- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File Number: 0-22319
Patient Infosystems, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 16-1476509
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
46 Prince Street
Rochester, New York 14607
------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (585) 242-7200
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: X Yes _ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
_ Yes X No
As of June 28, 2002, the aggregate market value of the voting and nonvoting
common stock held by nonaffiliates of the registrant was $635,700 and 3,973,122
shares of common stock were outstanding.
As of March 31, 2003, there were 10,956,024 shares of the issuer's common stock
outstanding.
- --------------------------------------------------------------------------------
PART I
Item 1. Description of Business.
General
Patient Infosystems, Inc. ("Patient Infosystems") was incorporated in the
State of Delaware on February 22, 1995 under the name DSMI Corp., changed its
name to Disease State Management, Inc. on October 13, 1995, and then changed its
name to Patient Infosystems, Inc. on June 28, 1996. Patient Infosystems'
principal executive offices are located at 46 Prince Street, Rochester, New York
14607 and its telephone number is 585-242-7200. Patient Infosystems' Internet
address is www.ptisys.com.
Patient Infosystems is a health management solutions company that
integrates clinical expertise with advanced Internet, call center and data
management capabilities. Founded in 1995 as a disease management company,
Patient Infosystems has evolved to offer a comprehensive portfolio of products
and services designed to improve patient clinical outcomes and quality of life,
reduce healthcare costs and facilitate patient-provider-payor communication.
Care Team Connect for Health, Patient Infosystems' principal product line that
provides a complete solution for population health management, can be marketed
as a comprehensive solution or a set of discrete services that complement a
client's existing operations. Care Team Connect integrates a number of
components that had historically been marketed by the Company as stand alone
products. During the 2002 year, the clinical content of these components were
revised and all components were migrated to an updated technology platform. Care
Team Connect includes the following:
1) Population Health Management and Analysis. Systems to collect, analyze, and
report data about an overall target patient population. These systems
utilize telephone, Internet, electronic or print media as input sources and
may be used for risk identification and stratification, obtaining
information on care quality and patient/member satisfaction, and the
provision of patient and provider education.
2) Disease Management. Patient-centered disease management and case management
support systems designed to improve patient compliance with prescribed
treatment protocols and to improve the process of patient management
outside the traditional "office visit." The system utilizes trained
telephone operators and computerized interactive voice response technology
to communicate via telephone and gather relevant information directly from
the patient. This data is subsequently automatically transmitted via
electronic or print media to healthcare payors, providers and patients, as
appropriate. These services are also available via the Internet.
3) Nurse Help Line and Demand Management. Services to facilitate the
appropriate deployment of costly healthcare resources. These systems
provide enrolled patients with 24-hour access to a registered nurse for
access to health information and management of their care between episodes
of medical intervention.
Patient Infosystems markets its services to a broad range of clients,
including self-insured employers and trust funds, insurance companies,
pharmaceutical and medical equipment and device manufacturers, pharmacy benefit
managers ("PBMs"), other healthcare payors, such as managed care organizations
("MCOs") and healthcare providers, including integrated delivery networks
("IDN's").
Initially, during its first two years of operations, Patient Infosystems
emphasized the development of disease management programs, which accounted for a
substantial portion of its revenue through 1997. However, since 1998, Patient
Infosystems has devoted resources to the development of other applications of
its technology platform, including demand management, patient surveys, outcomes
analysis and Internet-based capabilities. These additional products accounted
for nearly 45% of the total revenue of Patient Infosystems during the fiscal
year ended December 31, 2002 and accounted for 59% and 62% of total revenue of
Patient Infosystems during the fiscal years ended December 31, 2001 and 2000,
respectively.
Recent Developments
On February 1, 2003, Patient Infosystems started operating a smoking
cessation program, which is a new category of services for Patient Infosystems.
On September 23, 2002, Patient Infosystems signed an agreement to acquire
substantially all the assets of American CareSource Corporation ("ACS"),
headquartered in Dallas, Texas. ACS is an ancillary healthcare benefits
management company. It provides a bridge connecting healthcare payers and the
providers of ancillary healthcare services. Ancillary healthcare services
include a broad array of services that supplement or support the care provided
by hospitals and physicians, including the non-physician services associated
with outpatient surgery centers, free-standing diagnostic imaging centers, home
infusion, durable medical equipment, orthotics and prosthetics, laboratory and
many other services. These ancillary services are provided to patients as
benefits under group health plans and workers' compensation plans. ACS manages
the administration of these ancillary healthcare benefits.
Under the terms of the Asset Purchase Agreement, Patient Infosystems agreed
to acquire the assets of ACS in exchange for two-thirds of the common stock of
Patient Infosystems. The agreement provides for a closing of the anticipated
transaction no later than May 2003. The Asset Purchase Agreement contains
various conditions to closing, some of which may not be satisfied. Therefore
completion of the transaction cannot be assured until closing.
The Agreement provides that either Patient Infosystems or ACS may terminate
the Agreement if the closing of the acquisition does not occur by December 31,
2002, subject to certain exceptions.
The parties are currently negotiating a substantial amendment to the Asset
Purchase Agreement. As a result, the proposed terms of the transaction will
change materially. The revised terms may include the provisions of a loan from
Patient Infosystems to ACS in the aggregate amount of approximately $1.5 million
or more. Patient Infosystems will be required to raise additional capital
through a private placement of preferred stock to finance the loan and the
proposed transaction. No assurance can be given that Patient Infosystems and ACS
will agree on revised terms, or that the acquisition will close.
Among the conditions to closing are the following:
o the approval of the shareholders of Patient Infosystems of certain
amendments to its Certificate of Incorporation;
o the execution by certain stockholders of ACS and Patient Infosystems of a
Shareholders' Agreement providing for the voting of shares of Patient
Infosystems in favor of the election of certain individuals to the board of
directors of Patient Infosystems;
o the execution of agreements by John Pappajohn and Derace Schaffer to hold
all indebtedness of Patient Infosystems in abeyance until March 31, 2004;
o written documentation that the bank debt of Patient Infosystems to Wells
Fargo Bank has been renegotiated so as to provide a grace and forbearance
period until December 31, 2003, before any principal payments are required
and that John Pappajohn and Derace Schaffer will remain guarantors of such
bank debt if required by Wells Fargo Bank;
o a private placement of equity securities of Patient Infosystems providing
for proceeds of not less than $3 million;
o the execution of a Voting Agreement by each stockholder of Patient
Infosystems owning more than 10% of the outstanding shares of common stock
of Patient Infosystems; and
o fulfillment of customary contractual conditions set forth in the Asset
Purchase Agreement;
The Asset Purchase Agreement may be terminated and the acquisition
abandoned at any time prior to the closing date of the transaction under the
following conditions:
o by mutual agreement in writing by Patient Infosystems and ACS;
o by either Patient Infosystems or ACS if the other party materially breaches
any of the representations, warranties, covenants or agreements set forth
in the Asset Purchase Agreement at the time of its execution or on the
closing date;
o by either Patient Infosystems or ACS if the other party fails to perform
timely, in all material respects the covenants and obligations that it is
required to perform under the Asset Purchase Agreement and such party does
not obtain in writing a waiver of such performances, or
The Agreement provides that either Patient Infosystems or ACS may terminate
the Agreement if the closing of the acquisition does not occur by December 31,
2002, subject to certain exceptions.
The parties are currently negotiating a substantial amendment to the Asset
Purchase Agreement. As a result, the proposed terms of the transaction will
change materially. The revised terms may include the provisions of a loan from
Patient Infosystems to ACS in the aggregate amount of approximately $1.5 million
or more. Patient Infosystems will be required to raise additional capital
through a private placement of preferred stock to finance the loan and the
proposed transaction. No assurance can be given that Patient Infosystems and ACS
will agree on revised terms, or that the acquisition will close.
In December 2002, Patient Infosystems loaned to ACS $200,000 of working
capital, which was loaned to Patient Infosystems by Mr. Pappajohn. The loan from
Patient Infosystems to ACS is secured by substantially all the assets of ACS.
During January of 2003, Patient Infosystems made additional loans of $300,000 to
ACS under substantially the same terms.
During the fiscal year ended December 31, 2002, approximately 54% of
Patient Infosystems' revenue came from two clients, AstraZeneca, Inc. ("Zeneca")
and a healthcare insurance entity (the "Client"). Zeneca sponsored patients from
an affiliate of Client (the "Sponsored Group") in a program operated by Patient
Infosystems. Client directly sponsored patients from other of its affiliates in
substantially the same program as that provided to the Sponsored Group. In
September 2002, Patient Infosystems received notification from Zeneca that it
intended to terminate its service agreement with Patient Infosystems as of
January 1, 2003. In January 2003, Client assumed approximately 20% of the
Sponsored Group under its service agreement with Patient Infosystems. In
February 2003, Patient Infosystems received notification that Client intends to
terminate its service agreement with Patient Infosystems, effective July 1,
2003. Neither Zeneca nor Client cited any dispute with or breach of any
agreement by Patient Infosystems. Patient Infosystems has replaced this lost
revenue with other client contracts, but no assurance can be given the new
sources of revenue will be permanent.
On February 1, 2003, Patient Infosystems initiated operations on a smoking
cessation program for two healthcare insurance entities. The call center program
is being offered through a strategic alliance with Behavioral Solutions, the
developers of an innovative program using behavioral health counselors. This
program represents a new product line for Patient Infosystems.
Information Capture, Delivery and Analysis Technologies Utilizing the Internet
Patient Infosystems' technology platform integrates an advanced voice
recognition telephone system, high-speed data processing and analysis
capability, demand publishing and information distribution capabilities and
behavior modification-based compliance algorithms with a real time Internet
on-line communication system. The system utilizes its call center and Internet
technology to communicate via telephone directly with the patient at home as
well as with payors and providers in order to gather and deliver relevant
patient data. Depending on a patient's response, situation-specific algorithms
are applied to target future questions and thus help customize the collection of
data.
Patient Infosystems' system analyzes and prepares the captured data for
automatic delivery to the payor, provider and patient using its Internet and
demand publishing capabilities. Patient Infosystems' Internet capabilities
enable Patient Infosystems' systems to interface on a real-time basis with
patients, payors and providers. Demand publishing technology enables the
creation of highly individualized reports by inserting stored graphic images and
text that can be customized for race, gender and age. These reports are also
customized to the patient's specific situation, and the system can utilize the
information received during contacts with the patient to customize the content
of the report. The data relevant to the separate report for healthcare providers
is formatted to be automatically transmitted via mail, fax or Internet.
Each contact with a patient contributes to the establishment of a
longitudinal database, which can be analyzed to provide information about
treatment modalities for patients, providers and payors. Patient Infosystems'
system is designed to analyze patient compliance to prescribed treatment
regimens and gather additional clinical information so that the patient's
caregivers can develop improvements in such regimens.
Internet Capabilities
In 1999, Patient Infosystems acquired substantially all the assets of
HealthDesk Corporation ("HealthDesk"), a consumer healthcare software company
that focuses on general health and chronic disease management through ongoing
targeted support for patients, families and caregivers. The acquired assets
include HealthDesk OnLine and HealthDesk OnLine for Diabetes, which are both
accessible through the Internet and on CD-ROM. Patient Infosystems also acquired
HealthDesk's Care Team Connect product, which is accessible over the Internet
and provides a communication mechanism to caregivers. Patient Infosystems uses
the core technologies associated with the HealthDesk products to support Patient
Infosystems' current Care Team Connect for Health product, which includes the
case management support system, disease management, demand management, quality
of life assessments and clinical data analysis.
