors, in consideration for services
he rendered to us. Pursuant to a Share Cancellation Agreement by and between us,
Emergisoft and Mr. Kropf, 23,364,725 of the shares were canceled effective upon
the consummation of the merger with Emergisoft on May 25, 2001.
Woodcrest Consulting Agreement
In February 2000, Emergisoft entered into a consulting agreement with
Woodcrest Capital, LLC to provide, among other things, assistance with the
development and implementation of a business plan and strategy, determination of
management organizational structure and staffing needs, identification of and
recruitment of qualified personnel for Emergisoft's management, engagement and
supervision of professional advisors, and assessment of working capital needs
and assistance in arranging to finance those needs. Woodcrest received 6,875,000
shares of common stock as consideration for the consulting agreement. Emergisoft
recorded a charge of $2,800,000 in the year ended December 31, 2000 for the fair
value of the equity issued, which was to be amortized over the two-year term of
the consulting agreement. The consulting agreement was terminated in December
2000 and, as a result, Emergisoft recorded the full charge in the year ended
December 31, 2000. Woodcrest's shares were converted into shares of our common
stock as part of the Emergisoft merger transition.
InfoSphere Services Agreement
In March 2000, Emergisoft entered into a services agreement with InfoSphere
Incorporated. InfoSphere provided and continues to provide to us the majority of
the programmers that are being utilized in the development of CareLyncED (TM).
Originally, pursuant to the services agreement, Emergisoft issued shares of its
common stock to pay for 50% of the services provided by InfoSphere at a value of
$.40 per share. Under the terms of the services agreement, Emergisoft issued a
total of 2,386,048 shares of its common stock to InfoSphere. In January 2001,
Emergisoft and InfoSphere amended the services agreement to provide for payments
of cash only for services rendered by InfoSphere. The president of InfoSphere,
Cameron Ware, serves on the Company's Board of Directors. InfoSphere's shares
were converted into shares of our common stock as part of the Emergisoft merger
transaction.
Common Stock Purchase Agreement
In December 2000, Berlwood V, L.P. purchased 15,767,550 shares of
Emergisoft common stock for $4,000,000 or $.2536855 per share. Berlwood's shares
were converted into shares of our common stock as part of the Emergisoft merger
transaction. In connection with Berlwood's purchase of common stock, the
consulting agreement between Woodcrest Capital, L.L.C. and Emergisoft was
terminated. As a condition to Berlwood's purchase of Emergisoft common stock,
Emergisoft, Berlwood and Woodcrest entered into an Agreement Among Stockholders,
which now applies to us in the way it applied to Emergisoft. Pursuant to such
agreement, each of Berlwood and Woodcrest, and/or their permitted transferees,
have the right to elect one member of our Board of Directors.
Pursuant to the Agreement Among Stockholders, Berlwood, irrevocably
appointed Woodcrest, or its permitted transferees, as Berlwood's lawful attorney
and proxy. Such proxy gives Woodcrest the limited right to vote each of the
15,767,550 shares of our common stock beneficially owned by Berlwood only for
the following limited purposes: (a) to elect one director that Woodcrest and/or
its permitted transferees are entitled to elect pursuant to the Agreement Among
Stockholders; (b) to remove a director
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elected by Woodcrest and/or its permitted transferees; and (c) to fill any
vacancy on our Board of Directors resulting from the removal, resignation or
death of a director elected by Woodcrest and/or its permitted transferees.
Similarly, Woodcrest, or its permitted transferees, appointed Berlwood, or
its permitted transferees, as Woodcrest's lawful attorney and proxy. Such proxy
gives Berlwood the limited right to vote each of the 15,174,189 shares of our
common stock beneficially owned by Woodcrest, or its permitted transferees, only
for the following limited purposes: (a) to elect one director that Berlwood
and/or its permitted transferees are entitled to elect pursuant to the Agreement
Among Stockholders; (b) to remove a director elected by Berlwood and/or its
permitted transferees; and (c) to fill any vacancy on our Board of Directors
resulting from the removal, resignation or death of a director elected by
Berlwood and/or its permitted transferees.
The Agreement Among Stockholders continues in effect for the benefit of
Berlwood and/or its permitted transferees or Woodcrest and/or its permitted
transferees until such time as Berlwood or Woodcrest, and/or their permitted
transferees, as applicable, hold less than a five percent interest in our issued
and outstanding common stock.