Integrated Disease Management System
Patient Infosystems' primary application of its integrated information
capture and delivery technology is its integrated Care Team Connect approach to
chronic condition management---Care Team Connect for Asthma, Hypertension,
Diabetes, and Congestive Heart Failure. This system is designed to assist
patients in managing their chronic disease, to improve patient compliance with
care plans, and, as a consequence, improve patient outcomes.
Patient Infosystems' disease management programs have been developed for
targeted diseases on both a customized and standardized basis. All follow the
same conceptual approach.
First, using a panel of medical and clinical experts, Patient Infosystems
develops a disease-specific patient intervention and compliance program that
includes a template for the integration of each patient's history, current
medical status and treatment protocol. The panel identifies guidelines for
generally accepted treatment protocols and diagnostic interventions for
particular diseases and then uses these guidelines to determine an intervention
protocol and the information to be gathered from the patient.
Second, when a patient is enrolled, a limited patient history is obtained,
which may include the histories of the chronic illness, medications, and
surgical procedures as well as other information deemed relevant by the
disease-specific compliance program. This information is included in Patient
Infosystems' database for each patient and is used to create the reports that
are distributed to the patient's healthcare provider and payor, as well as to
the patient.
Third, Patient Infosystems establishes periodic telephone contacts with
each patient to monitor the patient's compliance with prescribed therapies, as
well as the patient's overall health status treatment progress. Contacts are
made in accordance with a designated patient contact schedule, which is
established for each disease management program and the risk level identified
for that particular patient. The frequency varies depending upon the disease
under management and the goal of the applicable treatment.
Fourth, the data gathered from the patient during each contact is processed
and stored in Patient Infosystems' database. Using the information obtained from
patient contacts and other available information regarding the patient and his
or her treatment, personalized reports are prepared, typically following each
patient contact, for evaluation by the patient, the patient's healthcare
provider and, on a routine basis, payors.
Fifth, each patient enrolled in one of the disease management programs is
provided with 24 hour telephonic access to a registered nurse for questions
regarding his or her illness or other health information.
Patient Infosystems' demand publishing and Internet technology further
support its disease management programs. These technologies enable Patient
Infosystems to provide personalized behavior modification and educational
materials to patients in addition to individual patient reports, which may
include pictures, diagrams and informative discussions relating to the treatment
course intended to modify or reinforce certain behaviors. At the same time,
individual patient reports are provided to the healthcare provider. These
reports are more factual in nature and contain the relevant clinical and
behavioral information that has been gathered. On a routine basis, Patient
Infosystems can provide summary information to the patient's healthcare payor
with respect to patient progress and activity. The summary reporting for
customers are made available through the Internet.
Patient Infosystems enrolled its first patients in a disease management
program in October 1996, and has enrolled more than 532,000 patients in those
programs through January 31, 2003.
Patient Infosystems' customer agreements, which are typically terminable
without cause by either party, require payment to Patient Infosystems of
operational fees. The amount of the program operational fee generally varies
with the length, complexity and frequency of patient contacts as dictated by the
respective program protocols. Patient enrollment in each of Patient Infosystems'
programs will depend upon the identification and referral by Patient
Infosystems' customers of patients to Patient Infosystems' system, which will
vary from program to program. During the 2002 fiscal year ended December 31,
2002, Patient Infosystems has introduced a product enhancement to capture
potential patient enrollments through the analysis of historical medical and
pharmacy claims.
Patient Infosystems' disease specific management programs are as follows:
Asthma
Patient Infosystems has developed disease management programs for asthmatic
patients that have been marketed to payors and other participants in the
healthcare industry, and such programs have been provided to patients since
1997. Through January 31, 2003, Patient Infosystems has had approximately 15,000
patients participate in these programs.
Congestive Heart Failure
Patient Infosystems has services agreements to operate disease management
programs to aid in the treatment of patients suffering from congestive heart
failure. Patient Infosystems has completed the development of the program in the
English and Spanish languages. These programs have been provided to patients
since 1997, and through January 31, 2003, Patient Infosystems has had
approximately 32,700 patients participate in the programs. During the fiscal
year ended December 31, 2002, approximately 54% of Patient Infosystems' revenue
came from two clients, AstraZeneca, Inc. ("Zeneca") and a healthcare insurance
entity (the "Client"). Zeneca sponsored patients from an affiliate of Client
(the "Sponsored Group") in a program operated by Patient Infosystems. Client
directly sponsored patients from other of its affiliates in substantially the
same program as that provided to the Sponsored Group. In September 2002, Patient
Infosystems received notification from Zeneca. that it intended to terminate its
service agreement with Patient Infosystems as of January 1, 2003. In January
2003, Client assumed approximately 20% of the Sponsored Group under its service
agreement with Patient Infosystems. In February 2003, Patient Infosystems
received notification that Client intends to terminate its service agreement
with Patient Infosystems, effective July 1, 2003. Neither Zeneca nor Client
cited any dispute with or breach of any agreement by Patient Infosystems.
Diabetes
Patient Infosystems has developed disease management programs for diabetic
patients that have been marketed to payors and other participants in the
healthcare industry. These programs have been provided to patients since 1997,
and through January 31, 2003, Patient Infosystems has had approximately 10,700
patients participate in these programs.
Secondary Cardiovascular Disease
Patient Infosystems has entered into a services agreement with
Bristol-Myers to develop, implement and operate a disease management program
relating to the prevention of cardiovascular sequelae in patients who have
recently experienced certain cardiovascular illnesses or treatments such as
angina, cardiac bypass surgery or myocardial infarction. Patient Infosystems has
completed the development of this program in both the English and Spanish
languages. This program has been provided to patients since 1997, and through
January 31, 2003, Patient Infosystems has had approximately 500 patients
participate in this program.
Hypertension
Patient Infosystems has developed a compliance program for patients with
hypertension that has been marketed to payors and other participants in the
healthcare industry. Bristol-Myers and RxAmerica have each retained Patient
Infosystems to provide this compliance program for patients who are suffering
from hypertension and are enrolled in healthcare programs for which these
companies provide services. Through January 31, 2003, approximately 830 patients
have participated in this program.
Program Re-designs
During 2002, Patient Infosystems re-designed each of its disease management
products in order to be more responsive to the market. Specific changes to the
programs which are now operational under the Care Team Connect label include
claims data analysis to identify patients with chronic disease and assign each
risk level, targeted interventions by severity of the patient's disease,
introduction of additional clinical content and inclusion of the Nurse 411
Demand Management service as a 24-hour nurse help line.
Pharmaceutical and Medical Equipment Support Programs
Patient Infosystems has delivered custom programs sold to pharmaceutical
and medical device manufacturers that are intended to add value to their direct
to consumer marketing efforts. Patient Infosystems was retained by
Bristol-Myers, Zeneca, Janssen and Abbott to develop and operate programs that
support specific products in the areas of diabetes, anxiety, prostatis and
others. In September 2002, Patient Infosystems received notification that Zeneca
intended to terminate it service agreement with Patient Infosystems as of
January 1, 2003. As of January 31, 2003, approximately 32,000 patients have
participated in Patient Infosystems' pharmaceutical and medical equipment
support programs. In October 2000, Patient Infosystems was retained by Urologix,
Inc. to develop and operate a Prostate Care Center to provide telephonic and
Internet support for their direct to consumer advertising campaign. During the
one year term of the Urologix agreement, 1,500 men participated in this program.
"Nurse411" demand management programs
Nurse411 provides a 24 hour telephonic help line for enrolled populations
as well as demand management services. Demand management involves assisting
providers in evaluating patient treatment needs to identify those patients who
may not require immediate or intensive services. The goal of demand management
is to reduce the need for, and use of, costly, often clinically unnecessary,
medical services and arbitrary managed-care interventions while improving the
overall quality of life of patients. During 2002, Patient Infosystems provided
demand management services to approximately 142,700 enrollees.
Patient survey programs
Organizations in many different areas of the healthcare industry survey
users regarding their products and services for a variety of reasons including
regulatory, marketing and research purposes. Patient Infosystems' information
systems, with their ability to proactively contact patients in a cost-efficient
manner, may be used for this type of application. Patient Infosystems has
developed a series of automated surveys ranging from general health to disease
specific instruments. Through January 31, 2003, approximately 440,200 patients
have participated in these survey programs.
Internet-based products and services
Patient Infosystems' Case Management Support System ("CMSS") is an
Internet-based software product that is used by case management organizations.
The customer's case managers access the system using an approved browser and
Internet Service Provider ("ISP") connection. (Browser and ISP are not supplied
by Patient Infosystems.) The system enables care managers to effectively
interface with, and utilize, Patient Infosystems' intervention programs for
patient care planning and implementation improves case managers' efficiency and
productivity. Additionally, the CMSS provides the case management organization's
management with a reporting tool and a case distribution and documentation tool
that can be used to better monitor and manage case management activity. Patient
Infosystems licenses its CMSS software and operating system to customers who
agree to an initial license fee plus ongoing user and support fees. There were
no new sales of this product during 2002. As of January 31, 2003, there is one
licensee.
Other Applications of the Integrated Information Capture and Delivery Technology
Outcomes Analysis
Patient Infosystems expects to utilize aggregate anonymous information
gathered from patients enrolled in its programs to serve two purposes. First,
information regarding treatment results, success of the compliance program and
patient reaction to differing treatments or compliance protocols may be used by
Patient Infosystems to further improve each disease-specific compliance program.
Second, this information may be used by payors, pharmaceutical companies and
healthcare providers to assist in the development of improved treatment
modalities. Patient Infosystems has developed analytical methodologies using
database management and information technologies.
Clinical Studies
Many pharmaceutical companies and contract research organizations are
seeking more economical, efficient and reliable methods for compiling and
analyzing clinical data in conducting clinical trials. Furthermore, many drug
development protocols have begun to emphasize subjective criteria and outcomes
information. Patient Infosystems believes that its system will allow it to
develop programs tailored to the measurement of outcomes data relating to the
conduct of later stage clinical trials. Patient Infosystems believes that its
system can also assist pharmaceutical companies in studying and documenting the
efficacy of approved products in order to provide ongoing information to the
Food and Drug Administration or for marketing purposes.
Clinical Registry Technical Assistance
Patient Infosystems assists organizations with the development of clinical
registries used to increase effective management of patients with chronic
disease. Patient Infosystems is supporting the development, including project
management and implementation, of a patient registry for federally qualified
health centers, through a national initiative known as the Health Disparities
Collaboratives. This project is administered as a subcontract through the
Institute for Healthcare Improvement.
Sales and Marketing
Through 1997, Patient Infosystems' efforts focused primarily on the
development of disease management programs. Beginning in 1998, Patient
Infosystems began aggressively marketing the other services that its technology
platform can provide including demand management, patient surveys,
pharmaceutical support programs and outcomes analysis. Patient Infosystems
markets its integrated disease management system to organizations within the
healthcare industry that are involved in the treatment of disease or payment of
medical services for patients who require complex or long-term medical
therapies. These industry organizations include five distinct groups:
pharmaceutical and medical equipment manufacturers, healthcare providers,
pharmacy benefits managers, healthcare payors and self-funded trust
funds/employer groups. As of July 2000, Patient Infosystems has also entered
into an agreement with USI Administrators, Inc. along with several of its
subsidiaries (collectively known as "USI"), one of the country's largest
third-party administrators ("TPA"), to co-market its products and services to
USI's potential employer client base. Similar agreements have been executed with
ACS and Future Health. ACS is a company that provides claims processing services
and ancillary network referral services to provider networks, managed care
organizations and TPAs. Future Health is a population risk management company
that provides risk identification case management, utilization management and
disease management, primarily for self-funded employer groups. Patient
Infosystems currently employs a sales and marketing staff of two persons to
market its systems. In addition, the senior members of Patient Infosystems'
management are actively engaged in marketing Patient Infosystems' programs.
Studies have been conducted to document the clinical and cost benefits that
result from the application of its integrated information capture and delivery
system. The results of these studies are being used to supplement Patient
Infosystems' marketing efforts. Patient Infosystems intends to continue to
promote the benefits of its products through press releases, direct marketing
and possibly through publication in clinical journals and presentations at
scientific conferences referencing the favorable near term-results of these
studies. To date, these studies have pertained to Patient Infosystems' asthma,
diabetes and congestive heart failure programs.
Research and Development
Research and development expenses consist primarily of salaries, related
benefits and administrative costs allocated to Patient Infosystems' research and
development personnel. These personnel are actively involved in the conversion
of Patient Infosystems' technology platform to a fully web-enabled design.
Patient Infosystems' research and development expenses were $105,614, or 4.5% of
total revenues, for the fiscal year ended December 31, 2002, $190,731, or 12.0%,
of total revenues, for the fiscal year ended December 31, 2001, and $305,543, or
14.3% of total revenues, for the fiscal year ended December 31, 2000. Research
and development costs have decreased as Patient Infosystems has completed the
development of its primary disease management programs. Patient Infosystems
anticipates that the amount spent on research and development will remain
relatively constant in future periods as it continues its internal process to
update its products.
Employees
As of March 1, 2003, Patient Infosystems had 64 full and part-time
employees.
RISK FACTORS
Forward-Looking Statements
When used in this and in future filings by Patient Infosystems with the
Securities and Exchange Commission, in Patient Infosystems' press releases and
in oral statements made with the approval of an authorized executive officer of
Patient Infosystems, the words or phrases "will likely result," "expects,"
"plans," "will continue," "is anticipated," "estimated," "project," or "outlook"
or similar expressions (including confirmations by an authorized executive
officer of Patient Infosystems of any such expressions made by a third party
with respect to Patient Infosystems) are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Patient Infosystems wishes to caution readers not to place undue
reliance on any such forward-looking statements, each of which speak only as of
the date made. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. Patient Infosystems has no
obligation to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
An investment in Patient Infosystems' common stock is speculative in nature
and involves a high degree of risk. No investment in Patient Infosystems' common
stock should be made by any person who is not in a position to lose the entire
amount of such investment.
Working Capital Shortfalls; Urgent Need for Working Capital, Possible Cessation
of Operations, Qualified Auditors' Opinion;
Patient Infosystems has never earned profits and has been dependent upon
its initial public offering, private placements of its equity securities and
debt, through which Patient Infosystems has raised over $25 million to date, to
fund its working capital requirements. Patient Infosystems incurred an operating
loss of approximately $1.7 million with a net loss of approximately $2.2 for the
year ended December 31, 2002 and had an approximate $6.1 million deficit in
working capital and a shareholders' deficit of approximately $8.7 million at
December 31, 2002. Since September 2000, Patient Infosystems' operations have
been supported substantially by loans from certain directors of Patient
Infosystems. On March 23, 2003, Messrs. Pappajohn and Shaffer made a commitment
to Patient Infosystems to obtain the operating funds that Patient Infosystems
believes would be sufficient to fund its operations through December 31, 2003
based upon an operational forecast for Patient Infosystems. As with any
forward-looking projection, no assurances can be given concerning the outcome of
Patient Infosystems' actual financial status given the substantial uncertainties
that exist. There can be no assurances given that Patient Infosystems can raise
either the required working capital through the sale of its securities or that
Patient Infosystems can borrow the additional amounts needed. If it is unable to
identify additional sources of capital, Patient Infosystems will be required to
cease operations. As a result of the above, the Independent Auditors' Report on
Patient Infosystems' consolidated financial statements appearing at Item 15
includes an emphasis paragraph indicating that Patient Infosystems' recurring
losses from operations, negative working capital and stockholders' deficit raise
substantial doubt about its ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Substantial Indebtedness
As of December 31, 2002, Patient Infosystems had total liabilities of
$9,887,505 and a working capital deficit of $6,135,451. Also at December 31,
2002, Patient Infosystems had a stockholders' deficit of $8,670,239. Through
December 31, 2002 these amounts reflect the effects of Patient Infosystems'
continuing losses, issuance of demand notes totaling $5,077,500 to directors of
Patient Infosystems and long term borrowings of $3,000,000 against its line of
credit. Patient Infosystems has never earned profits and, since its inception,
Patient Infosystems has primarily funded its operations, working capital needs
and capital expenditures from the sale of equity securities. Patient Infosystems
is currently maintaining it operations only through the receipt of continuing
loans from one of its directors. If these loans or additional funds were not
available, Patient Infosystems would likely be required to cease operations.
History of Operating Losses; Continued Limited Patient Enrollment
Patient Infosystems has incurred losses in every quarter since its
inception in February 1995. Patient Infosystems' ability to operate profitably
is dependent upon its ability to develop and market its products in an
economically successful manner. To date, Patient Infosystems has been unable to
do so. No assurances can be given that Patient Infosystems will be able to
generate revenues or ever operate profitably in the future.
Patient Infosystems' prospects must be considered in light of the numerous
risks, expenses, delays and difficulties frequently encountered in an industry
characterized by intense competition, as well as the risks inherent in the
development of new programs and the commercialization of new services
particularly given its failure to date to operate profitably. There can be no
assurance that Patient Infosystems will achieve recurring revenue or
profitability on a consistent basis, if at all.
In October 1996, Patient Infosystems began enrolling patients in its first
disease management program and only began substantial patient contacts during
1998. Patient Infosystems currently has patients enrolled in five of its
disease-specific programs. Through January 2003, an aggregate of approximately
675,000 persons have been enrolled in Patient Infosystems' programs. However,
Patient Infosystems has never been able to enroll a sufficient number of
patients to cover the cost of any of its particular programs. The participation
of patients in Patient Infosystems' programs has been limited by several
factors, including the limited ability of clients to provide Patient Infosystems
with accurate information with respect to the specific patient populations and
coding errors that necessitated extensive labor-intensive data processing prior
to program implementation. In addition, Patient Infosystems has encountered
resistance from patients and other sources of information to Patient
Infosystems' systems.
Recent Loss of Important Clients
During the fiscal year ended December 31, 2002, approximately 54% of
Patient Infosystems' revenue came from two clients, AstraZeneca, Inc. ("Zeneca")
and a healthcare insurance entity (the "Client"). Zeneca sponsored patients from
an affiliate of Client (the "Sponsored Group") in a program operated by Patient
Infosystems. Client directly sponsored patients from other of its affiliates in
substantially the same program as that provided to the Sponsored Group. In
September 2002, Patient Infosystems received notification from Zeneca. that it
intended to terminate its service agreement with Patient Infosystems as of
January 1, 2003. In January 2003, Client assumed approximately 20% of the
Sponsored Group under its service agreement with Patient Infosystems. In
February 2003, Patient Infosystems received notification that Client intends to
terminate its service agreement with Patient Infosystems, effective July 1,
2003. Neither Zeneca nor Client cited any dispute with or breach of any
agreement by Patient Infosystems. Patient Infosystems has replaced this lost
revenue with other client contracts, but no assurance can be given the new
sources of revenue will be permanent.
Significant Customer Concentration
During 2000, a significant customer ceased operation of services supplied
by Patient Infosystems, which had a material adverse effect on the results of
operations. As of December 31, 2002, Patient Infosystems now has more customers
than it did at December 31, 2000 or 2001. While the customer base is more
diverse, there is still a significant concentration of Patient Infosystems'
business in a small number of customers, with several of Patient Infosystems'
most significant contracts being with Zeneca, CHA Health and Independence Blue
Cross. Patient Infosystems has received notice of termination from Zeneca and
expects that its sales of services will be concentrated in a small number of
customers for the foreseeable future. Consequently, the loss of any one of its
customers could have a material adverse effect on Patient Infosystems and its
operations. There can be no assurance that customers will maintain their
agreements with Patient Infosystems, enroll a sufficient number of patients in
the programs developed by Patient Infosystems for Patient Infosystems to achieve
or maintain profitability, or that customers will renew their contracts upon
expiration, or on terms favorable to, Patient Infosystems.
Consequences of the Need to Raise Additional Working Capital
In connection with their financing of Patient Infosystems' operations, Mr.
Pappajohn and Dr. Schaffer have been awarded 2,735,822 shares of common stock
over the last two years. As Patient Infosystems seeks additional financing or
purchases, it is likely that it will issue a substantial number of additional
shares that may be extremely dilutive to the current stockholders. As a result,
the value of outstanding shares of common stock could decline further.
Resignations of Directors and Management; No Independant Directors
In February 2002, Carl Korht, a director of Patient Infosystems, resigned
effective April 1, 2002. Mr. Korht did not cite any dispute with Patient
Infosystems and indicated that his reasons for departing from Patient
Infosystems were personal. No assurance can be given that Patient Infosystems'
current or future members of management will be able to operate the business of
Patient Infosystems effectively. As a result, the Board of Directors of Patient
Infosystems now only consists of three persons. One director, Mr. Chaufournier,
is also the Chief Executive Officer of Patient Infosystems. The other two, Mr.
Pappajohn and Dr. Schaffer, are owed significant amounts of money by Patient
Infosystems. It is anticipated that it will be difficult to attract additional
independent directors to join the Board of Directors.
Terminability of Agreements; Exclusivity Provisions
Patient Infosystems' current services agreements with its customers
generally automatically renew and may be terminated by those customers without
cause upon notice of between 30 and 90 days. In addition, Patient Infosystems
has given Bristol-Myers a right of first refusal in responding to any third
party's request for proposal where the Bristol-Myers sponsored programs may be
offered by Patient Infosystems, and has agreed not to resell these programs to
any of Bristol-Myers pharmaceutical competitors. In general, customer contracts
may include significant performance criteria and implementation schedules for
Patient Infosystems. Failure to satisfy such criteria or meet such schedules
could result in termination of the agreements.
New Concept; Uncertainty of Market Acceptance; Limitations of Commercialization
Strategy
In connection with the commercialization of Patient Infosystems' health
information system, Patient Infosystems is marketing relatively new services
designed to link patients, health care providers and payors in order to provide
specialized disease management services for targeted chronic diseases. However,
at this time, services of this type have not gained general acceptance from
Patient Infosystems' customers. This is still perceived to be a new business
concept in an industry characterized by an increasing number of market entrants
who have introduced or are developing an array of new services. As is typical in
the case of a new business concept, demand and market acceptance for newly
introduced services are subject to a high level of uncertainty, and there can be
no assurance as to the ultimate level of market acceptance for Patient
Infosystems' system, especially in the health care industry, in which the
containment of costs is emphasized. Because of the subjective nature of patient
compliance, Patient Infosystems may be unable, for an extensive period of time,
to develop a significant amount of data to demonstrate to potential customers
the effectiveness of its services. Even after such time, no assurance can be
given that Patient Infosystems' data and results will be convincing or
determinative as to the success of its system. There can be no assurance that
increased marketing efforts and the implementation of Patient Infosystems'
strategies will result in market acceptance for its services or that a market
for Patient Infosystems' services will develop or not be limited.