Berlwood/Woodcrest Financing
In May 2001, each of Berlwood and Woodcrest signed a letter of commitment
for our benefit. Pursuant to the terms of the letters of commitment, each of
Woodcrest and Berlwood approved a commitment of $750,000 in financing for us. We
may draw on such commitments in whole or in part, from time to time, and at any
time prior to April 30, 2002. Each of Woodcrest and Berlwood may elect to fund
draws on the basis of a promissory note or a common stock investment or a
combination of the two. If a common stock investment is selected by either
Berlwood or Woodcrest, the common stock will be issued at $.2536855 per share.
Description of Securities
Our capital stock consists of 750,000,000 authorized shares of common
stock, $.001 par value per share. As of June 30, 2001, there were 48,873,818
shares of common stock outstanding. We also have assumed warrants, convertible
notes and options outstanding as described below.
Common Stock
Holders of common stock are entitled to one vote per share on all matters
subject to stockholder vote. All of our presently outstanding shares of common
stock, and all newly issued shares of common stock will be fully paid and
non-assessable. If we are liquidated or dissolved, holders of shares of common
stock will be entitled to share ratably in assets remaining after satisfaction
of liabilities.
Warrants
Upon consummation of the merger with Emergisoft, we assumed certain
warrants issued by Emergisoft. Holders of warrants are entitled to purchase a
total of 496,412 fully paid and non-assessable shares of our common stock at an
exercise price of $.40 per share. Such common stock will have the same rights as
other shares of common stock as described above. The warrants are exercisable at
any time prior to February 7, 2010, and contain anti-dilution protection
provisions covering all issuances or deemed issuances of common stock. In the
event of such issuances or deemed issuances of common stock for less than $.40
per share, the exercise price of the warrants will automatically adjust to such
lower amount.
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10% Convertible Notes
Pursuant to the merger with Emergisoft, we assumed a total of $5,854 in
principal amount of convertible notes which bear interest at the rate of 10% per
annum. Interest will be added to the outstanding principal amount of the notes
on February 7, 2001, and February 7, 2002. The notes plus any accrued interest
are convertible into fully paid and non-assessable shares of common stock at a
conversion price of $.20 per share. On February 7, 2002, we must pay any
unpaid/non-converted principal plus accrued interest. The notes contain
anti-dilution protection provisions covering all issuances or deemed issuances
of common stock. Upon an issuance or deemed issuance of common stock below $.20
per share, the conversion price will automatically adjust to the lower price.
Options
Pursuant to the merger with Emergisoft, we assumed all of Emergisoft's
outstanding options issued under its stock incentive plan, which provided for
the grant of incentive stock options, non-qualified stock options, stock
appreciation rights and restricted stock to consultants, directors, officers and
key employees of Emergisoft. The purpose of the plan was to attract and retain
skilled, qualified officers, directors, key employees and consultants, to
motivate them to achieve long-range goals and to further align their interests
with those of Emergisoft's stockholders. We reserved 7,634,476 shares of our
common stock for issuance upon the exercise of outstanding options as of the
date of the merger.
Market Price of and Dividends on Common Equity and Other Stockholder Matters
Market Information
There is no significant trading market for our common stock, which subjects
the market price of our common stock to a high level of volatility.
Our common stock is not eligible for trading on any national or regional
exchange. Our common stock is currently trading on the NASDAQ Over-the-Counter
Bulletin Board Trading System pursuant to Rule 15c2-11 of the Securities
Exchange Act of 1934. This market tends to be highly illiquid, in part because
there is no national quotation system by which potential investors can trace the
market price of shares except through information received or generated by a
limited number of broker-dealers that make a market in that particular stock.
There are currently no plans, proposals, arrangements or understandings with any
person with regard to the development of a trading market in our common stock.
We are not certain that an active trading market in our common stock will
develop, or if such a market develops, that it will be sustained. In addition,
there is a greater chance for market volatility for securities that trade on the
Bulletin Board as opposed to a national exchange or quotation system. This
volatility may be caused by a variety of factors, including:
o the lack of readily available price quotations;
o the absence of consistent administrative supervision of "bid" and "ask"
quotations;
o lower trading volume; and
o market conditions.
26
In addition, business events may cause a decline in the price of our common
stock. These events could include, but are not limited to:
o announcements concerning our business or competitors;
o technological innovations;
o loss of key personnel; and
o government regulation.
In a volatile market, we may experience wide fluctuations in the market
price of our securities. These fluctuations may have an extremely negative
effect on the market price of our securities and may prevent a stockholder from
obtaining a market price equal to his purchase price when he attempts to sell
our securities in the open market. In these situations, a stockholder may be
required to either sell our securities at a market price which is lower than his
purchase price, or to hold his investment in our securities for a longer period
of time than he planned to hold this investment. A sharp decline in the price of
our common stock could also result in securities class action litigation against
us. Such litigation could be very costly and divert management's attention and
resources, which may have a material adverse effect on our business, financial
condition and results of operations.