Unpredictability of Patient Behavior May Affect Success of Programs
The ability of Patient Infosystems to monitor and modify patient behavior
and to provide information to health care providers and payors, and consequently
the success of Patient Infosystems' disease management system, is dependent upon
the accuracy of information received from patients. Patient Infosystems has not
taken and does not expect that it will take, specific measures to determine the
accuracy of information provided to Patient Infosystems by patients regarding
their medical histories. No assurance can be given that the information provided
to Patient Infosystems by patients will be accurate. To the extent that patients
have chosen not to comply with prescribed treatments, such patients might
provide inaccurate information to avoid detection. Because of the subjective
nature of medical treatment, it will be difficult for Patient Infosystems to
validate or confirm any such information. In the event that patients enrolled in
Patient Infosystems' programs provide inaccurate information to a significant
degree, Patient Infosystems would be materially and adversely affected.
Furthermore, there can be no assurance that patient interventions by Patient
Infosystems will be successful in modifying patient behavior, improving patient
health or reducing costs in any given case. Many potential customers may seek
data from Patient Infosystems with respect to the results of its programs prior
to retaining it to develop new disease management or other health information
programs. Patient Infosystems' ability to market its system to new customers may
be limited if it is unable to demonstrate successful results for its programs.
Competition
The market for health care information products and services is intensely
competitive. Competitors vary in size and in scope and breadth of products and
services offered, and Patient Infosystems competes with various companies in
each of its disease target markets. Many of Patient Infosystems' competitors
have significantly greater financial, technical, product development and
marketing resources than Patient Infosystems. Furthermore, other major
information, pharmaceutical and health care companies not presently offering
disease management or other health care information services may enter the
markets in which Patient Infosystems intends to compete. In addition, with
sufficient financial and other resources, many of these competitors may provide
services similar to those of Patient Infosystems without substantial barriers.
Patient Infosystems does not possess any patents with respect to its integrated
information capture and delivery system.
Patient Infosystems' competitors include specialty health care companies,
health care information system and software vendors, health care management
organizations, pharmaceutical companies and other service companies within the
health care industry. Many of these competitors have substantial installed
customer bases in the health care industry and the ability to fund significant
product development and acquisition efforts. Patient Infosystems also competes
against other companies that provide statistical and data management services,
including clinical trial services to pharmaceutical companies.
Patient Infosystems believes that the principal competitive factors in its
market are the ability to link patients, health care providers and payors, and
provide the relevant health care information at an acceptable cost. In addition,
Patient Infosystems believes that the ability to anticipate changes in the
health care industry and identify current needs are important competitive
factors. There can be no assurance that competitive pressures will not have a
material adverse effect on Patient Infosystems.
Substantial Fluctuation in Quarterly Operating Results
Patient Infosystems' results of operations have fluctuated significantly
from quarter to quarter as a result of a number of factors, including the volume
and timing of sales and the rate at which customers implement disease management
and other health information programs within their patient populations.
Accordingly, Patient Infosystems' future operating results are likely to be
subject to variability from quarter to quarter and could be adversely affected
in any particular quarter.
Dependence on Data Processing and Telephone Equipment
The business of Patient Infosystems is dependent upon its ability to store,
retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors, other computer
problems or interruptions of telephone service could have a material adverse
effect on the business of Patient Infosystems.
Quality Control
Patient Infosystems has developed quality control measures designed to
insure that information obtained from patients is accurately transcribed, that
reports covering each patient contact are delivered to health care providers and
patients and that Patient Infosystems' personnel and technologies are
interacting appropriately with patients and health care providers. Quality
control systems include random monitoring of telephone calls, patient surveys to
confirm patient participation and effectiveness of the particular program, and
supervisory reviews of telephone agents.
ACS' History of Operating Losses
Pursuant to the Asset Purchase Agreement, Patient Infosystems has agreed to
acquire substantially all of the assets of ACS. ACS has incurred losses in each
of the past four years and has not, since its inception, operated profitability.
There can be no assurance that the acquisition of ACS will result in an increase
in revenue or cash flows of Patient Infosystems.
Limited Number of Customers of ACS
ACS' five largest customers account for approximately 79% of its revenues.
In addition, ACS does not have long-term contracts with its customers. After the
closing of the Asset Purchase Agreement, the loss of one or more of these
customers, or an adverse change in the financial condition of one or more of
these customers, could have a material adverse effect on the business and
results of operations of Patient Infosystems.
Patient Infosystems may have difficulty integrating the business of ACS with
existing operations
The acquisition of ACS will involve the integration of a company that has
previously operated in an entirely different business than that of Patient
Infosystems. Patient Infosystems cannot assure you that the integration of
Patient Infosystems with ACS will be successfully completed without encountering
difficulties or experiencing the loss of key Patient Infosystems or ACS
employees, customers or suppliers, or that the benefits from such integration
will be realized. In addition, Patient Infosystems cannot assure you that the
management teams of ACS and Patient Infosystems will be able to successfully
work with each other.
Government Regulation
The health care industry, including the current business of Patient
Infosystems and the expanded operations of Patient Infosystems, including the
business of ACS, following the closing of the acquisition described in the Asset
Purchase Agreement, is subject to extensive regulation by both the Federal and
state governments. A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide health care
services. Additionally, services provided to health benefit plans in certain
cases are subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") and may be affected by other state and Federal
statutes. Generally, state laws prohibit the practice of medicine and nursing
without a license. Many states interpret the practice of nursing to include
health teaching, health counseling, the provision of care supportive to, or
restorative of, life and well being and the execution of medical regimens
prescribed by a physician. Accordingly, to the extent that Patient Infosystems
assists providers in improving patient compliance by publishing educational
materials or providing behavior modification training to patients, such
activities could be deemed by a state to be the practice of medicine or nursing.
Although Patient Infosystems has not conducted a survey of the applicable law in
all 50 states, it believes that it is not engaged in the practice of medicine or
nursing. There can be no assurance, however, that Patient Infosystems'
operations will not be challenged as constituting the unlicensed practice of
medicine or nursing. If such a challenge were made successfully in any state,
Patient Infosystems could be subject to civil and criminal penalties under such
state's law and could be required to restructure its contractual arrangements in
that state. Such results or the inability to successfully restructure its
contractual arrangements, could have a material adverse effect on Patient
Infosystems.
Patient Infosystems is subject to state laws governing the confidentiality
of patient information. A variety of statutes and regulations exist safeguarding
privacy and regulating the disclosure and use of medical information. State
constitutions may provide privacy rights and states may provide private causes
of action for violations of an individual's "expectation of privacy." Tort
liability may result from unauthorized access and breaches of patient
confidence. Patient Infosystems intends to comply with state law and regulations
governing medical information privacy.
In addition, on August 21, 1996 Congress passed the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This
legislation requires the Secretary of the Department of Health and Human
Services to adopt national standards for electronic health transactions and the
data elements used in such transactions. The Secretary is required to adopt
safeguards to ensure the integrity and confidentiality of such health
information. Violation of the standards is punishable by fines and, in the case
of negligent or intentional disclosure of individually identifiable health
information, imprisonment. The Secretary has promulgated final rules addressing
the standards, however, the implementation time line extends into 2003 and
beyond. Although Patient Infosystems intends to comply with all applicable laws
and regulations regarding medical information privacy, failure to do so could
have an adverse effect on Patient Infosystems' business.
Patient Infosystems and its customers may be subject to Federal and state
laws and regulations that govern financial and other arrangements among health
care providers. These laws prohibit certain fee splitting arrangements among
health care providers, as well as direct and indirect payments, referrals or
other financial arrangements that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Possible sanctions for violation of these
restrictions include civil and criminal penalties. Specifically, HIPAA increased
the amount of civil monetary penalties from $2,000 to $10,000. Criminal
penalties range from misdemeanors, which carry fines of not more than $10,000 or
imprisonment for not more than one year, or both, to felonies, which carry fines
of not more than $25,000 or imprisonment for not more than five years, or both.
Further, criminal violations may result in permanent mandatory exclusions and
additional permissive exclusions from participation in Medicare and Medicaid
programs.
Furthermore, Patient Infosystems and its customers may be subject to
federal and state laws and regulations governing the submission of false
healthcare claims to the government and private payers. Possible sanctions for
violations of these laws and regulations include minimum civil penalties between
$5,000-$10,000 for each false claim and treble damages.
Regulation in the health care field is constantly evolving. Patient
Infosystems is unable to predict what government regulations, if any, affecting
its business may be promulgated in the future. Patient Infosystems' business
could be adversely affected by the failure to obtain required licenses and
governmental approvals, comply with applicable regulations or comply with
existing or future laws, rules or regulations or their interpretations.
Significant and Extensive Changes in the Health Care Industry
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of health care industry participants. Several lawmakers have announced that they
intend to propose programs to reform the U.S. health care system. These programs
may contain proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change the operating environment for Patient
Infosystems and its targeted customers. Health care industry participants may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring certain expenditures, including those for Patient
Infosystems' programs. Patient Infosystems cannot predict what impact, if any,
such changes in the health care industry might have on its business, financial
condition and results of operations. In addition, many health care providers are
consolidating to create larger health care delivery enterprises with greater
regional market power. As a result, the remaining enterprises could have greater
bargaining power, which may lead to price erosion of Patient Infosystems'
programs. The failure of Patient Infosystems to maintain adequate price levels
could have a material adverse effect on its business.
Dependence on Customers for Marketing and Patient Enrollment
Patient Infosystems has limited financial, personnel and other resources to
undertake extensive marketing activities. One element of Patient Infosystems'
marketing strategy involves marketing specialized disease management programs to
pharmaceutical companies and managed care organizations, with the intent that
those customers will market the program to parties responsible for the payment
of health care costs, who will enroll patients in the programs. Accordingly,
Patient Infosystems, will to a degree, be dependent upon its customers, over
whom it has no control, for the marketing and implementation of its programs and
for the receipt of valid patient information. The timing and extent of patient
enrollment is completely within the control of Patient Infosystems' customers.
Patient Infosystems has faced difficulty in receiving reliable patient
information from certain customers, which has hampered its ability to complete
certain of its projects. To the extent that an adequate number of patients are
not enrolled in the program, or enrollment of initial patients by a customer is
delayed for any reason, Patient Infosystems' revenue may be insufficient to
support its activities.
Control of Patient Infosystems
The executive officers, directors and certain stockholders of Patient
Infosystems who beneficially own in the aggregate approximately 67% of the
outstanding common stock control Patient Infosystems. As a result of such
ownership, these stockholders, in the event they act in concert, will have
control over the management policies of Patient Infosystems and all matters
requiring approval by the stockholders of Patient Infosystems, including the
election of directors.
Potential Liability and Insurance
Patient Infosystems will provide information to health care providers and
managed care organizations upon which determinations affecting medical care will
be made, and it could share in potential liabilities for resulting adverse
medical consequences to patients. In addition, Patient Infosystems could have
potential legal liability in the event it fails to record or disseminate
correctly patient information. Patient Infosystems maintains an errors and
omissions insurance policy with coverage of $5 million in the aggregate and per
occurrence. Although Patient Infosystems does not believe that it will directly
engage in the practice of medicine or direct delivery of medical services and
has not been a party to any such litigation, it maintains a professional
liability policy with coverage of $5 million in the aggregate and per
occurrence. There can be no assurance that Patient Infosystems' procedures for
limiting liability have been or will be effective, that Patient Infosystems will
not be subject to litigation that may adversely affect Patient Infosystems'
results of operations, that appropriate insurance will be available to it in the
future at acceptable cost or at all or that any insurance maintained by Patient
Infosystems will cover, as to scope or amount, any claims that may be made
against Patient Infosystems.
Intellectual Property
Patient Infosystems considers its methodologies, processes and know-how to
be proprietary. Patient Infosystems seeks to protect its proprietary information
through confidentiality agreements with its employees. Patient Infosystems'
policy is to have employees enter into confidentiality agreements containing
provisions prohibiting the disclosure of confidential information to anyone
outside Patient Infosystems, requiring employees to acknowledge, and, if
requested, assist in confirming Patient Infosystems' ownership of any new ideas,
developments, discoveries or inventions conceived during employment, and
requiring assignment to Patient Infosystems of proprietary rights to such
matters that are related to Patient Infosystems' business.
Item 2. Description of Properties.
Patient Infosystems' executive and corporate offices are located in
Rochester, New York in approximately 5,000 square feet of leased office space
under an operating lease that expires on June 30, 2003, after which Patient
Infosystems expects to extend this lease at a minimum through the end of 2003.
Patient Infosystems believes its offices are suitable to meet its current needs.
Item 3. Legal Proceedings.
Neither Patient Infosystems, nor any of its subsidiaries, is a party to any
material legal proceeding, nor, to the knowledge of Patient Infosystems, is any
such proceeding threatened against it or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information
Patient Infosystems' common stock is traded on the Over-the-Counter
Bulletin Board (the "OTC Bulletin Board") under the symbol PATI. The following
table sets forth, for the periods indicated, the range of high and low bid
quotations for Patient Infosystems' common stock as quoted on the OTC Bulletin
Board. The reported bid quotations reflect inter-dealer prices without retail
markup, markdown or commissions, and may not necessarily represent actual
transactions.
High Low
2001
First Quarter $0.20 $0.09
Second Quarter $0.43 $0.06
Third Quarter $0.29 $0.17
Fourth Quarter $0.17 $0.04
2002
First Quarter $0.20 $0.06
Second Quarter $0.20 $0.12
Third Quarter $0.30 $0.09
Fourth Quarter $0.51 $0.08
(b) Holders
The approximate number of record holders of Patient Infosystems' common
stock as of March 31, 2003 is 83.
(c) Dividends
Patient Infosystems has not declared cash dividends on its common stock.
Patient Infosystems is declaring 9% cumulative dividends on its Series C
Cumulative Convertible Preferred Stock that was issued on March 31, 2000.
(d) Recent sales of unregistered securities
On March 31, 2000, Patient Infosystems completed a private placement of
100,000 shares of newly issued Series C 9% Cumulative Convertible Preferred
Stock ("Series C Preferred Stock"), raising $1,000,000 in total proceeds. The
shares were sold to four accredited investors, under an exemption from
registration pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933. There was no placement agent and no commissions were paid to any party.
These shares can be converted into common stock at a rate of 8 shares of common
stock to 1 share of Series C Preferred Stock. Each share of Series C Preferred
Stock has voting rights equivalent to 8 shares of common stock. John Pappajohn
and Derace Schaffer, members of the Board of Directors of Patient Infosystems,
purchased 50,000 and 25,000 shares of Series C Preferred Stock respectively. The
proceeds from this issuance have been used to support Patient Infosystems'
operations.
In 2002, Patient Infosystems borrowed $1,170,000 from Mr. Pappajohn in the
form of demand notes secured by the assets of Patient Infosystems. Patient
Infosystems anticipates that it will need to borrow additional funds before it
can secure capital through the issuance of additional securities. From January
1, 2003 through March 31, 2003, an additional $600,000 has been borrowed from
Mr. Pappajohn under substantially the same terms.
On June 6, 2001, Patient Infosystems issued a total of 2,319,156 shares of
unregistered common stock to Mr. Pappajohn and Dr. Schaffer as consideration for
their continued financial support of Patient Infosystems. Based upon recent
trading of Patient Infosystems' common stock at the time of issuance, Patient
Infosystems assigned a fair market value of $0.15 per share or a total of
$347,873 to these unregistered shares and realized this amount as an operating
expense in June of 2001. The shares were issued to accredited investors under an
exemption from registration pursuant to Section 4(2) and Rule 506 of the
Securities Act of 1933. There was no placement agent and no commissions were
paid to any party.
On June 11, 2002, the board of directors of Patient Infosystems approved
the conversion of up to $4,642,500 in debt and $438,099 of accrued interest owed
to Mr. Pappajohn and Dr. Schaffer into 36,289,993 shares of Patient Infosystems'
common stock using a value of $0.14 per common share. The average value of
Patient Infosystems' common stock based upon an average closing price for a
period immediately before June 11, 2002 was $0.1354. Patient Infosystems'
Certificate of Incorporation authorizes Patient Infosystems to issue up to
20,000,000 shares of common stock, 10,956,024 of which were issued and
outstanding and 2,029,040 of which were reserved for issuance under outstanding
options, warrants and upon conversion of outstanding convertible preferred
stock. Giving effect to this debt conversion transaction will require an
amendment to Patient Infosystems' Certificate of Incorporation to authorize
additional shares of common stock. Accordingly, this debt conversion transaction
cannot occur unless and until the stockholders of Patient Infosystems approve
this amendment. The shares will be issued to accredited investors under an
exemption from registration pursuant to Section 4(2) and Rule 506 of the
Securities Act of 1933. There was no placement agent and no commissions were
paid to any party. A date for a meeting of the stockholders of Patient
Infosystems has not yet been established.
Item 6. Selected Financial Data.
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2002 2001 2000 1999 1998
Statement of Operations Data:
Revenues $2,355,677 $1,586,443 $2,139,262 $3,545,207 $2,344,072
Costs and expenses:
Cost of sales 1,914,464 2,420,151 3,906,010 5,219,562 4,011,710
Sales and marketing 746,353 813,975 1,425,990 2,809,554 1,929,525
General and administrative 1,282,683 2,028,804 2,329,585 1,916,003 1,490,210
Research and development 105,614 190,731 305,543 967,365 298,686
Total costs and expenses 4,049,114 5,453,661 7,967,128 10,912,484 7,730,131
Operating loss (1,693,437) (3,867,218) (5,827,866) (7,367,277) (5,386,059)
Other (expense) income (530,924) (598,087) (211,340) (250,897) 556,592
NET LOSS (2,224,361) (4,465,305) (6,039,206) (7,618,174) (4,829,467)
Convertible preferred stock dividends (90,000) (90,000) (617,500) - -
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $(2,314,361) $(4,555,305) $(6,656,706) $(7,618,174) $(4,829,467)
Net loss per share - basic and diluted $(0.21) $(0.47) $(0.82) $(0.95) $(0.60)
Weighted average
common shares outstanding 10,956,024 9,770,501 8,135,635 8,032,533 8,018,398
- -----------------------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2001 2000 1999 1998
Balance Sheet Data:
Cash and cash equivalents $5,011 $29,449 $28,231 $489,521 $6,316,955
Working capital (6,135,451) (4,686,322) (1,375,391) 414,132 7,992,894
Total assets 1,217,266 1,222,133 2,292,244 3,844,395 10,519,727
Long term obligations 3,000,000 2,500,000 2,500,000 500,000 -
Total liabilities 9,887,505 7,578,011 4,481,225 1,427,732 894,339
Total stockholders' (deficit) equity (8,670,239) (6,355,878) (2,188,981) 2,416,663 9,625,388
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis provides a review of Patient
Infosystems' operating results for the fiscal years ended December 31, 2002,
2001 and 2000, and its financial condition at December 31, 2002 and 2001. The
focus of this review is on the underlying business reasons for significant
changes and trends affecting the revenues, net losses and financial condition of
Patient Infosystems. This review should be read in conjunction with the
accompanying consolidated financial statements.
In an effort to give investors a well-rounded view of Patient Infosystems'
current condition and future opportunities, this Annual Report on Form 10-K
includes forecasts by Patient Infosystems' management about future performance
and results. Because they are forward-looking, these forecasts involve
uncertainties. They include risks of market acceptance of, or preference for,
Patient Infosystems' systems and services, competitive forces, the impact of,
and changes in, government regulations, general economic factors in the
healthcare industry, and other factors discussed in Patient Infosystems' filings
with the Securities and Exchange Commission.
Overview
Patient Infosystems was formed on February 22, 1995. Although Patient
Infosystems has completed the development of its integrated information capture
and delivery system and has developed several disease management programs for
specific diseases, Patient Infosystems is continuing to refine its products for
additional applications. In October 1996 Patient Infosystems began enrolling
patients in its first disease management program and began substantial patient
contacts during 1998. Also in 1998, Patient Infosystems expanded its offered
products to include demand management and health related surveys. Patient
Infosystems currently has patients enrolled in more than 30 of its
disease-specific, demand management or survey programs. Through January 2003, an
aggregate of over 675,000 persons have been enrolled or participated in Patient
Infosystems' programs. However, Patient Infosystems has never been able to
enroll a sufficient number of patients to cover the cost of its programs. The
enrollment of patients in Patient Infosystems' programs has been limited by
several factors, including the limited ability of clients to provide Patient
Infosystems with accurate information with respect to the specific patient
populations and coding errors that necessitated extensive labor-intensive data
processing prior to program implementation.
In response to these market dynamics, Patient Infosystems has taken several
tactical and strategic steps including, formal designation of internal personnel
at customer sites to assist clients with implementation; closer integration of
Patient Infosystems' systems personnel with clients to facilitate accurate data
transfers; promotion of a broader product line to enable clients to enter
Patient Infosystems' disease management programs through a variety of channels;
fully integrating demand, disease and case management services to facilitate
internal mechanisms for patient referrals and providing the customers access and
control over their patients' confidential information though targeted use of
Internet technology. Patient Infosystems' demand management services and
automated surveys (general health and disease-specific), can provide mechanisms
for enrollment to Patient Infosystems' disease management programs. Patient
Infosystems continues to develop capabilities or relationships that will enable
its customers to more effectively leverage the data stored in their legacy
systems. Nevertheless, no assurance can be given that Patient Infosystems'
efforts will succeed in increasing patient enrollment in its programs.