The market price of shares of our common stock may be adversely affected by
the sale, or availability for sale, of substantial amounts of the common stock
in the public market. While currently substantially all of our shares are
subject to legal or contractual resale restrictions, 46,235,085 shares held by
the former Emergisoft stockholders will become eligible for sale, subject to the
volume limitations, manner of sale and notice requirements of Securities and
Exchange Commission Rule 144, on May 25, 2002. Also, upon the expiration of a
lock-up agreement with us on May 25, 2002, an additional 1,635,725 shares of
common stock held by our primary stockholder prior to the merger with
Emergisoft, will become eligible for sale without regard to the volume
limitations and manner of sale and notice requirements of Rule 144.
Holders
As of May 25, 2001, there were approximately 188 holders of our common
stock.
Dividends
We have not paid, and do not currently intend to pay cash dividends on our
common stock in the foreseeable future. The current policy of our Board of
Directors is for us to retain all earnings, if any, to provide funds for
operation and expansion of our business. The declaration of dividends, if any,
will be subject to the discretion of the Board of Directors, which may consider
such factors as our results of operations, financial condition, capital needs
and acquisition strategy.
Legal Proceedings
In December 1999, one of our stockholders and a former officer filed suit
in federal court alleging that we were infringing on a copyright for the ICUS
database and tool set (ICUS) that he alleged was owned personally by him. Our
current service offering uses ICUS at all current customer sites. We believe
that we have an existing license to use and sublicense ICUS.
27
In January 2000, the court issued a preliminary injunction allowing us to
keep one copy of the ICUS source code for purposes of providing support to our
current customers, but prohibiting us from selling and/or marketing our current
ICUS-based product.
On January 8, 2001, the federal court granted our motion for summary
judgment, dismissing all of the former officer's claims and dissolving the
preliminary injunction. The court is now reviewing the plaintiff's motion to set
aside that summary judgment and our motion for attorneys' fees.
The former officer also has made us a party in his divorce action, which is
pending in a Tarrant County, Texas district court. Many of the claims asserted
in this action are the same or essentially the same as the claims which were
dismissed by the federal court. We will seek dismissal of those claims at the
appropriate time and contest the remainder of the plaintiff's claims vigorously.
Recent Sales of Unregistered Securities
We have or Emergisoft has issued and sold or otherwise transferred the
below listed unregistered securities in the past three years. These issuances
were deemed exempt from registration under the Securities Act of 1933 in
reliance on either (i) Section 4(2) of the Securities Act, as transactions not
involving any public offering, (ii) Rule 506 promulgated under the Securities
Act, or (iii) Rule 701 promulgated under the Securities Act. No underwriters
were involved in connection with the sales of securities referred to in this
section.
o In January 1999, Robert Kropf, our sole officer and director at the time,
was issued 25,000,000 shares of our common stock as compensation for his
services valued at $25,000.
o In March 1999, Emergisoft commenced its first private placement. The
maximum offering was 7,500,000 shares of common stock at $.10 per share, an
aggregate offering value of $750,000. All of the common stock was sold to
accredited investors.
o Subsequent to January 1, 1999, Emergisoft issued a total of 10,046,396
shares of its common stock as compensation for services to independent
contractors and service providers. The total value of the services was
$4,398,292.
o In March 2000, Emergisoft commenced a second private placement. The maximum
offering was 240 units (or 9,374,880 shares) at a price of $25,000 per
unit. Each unit consisted of 39,062 shares of Emergisoft common stock. All
of the common stock was sold to accredited investors.
o On December 8, 2000, 15,767,500 shares of Emergisoft common stock were
issued under a Common Stock Purchase Agreement by and between Emergisoft
and Berlwood V, L.P., a Texas limited partnership. The purchase price was
$4,000,000.
o On May 25, 2001, each share of common stock of Emergisoft issued and
outstanding immediately prior to that date was converted into the right to
receive one fully paid, non-assessable share of our common stock.
o Prior to the merger transaction in May of 2001, options to purchase a total
of 8,212,000 shares of Emergisoft common stock were granted to directors,
officers, employees and consultants under the Emergisoft stock incentive
plan.
28
Indemnification of Directors and Officers
Our Articles of Incorporation provide that our Board of Directors may from
time to time provide in the By-Laws or by resolutions, that we indemnify our
officers, directors, agents and other persons to the full extent permitted by
the law of the State of Nevada. Our By-Laws provide for full indemnification of
our directors, officers, employees or agents.