Patient Infosystems has entered into services agreements to develop,
implement and operate programs for: (i) patients who have recently experienced
certain cardiovascular events; (ii) patients who have been diagnosed with
primary congestive heart failure; (iii) patients suffering from asthma; (iv)
patients suffering from diabetes, (v) patients who are suffering from
hypertension, (vi) demand management, which provides access to nurses, and (vii)
various survey initiatives which assess, among other things, satisfaction,
compliance of providers or payors to national standards, health status or risk
of specific health related events. These contracts provide for fees paid by its
customers based upon the number of patients participating in each of its
programs, as well as initial program implementation and set-up fees from
customers. To the extent that Patient Infosystems has had limited enrollment of
patients in its programs, Patient Infosystems' operations revenue has been, and
may continue to be, limited. During 1999 and 2000, Patient Infosystems has
committed increased resources to developing strategic upgrades of its
information and telecommunications technologies to leverage the emerging
capabilities of the Internet. Moreover, as Patient Infosystems has completed the
development of its primary disease management programs, it anticipates that
development revenue will continue to be minimal unless and until Patient
Infosystems enters into new development agreements. Patient Infosystems' program
development contracts typically require payment from the customer at the time
that the contract is executed, with additional payments made as certain
development milestones are met. Development contract revenue is recognized on a
percentage of completion basis, in accordance with the ratio of total
development cost incurred to the estimated total development costs for the
entire project. Losses, if any, related to program development will be
recognized in full as identified. Patient Infosystems' contracts typically call
for a fee to be paid by the customer for each patient enrolled for a series of
program services, require payment for services incrementally as they are
delivered or require payment of a fixed fee per patient or member each month for
bundled program services. The timing of customer payments for the delivery of
program services varies by contract. Revenues from program operations are
recognized ratably as the program services are delivered. The amount of the per
patient fee varies from program to program depending upon the number of patient
contacts required, the complexity of the interventions, the cost of the
resources used and the detail of the reports generated.
Revenues from operations, which includes fees received by Patient
Infosystems for operating its programs, is the most significant source of
Patient Infosystems' revenues. Patient Infosystems is continuing to devote
significant efforts to increasing the number of programs that are in operation,
as well as developing resources to expand its products that include licensing of
Internet-based technology. Nevertheless, Patient Infosystems is still supporting
a substantial infrastructure in maintaining the capacity necessary to deliver
its services and to offer its services to new customers. Therefore, Patient
Infosystems will be required to increase substantially the number of patient
contacts and management programs to cover the costs necessary to maintain the
capability to service its customers. In that Patient Infosystems began
substantial patient contacts during 1998 and has still, to this date, increased
contacts at a relatively slow rate, Patient Infosystems is continually examining
its costing structures to determine the levels that will be necessary to achieve
profitability.
During 2002, Patient Infosystems found new sources of revenue that
increased its revenue from $1.6 million for the fiscal year ended December 31,
2001 to $2.4 million for the same period of 2002. Patient Infosystems maintained
control on costs and reduced its operating loss from $3.9 million for the fiscal
year ended December 31, 2001 to $1.7 million for the same period of 2002.
The sales cycle for Patient Infosystems' programs may be extensive from
initial contact to contract execution. During these periods, Patient Infosystems
may expend substantial time, effort and funds to prepare a contract proposal and
negotiate the contract. Patient Infosystems may be unable to consummate a
commercial relationship after the expenditure of such time, effort and financial
resources.
During 2002, Patient Infosystems felt the pressure of severe working
capital shortfalls. Patient Infosystems' available cash had been reduced to a
level that substantially limits its operations. Although Patient Infosystems
established lines of credit in the amount of $3 million, raised $1 million in
equity in 2000 and issued $5.1 million in demand notes, Patient Infosystems is
continuing to incur losses and must identify substantial additional capital to
sustain its operations. Patient Infosystems' operations are currently being
funded by loans being made on a monthly basis by a director of Patient
Infosystems. There can be no assurances given that Patient Infosystems can raise
either the required working capital through the sale of its securities or that
Patient Infosystems can borrow the additional amounts needed. In such instance,
if Patient Infosystems is unable to identify any additional sources of capital,
it will likely be forced to cease operations. As a result of the above, the
Independent Auditors' Report on Patient Infosystems' consolidated financial
statements appearing at Item 15 includes an emphasis paragraph indicating that
Patient Infosystems' recurring losses from operations, negative working capital
and stockholders' deficit raise substantial doubt about Patient Infosystems'
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
In November 2002, Patient Infosystems began providing increased technical
assistance and project management support to the federal government's national
Health Disparities Collaboratives, a chronic disease program focusing on
improving the care of underserved populations with chronic disease served by
federally qualified health centers. Patient Infosystems supports the management
of the development of a clinical registry software program and provides faculty
and staff support to the project. This initiative is administered by the Bureau
of Primary Health Care through a partnership with the Institute for Healthcare
Improvement. Although this contract is a growing product line for Patient
Infosystems, there is no guarantee that the contract will continue through the
Institute for Healthcare Improvement or will continue to be supported by the
Bureau of Primary Health Care.
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues
Revenues are comprised of revenues from operations fees, development fees
and licensing fees. Revenues increased 49% to $2,355,677 for the fiscal year
ended December 31, 2002 from $1,586,443 for the fiscal year ended December 31,
2001. A summary of these revenues by category, is as follows for the fiscal
years ended December 31:
Revenues 2002 2001
Operations Fees $ 2,125,522 $ 1,314,311
Consulting Fees 168,606 72,000
Development Fees 36,239 78,632
Licensing Fees 25,310 121,500
-----------------------------
Total $ 2,355,677 $ 1,586,443
=============================
Revenues from operations fees increased 61.7% from $1,314,311 for the
fiscal year ended December 31, 2001 to $2,125,522 for the fiscal year ended
December 31, 2002. Operations revenues are generated as Patient Infosystems
provides services to its customers for their disease-specific programs, patient
surveys, health risk assessments, patient satisfaction surveys, physician
education programs and marketing support programs. Operations revenues increased
in 2002 due to the growth of its disease and demand management business. This
growth is attributable primarily to its Congestive Heart Failure program and new
revenues being realized from its strategic marketing partners.
Due in part to the impact of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), P.L. 104-191, one of Patient Infosystems'
customers, which provided 50% of Patient Infosystems' revenue in 2002, has
elected to terminate its services agreement with Patient Infosystems effective
January 1, 2003. Under the terms of the agreement, Patient Infosystems had
provided its services to a third party that is considered a Covered Entity under
HIPAA. Patient Infosystems has a services agreement and a business associate
agreement to provide substantially the same services directly to an affiliate of
that Covered Entity and anticipates that it will continue to perform some or all
of the terminated services under such agreements. No assurance can be given that
the terminated services will be assumed under the other existing agreements, or
that any new revenues Patient Infosystems may receive, if any, will offset the
loss of revenue from the terminated services agreement.
Revenues from consulting increased 134% from $72,000 for the fiscal year
ended December 31, 2001 to $168,606 for the fiscal year ended December 31, 2002.
This increase is due to Patient Infosystems' expanded role in support of the
Health Disparities Collaboratives funded by the Bureau of Primary Healthcare and
administered by the Institute for Healthcare Improvement. Revenues from
consulting may increase during 2003. No assurances can be given that these
revenues will increase, or that any change will be material to Patient
Infosystems operating results.
Revenues from development fees decreased 53.9% from $78,632 for the fiscal
year ended December 31, 2001 to $36,239 for the fiscal year ended December 31,
2002. In 2001 and 2002, Patient Infosystems received development revenues in
connection with the enhancement of its existing programs. Development revenues
include clinical, technical and operational design or modification of Patient
Infosystems' primary disease management programs. Development revenues have
declined from year to year since the fiscal year ended December 31, 1997, as
Patient Infosystems reduced the amount of development work it has performed for
its customers. Patient Infosystems anticipates that revenue from development
fees may continue to decline unless Patient Infosystems enters into new
development agreements.
Revenues from licensing fees decreased 79.2% from $121,500 for the fiscal
year ended December 31, 2001 to $25,310 for the fiscal year ended December 31,
2002. Licensing revenue represents amounts that Patient Infosystems charges its
customers, either on a one-time only or continuing basis, for the right to
enroll patients in, or the right to license other entities, certain of its
programs, primarily Patient Infosystems' Internet-based Case Management Support
System product line. Patient Infosystems terminated one license agreement and
has not entered into any new licensing contracts. All remaining initial license
fees have been collected. Patient Infosystems anticipates that revenue from
licensing may decrease in future periods unless new license agreements are
signed.
During the fiscal year ended December 31, 2002, approximately 54% of
Patient Infosystems' revenue came from two clients, AstraZeneca, Inc. ("Zeneca")
and a healthcare insurance entity (the "Client"). Zeneca sponsored patients from
an affiliate of Client (the "Sponsored Group") in a program operated by Patient
Infosystems. Client directly sponsored patients from other of its affiliates in
substantially the same program as that provided to the Sponsored Group. In
September 2002, Patient Infosystems received notification from Zeneca. that it
intended to terminate its service agreement with Patient Infosystems as of
January 1, 2003. In January 2003, Client assumed approximately 20% of the
Sponsored Group under its service agreement with Patient Infosystems. In
February 2003, Patient Infosystems received notification that Client intends to
terminate its service agreement with Patient Infosystems, effective July 1,
2003. Neither Zeneca nor Client cited any dispute with or breach of any
agreement by Patient Infosystems. Patient Infosystems has replaced this lost
revenue with other client contracts, but no assurance can be given the new
sources of revenue will be permanent.
Costs and Expenses
Cost of sales includes salaries and related benefits, services provided by
third parties, and other expenses associated with the development of Patient
Infosystems' customized disease state management programs, as well as the
operation of each of its disease state management programs.
Cost of sales decreased 20.9% from $2,420,151 for the fiscal year ended
December 31, 2001 to $1,914,464 for the fiscal year ended December 31, 2002. The
decrease in these costs primarily reflects a reduction in staff.
Sales and marketing expenses decreased 8.3% from $813,975 for the fiscal
year ended December 31, 2001 to $746,353 for the fiscal year ended December 31,
2002. These costs consist primarily of salaries, related benefits and travel
costs, sales materials and other marketing related expenses. Decreased spending
in this area is attributable to Patient Infosystems' efforts to reduce costs and
to its limited available capital, resulting in a smaller sales and marketing
staff and increased dependence on marketing partners during the fiscal year
ended December 31, 2002. It is anticipated that Patient Infosystems will need to
invest heavily in the sales and marketing process in future periods, and intends
to do so if funds are available. To the extent that Patient Infosystems has
limited funds available for sales and marketing, or cannot leverage its
marketing partnerships adequately, it will likely be unable to invest in the
necessary marketing activities to generate substantially greater sales.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of Patient Infosystems. General and administrative expenses decreased
36.38% from $2,028,804 for the fiscal year ended December 31, 2001 to $1,282,683
for the fiscal year ended December 31, 2002. The decrease in these costs was
caused by the reduction in the amortization of in debt issuance and other
financing costs related to funding operations, pay decreases for officers of
Patient Infosystems and a renegotiation and elimination of the minimum
obligation under a vendor agreement. Patient Infosystems expects that general
and administrative expenses will remain relatively constant in future periods,
but may experience fluctuations due to uncertainties related to financing costs.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to Patient Infosystems' research and
development personnel for development of certain components of its integrated
information capture and delivery system, its Internet-based software products
and its standardized disease state management programs. Research and development
expenses decreased 44.6% from $190,731 for the fiscal year ended December 31,
2001 to $105,614 for the fiscal year ended December 31, 2002. The decrease in
research and development expenses reflects the transition of Patient
Infosystems' decreased investment in information systems and new technology.
Other Income/Expense is comprised of interest expense and losses on
investments. The totals are as follows for the fiscal years ended December 31:
2002 2001
------------- ------------
Interest expense $ (535,269) $ (410,063)
Other income (expense)
Other 4,345 11,976
ReCall Services, Inc. (200,000)
------------- ------------
Total Expense $ (530,924) $ (598,087)
------------- ------------
Interest expense is due to debt. Interest expense increased to $535,269 for
the fiscal year ended December 31, 2002 from $410,063 for the fiscal year ended
December 31, 2001. The increase in interest expense reflects the increased debt
required to fund operations.
The other expense for the fiscal year ended December 31, 2001 consists
primarily of an impairment of an investment. In September of 2001 Patient
Infosystems was notified that Recall Services, Inc. was ceasing operations and
declared its $200,000 investment in Recall Services, Inc. impaired.
Patient Infosystems had no tax benefit in 2002 due, in part, to recording a
full valuation allowance to reduce its deferred tax assets. Patient Infosystems'
deferred tax assets consist primarily of the tax benefit associated with its net
operating loss carryforwards.
Management of Patient Infosystems has evaluated the available evidence
about future taxable income and other possible sources of realization of
deferred tax assets. The valuation allowance reduces deferred tax assets to
zero, which represents management's best estimate of the amount of such deferred
tax assets that more likely than not will be realized.
For the fiscal year ended December 31, 2002, Patient Infosystems declared
$90,000 in dividends on convertible preferred stock.
Patient Infosystems had a net loss attributable to common stockholders of
$2,314,361 for the fiscal year ended December 31, 2002, compared to $4,555,305
for the fiscal year ended December 31, 2001. This represents a loss of $.21 per
basic and diluted share for 2002 and $.47 for 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Revenues are comprised of revenues from operations fees, development fees
and licensing fees. Revenues decreased 25.8% from $2,139,262 for the fiscal year
ended December 31, 2000 to $1,586,443 for the fiscal year ended December 31,
2001. A summary of these revenues by category, is as follows for the fiscal
years ended December 31:
Revenues 2001 2000
Operations Fees $1,386,311 $1,941,810
Development Fees 78,632 81,626
Licensing Fees 121,500 115,826
---------- ----------
Total $1,586,443 $2,139,262
Revenues from operations fees decreased 28.6% from $1,941,810 for the
fiscal year ended December 31, 2000 to $1,386,311 for the fiscal year ended
December 31, 2001. Operations revenues are generated as Patient Infosystems
provides services to its customers for their disease-specific programs, patient
surveys, health risk assessments, patient satisfaction surveys, physician
education programs and marketing support programs. Operations revenues decreased
in 2001 due to termination of Medicare products by two of Patient Infosystems'
key customers and completion of two pharma projects that generated substantial
revenue in the first half of 2000, but made immaterial contribution during 2001.
Revenues from development fees decreased 3.7% from $81,626 for the fiscal
year ended December 31, 2000 to $78,632 for the fiscal year ended December 31,
2001. In 2000, Patient Infosystems received development revenues from a variety
of customers for creation of, or modification to, specific programs. Patient
Infosystems has completed substantially all services under these agreements and
is primarily receiving revenues in connection with the enhancement of its
existing programs. Development revenues include clinical, technical and
operational design or modification of Patient Infosystems' primary disease
management programs. Development revenues have declined from year to year since
the fiscal year ended December 31, 1997, as Patient Infosystems reduced the
amount of development work it has performed for its customers. Patient
Infosystems anticipates that revenue from development fees will continue to
decline unless Patient Infosystems enters into new development agreements.
Revenues from licensing fees increased 4.9% from $115,826 for the fiscal
year ended December 31, 2000 to $121,500 for the fiscal year ended December 31,
2001. Licensing revenue represents amounts that Patient Infosystems charges its
customers, either on a one-time only or continuing basis, for the right to
enroll patients in, or the right to license to other entities, certain of its
programs, primarily Patient Infosystems' Internet-based Case Management Support
System product line. Patient Infosystems has not entered into any new licensing
contracts and a substantial portion the initial license fees for the existing
contracts have been collected. Patient Infosystems anticipates that revenue from
licensing will decrease in future periods unless new license agreements are
signed.
Costs and Expenses
Cost of sales includes salaries and related benefits, services provided by
third parties, and other expenses associated with the development of Patient
Infosystems' customized disease state management programs, as well as the
operation of each of its disease state management programs.
Cost of sales decreased 38% from $3,906,010 for the fiscal year ended
December 31, 2000 to $2,420,151 for the fiscal year ended December 31, 2001. The
decrease in these costs primarily reflects a decreased level of operational
activities and the full year realization of program development cost reductions
initiated during the last few months of 2000.
Sales and marketing expenses decreased 42.9% from $1,425,990 for the fiscal
year ended December 31, 2000 to $813,975 for the fiscal year ended December 31,
2001. These costs consist primarily of salaries, related benefits and travel
costs, sales materials and other marketing related expenses. Decreased spending
in this area is attributable to Patient Infosystems' efforts to reduce costs and
to its limited available capital, resulting in a smaller sales and marketing
staff and increased dependence on marketing partners during the fiscal year
ended December 31, 2001. It is anticipated that Patient Infosystems will need to
invest heavily in the sales and marketing process in future periods if funds are
available. To the extent that Patient Infosystems has limited funds available
for sales and marketing, or cannot leverage its marketing partnerships
adequately, it will likely be unable to invest in the necessary marketing
activities to generate substantially greater sales.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of Patient Infosystems. General and administrative expenses decreased
12.9% from $2,329,585 for the fiscal year ended December 31, 2000 to $2,028,804
for the fiscal year ended December 31, 2001. The decrease in these costs was
caused by the reduction in the amortization of in debt issuance and other
financing costs related to funding operations and pay decreases for officers of
Patient Infosystems. Without the financing cost, general and administrative
expense would have decreased 12.2% from $1,664,835 for the fiscal year ended
December 31, 2000 to $1,461,379 for the fiscal year ended December 31, 2001.
Patient Infosystems expects that general and administrative expenses will remain
relatively constant in future periods, but may experience fluctuations due to
uncertainties related to financing costs.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to Patient Infosystems' research and
development personnel for development of certain components of its integrated
information capture and delivery system, its Internet-based software products
and its standardized disease state management programs. Research and development
expenses decreased 37.6% from $305,543 for the fiscal year ended December 31,
2000 to $190,731 for the fiscal year ended December 31, 2001. The decrease in
research and development expenses reflects the transition of Patient
Infosystems' investment in Internet technology into operational systems during
2001.
Other Income/Expense is comprised of interest income and losses on
investments. The totals are as follows for the fiscal years ended December 31:
2001 2000
------------ ------------
Interest expense $ (410,063) $ (190,997)
Other income (expense)
Other 11,976 (20,343)
ReCall Services, Inc. (200,000) -
------------ ------------
Total Expense $ (598,087) $ (211,340)
------------ ------------
Interest expense is due to debt. Interest expense increased to $410,063 for
the fiscal year ended December 31, 2001 from $190,997 for the fiscal year ended
December 31, 2000. The increase in interest expense reflects the increased debt
required to fund operations.
The other expense for the fiscal year ended December 31, 2001 consists
primarily of an impairment of an investment. In September of 2001 Patient
Infosystems was notified that Recall Services, Inc. was ceasing operations and
declared its $200,000 investment in Recall Services, Inc. impaired.
Patient Infosystems had no tax benefit in 2001 due, in part, to recording a
full valuation allowance to reduce its deferred tax assets. Patient Infosystems'
deferred tax assets consist primarily of the tax benefit associated with its net
operating loss carryforwards.
Management of Patient Infosystems has evaluated the available evidence
about future taxable income and other possible sources of realization of
deferred tax assets. The valuation allowance reduces deferred tax assets to
zero, which represents management's best estimate of the amount of such deferred
tax assets that more likely than not will be realized.
For the fiscal year ended December 31, 2001, Patient Infosystems declared
$90,000 in dividends on convertible preferred stock.
Patient Infosystems had a net loss attributable to common stockholders of
$4,555,305 for the fiscal year ended December 31, 2001, compared to $6,656,706
for the year ended December 31, 2000. This represents a loss of $.47 per basic
and diluted share for 2001 and $.82 for 2000.
Liquidity and Capital Resources
At December 31, 2002, Patient Infosystems had a working capital deficit of
$6,135,451 as compared to a working capital deficit of $4,686,322 at December
31, 2001. Also at December 31, 2002, Patient Infosystems had a stockholders'
deficit of $8,670,239. Through December 31, 2002 these amounts reflect the
effects of Patient Infosystems' continuing losses that have been funded, in
part, by the issuance of demand notes totaling $5,077,500 to directors of
Patient Infosystems and long term borrowings of $3,000,000 against its line of
credit. Patient Infosystems has never earned profits and, since its inception,
Patient Infosystems has primarily funded its operations, working capital needs
and capital expenditures from the sale of equity securities and the issuance of
debt. Patient Infosystems is currently maintaining it operations only through
the receipt of continuing loans from one of its directors. If these loans or
additional funds were not available, Patient Infosystems would likely be
required to cease operations.
In December 1999, Patient Infosystems established a credit facility for
$1,500,000 guaranteed by Derace Schaffer and John Pappajohn, two directors of
Patient Infosystems. In March 2000, the facility was increased by $1,000,000
under substantially the same terms, also guaranteed by the same Board members.
On March 28, 2001, Patient Infosystems entered into an Amended and Restated
Credit Agreement with Wells Fargo Bank Iowa, N.A. ("Wells Fargo"), which
extended the term of Patient Infosystems' credit facility to March 31, 2002
under substantially the same terms. Dr. Schaffer and Mr. Pappajohn guaranteed
this extension.
On March 28, 2002, Wells Fargo extended the term of the credit facility to
March 31, 2003 under substantially the same terms. Dr. Schaffer and Mr.
Pappajohn also guaranteed this extension. As of the date of this filing, there
has been no consideration for the continued guarantee.
On June 28, 2002, Patient Infosystems and Wells Fargo agreed on an addendum
to the Amended and Restated Credit Agreement which extends the credit facility
by an additional $500,000, increasing the total credit facility to $3,000,000.
Mr. Pappajohn and Dr. Schaffer also guaranteed this extended credit facility.
On March 28, 2003, Wells Fargo extended the term of the credit facility to
January 2, 2004 under substantially the same terms. Dr. Schaffer and Mr.
Pappajohn also guaranteed this extension. As of the date of this filing, there
has been no consideration for the continued guarantee.
On June 11, 2002, the board of directors of Patient Infosystems approved
the conversion of up to $4,642,500 in debt and $438,099 of accrued interest owed
to Mr. Pappajohn and Dr. Schaffer into 36,289,993 shares of Patient Infosystems'
common stock using a value of $0.14 per common share. The average value of
Patient Infosystems' common stock based upon an average closing price for a
period immediately before June 11, 2002 was $0.1354. Patient Infosystems'
Certificate of Incorporation authorizes Patient Infosystems to issue up to
20,000,000 shares of common stock, 10,956,024 of which were issued and
outstanding and 2,217,320 of which were reserved for issuance under outstanding
options, warrants and upon conversion of outstanding convertible preferred
stock. Giving effect to this debt conversion transaction will require an
amendment to Patient Infosystems' Certificate of Incorporation to authorize
additional shares of common stock. Accordingly, this debt conversion transaction
cannot occur unless and until the stockholders of Patient Infosystems approve
this amendment. A date for a meeting of the stockholders of Patient Infosystems
has not yet been established.
Patient Infosystems has expended significant amounts to expand its
operational capabilities including increasing its administrative and technical
costs. While Patient Infosystems has curtailed its spending levels, to the
extent that revenues do not increase substantially, Patient Infosystems' losses
will continue and its available capital will diminish further. Patient
Infosystems' operations are currently being funded by loans being made by a
director of Patient Infosystems. There can be no assurances given that Patient
Infosystems can raise either the required working capital through the sale of
its securities or that Patient Infosystems can borrow the additional amounts
needed. In such instance, if Patient Infosystems is unable to identify any
additional sources of capital, it will likely be forced to cease operations. As
a result of the above, the Independent Auditors' Report on Patient Infosystems'
consolidated financial statements includes an emphasis paragraph indicating that
Patient Infosystems' recurring losses from operations raise substantial doubt
about Patient Infosystems' ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Capital expenditures during 2002 were $8,867, as compared to expenditures
of $9,204 during 2001 and $16,404 during 2000. The expenditures during these
periods represented the purchase of technology platform components of the
integrated information capture and delivery systems, as well as purchases
required to maintain Patient Infosystems' technology infrastructure.
Inflation
Inflation did not have a significant impact on Patient Infosystems'
operations during 2002, 2001 or 2000. Patient Infosystems continues to monitor
the impact of inflation in order to minimize its effects through pricing
strategies, productivity improvements and cost reductions.
Recent Accounting Pronouncements
New accounting pronouncements that became effective for the Company in 2002
did not have a material impact on the Company's financial statements.
Critical Accounting Policies
The SEC recently issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
Patient Infosystems significant accounting policies are described in Note 1
to the Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, the following accounting policies could be
deemed to be critical by SEC.
Use of Estimates. In preparing the consolidated financial statements
Patient Infosystems uses estimates in determining the economic useful lives of
its assets, provisions for doubtful accounts, tax valuation allowances and
various other recorded or disclosed amounts. Estimates require management to use
its judgment. While Patient Infosystems believes that its estimates for these
matters are reasonable, if the actual amount is significantly different than the
estimated amount, its assets, liabilities or results of operations may be
overstated or understated.
Impairment of Long-Lived Assets. Patient Infosystems records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted future cash
flows estimated to be generated by those assets are less than the carrying
amount of those assets. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. If the actual
value is significantly less than the estimated value, Patient Infosystems assets
may be overstated.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business and consistent with established policies
and procedures, Patient Infosystems uses the necessary financial instruments to
manage the fluctuations in interest rates. Patient Infosystems does not have any
foreign currency risk. Patient Infosystems does not enter into any of these
transactions for speculative purposes.
Item 8. Financial Statements and Supplemental Data.
The financial statements and supplementary data, together with the report
thereon by Patient Infosystems independent auditor, are listed below in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the names, ages and principal positions of
the directors and executive officers of Patient Infosystems.
Name Age Title
Derace L. Schaffer 54 Chairman of the Board of Directors
Roger Louis Chaufournier 44 President, Chief Executive Officer and Director
John Pappajohn 74 Director
Christine St. Andre 51 Chief Operating Officer
Kent Tapper 46 Vice President, Financial Planning and Chief Financial Officer
Derace L. Schaffer, M.D. Dr. Schaffer has been Chairman of the Board and a
Director of Patient Infosystems since its inception in February 1995. Dr.
Schaffer is President of the Ide Imaging Group, P.C., as well as the Lan Group,
a venture capital firm specializing in healthcare and high technology
investments. He serves as a director of the following public companies: Allion
Healthcare, Inc. and Radiologix, Inc. He is also a director of several private
companies, including Analytika, Inc., Card Systems, Inc. and Logisticare, Inc.
Dr. Schaffer is a board certified radiologist. He received his postgraduate
radiology training at Harvard Medical School and Massachusetts General Hospital,
where he served as Chief Resident. Dr. Schaffer is a member of Alpha Omega
Alpha, the national medical honor society, and is Clinical Professor of
Radiology at the University of Rochester School of Medicine. Dr. Schaffer
provides services to Patient Infosystems on a part-time basis.
Roger Louis Chaufournier. Mr. Chaufournier has been the President and Chief
Executive Officer of Patient Infosystems since April 1, 2000. Prior to joining
Patient Infosystems, Mr. Chaufournier was President of the STAR Advisory Group,
a healthcare consulting firm he founded in 1998. From August 1996 to July 1999,
Mr. Chaufournier was the Chief Operating Officer of the Managed Care Assistance
Company, a company that developed and operated Medicaid health plans. Managed
Care Assistance Company filed for protection under the federal bankruptcy laws
in June 2000. From 1993 to 1996, Mr. Chaufournier was Assistant Dean for
Strategic Planning for the Johns Hopkins University School of Medicine. In
addition, Mr. Chaufournier spent twelve years in progressive leadership
positions with the George Washington University Medical Center from 1981 to
1993. Mr. Chaufournier was also Chairman of the Board and acting President of
Metastatin Pharmaceuticals, a privately held company developing therapeutics in
the area of prostate cancer. Mr. Chaufournier was a three time Examiner with the
Malcolm Baldrige National Quality Award and has served as the national
facilitator for the federal Bureau of Primary Health Care chronic disease
collaboratives.
John Pappajohn. Mr. Pappajohn has been a Director of Patient Infosystems since
its inception in February 1995, and served as its Secretary and Treasurer from
inception through May 1995. Since 1969, Mr. Pappajohn has been the sole owner of
Pappajohn Capital Resources, a venture capital firm and President of Equity
Dynamics, Inc., a financial consulting firm, both located in Des Moines, Iowa.
He serves as a Director for the following public companies: Allion Healthcare,
Inc., MC Informatics, Inc. and Pace Health Management Systems, Inc.
Christine St. Andre. Ms. St. Andre has been the Executive Vice President and
Chief Operating Officer of Patient Infosystems since June 5, 2000. Ms. St. Andre
has more than 20 years experience managing complex healthcare organizations.
From 1994 to 2000, Ms. St. Andre was Chief Executive Officer for the University
of Utah Hospitals and Clinics. Prior to 1994, Ms. St. Andre served as Chief
Executive Officer of George Washington University Medical Center. Ms. St.
Andre's career in healthcare began in the area of information technology at the
Thomas Jefferson University.
Kent Tapper. Mr. Tapper has been Vice President, Financial Planning of Patient
Infosystems since April 1999. Mr. Tapper has served as Chief Information Officer
and Vice President, Systems Engineering and has been with Patient Infosystems
since July 1995. Mr. Tapper became the acting Chief Financial Officer of Patient
Infosystems in April 2000. From 1992 to 1995, Mr. Tapper served as Product
Manager, Audio Response and Call Center Platforms for Northern Telecom, Inc.
From 1983 to 1992, Mr. Tapper held Product Manager, Systems Engineering Manager
and various engineering management positions with Northern Telecom.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Patient Infosystems' executive officers and directors and persons who own more
than 10% of Patient Infosystems' common stock (collectively referred to as
"Reporting Persons") to file reports of ownership and changes in ownership with
the SEC. Reporting Persons are required by SEC regulations to furnish Patient
Infosystems with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms received or written
representations from Reporting Persons, Patient Infosystems believe that with
respect to the fiscal year ended December 31, 2002, all the Reporting Persons
complied with all applicable filing requirements.
Item 11. Executive Compensation.
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to Patient Infosystems and
its subsidiary for each of the fiscal years ended December 31, 2002, 2001 and
2000 for those persons who were at December 31, 2002, (i) the Chief Executive
Officer and (ii) certain other executive officers of Patient Infosystems who
received compensation in excess of $100,000 during the year ended December 31,
2002 (the "Named Executive Officers"):
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Securities
Name and Principal Position Underlying
Year Salary ($) Bonus ($) Options (#)
Roger L. Chaufournier, President and Chief 2002 $180,841 - -
Executive Officer (1) 2001 $196,502 - 200,000
2000 $151,546 - 200,000
Christine St. Andre, Chief Operating 2002 $157,512 - -
Officer (2) 2001 $171,893 - 150,000
2000 $97,885 - 150,000
Kent A. Tapper, Vice President, Financial 2002 $107,942 - -
Planning 2001 $116,628 - 100,000
2000 $119,335 - -
(1) Mr. Chaufournier was appointed President and Chief Executive Officer as of
March 23, 2000.
(2) Ms. St. Andre was appointed Chief Operating Officer as of June 5, 2000.
Neither the Chief Executive Officer nor any of the Named Executive Officers
of Patient Infosystems was awarded stock options during 2002.
No stock options were exercised by the Chief Executive Officer or any of
the Named Executive Officers of Patient Infosystems during 2002. The following
table sets forth certain information regarding unexercised options held by the
Chief Executive Officer and the Named Executive Officers of Patient Infosystems
at December 31, 2001. The table does not give effect to grants of options that
occurred after December 31, 2002. For additional information with respect to
these grants, see "Stock Option Plan".
Aggregated Option Exercises
and Fiscal Year End Option Values
Number of securities underlying Value of unexercised
unexercised options at in-the-money options
December 31, 2002 (#) at
December 31, 2002 ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
Roger Chaufournier 228,000 172,000 $ 1,850 $ 650
Christine St. Andre 170,000 130,000 $ 1,375 $ 500
Kent Tapper 108,000 28,000 $ 3,096 $ 350
(1) Calculated based upon $0.20 market value of the underlying securities as of
December 31, 2002.
Stock Option Plan
Patient Infosystems' Amended and Restated Stock Option Plan (the "Plan")
was adopted by the Board of Directors and stockholders in May 2000. As of March
31, 2003, up to 1,680,000 shares of common stock are authorized and reserved for
issuance under the Plan. Under the Plan, options may be granted in the form of
incentive stock options ("ISOs") or non-qualified stock options ("NQOs") from
time to time to salaried employees, officers, directors and consultants of
Patient Infosystems, as determined by the compensation committee of the Board of
Directors. The compensation committee determines the terms and conditions of
options granted under the Plan, including the exercise price. The Plan provides
that the compensation committee must establish an exercise price for ISOs that
is not less than the fair market value per share at the date of the grant.
However, if ISOs are granted to persons owning more than 10% of the voting stock
of Patient Infosystems, the Plan provides that the exercise price must not be
less than 110% of the fair market value per share at the date of the grant. The
Plan also provides for a non-employee director to be entitled to receive a
one-time grant of a NQO to purchase 36,000 shares at an exercise price equal to
fair market value per share on the date of his or her initial election to the
Board of Directors. Such NQO is exercisable only during the non-employee
director's term and automatically expires on the date such director's service
terminates. Each option, whether an ISO or NQO, must expire within ten years of
the date of the grant.
As of December 31, 2002, options to acquire 1,115,140 shares of common
stock had been granted to employees and directors of Patient Infosystems. The
following table sets forth information regarding the number of options
outstanding and the exercise price of these options.
Number of Options Outstanding at
December 31, 2002 Exercise Price
---------------- --------------
7,100 $0.09
36,000 $0.14
525,000 $0.19
150,000 $0.50
72,000 $0.69
77,040 $1.38
30,000 $1.88
200,000 $2.06
9,500 $2.44
8,500 $2.75
Of these options, 345,000, exercisable for $0.1875 per share, were granted
as of January 26, 2001 to certain officers and key members of management and
vested immediately in lieu of a cash bonus. The remainder of the options granted
on January 26, 2001 and all other options granted under the Plan vest to the
extent of 20% of the option grant on the first anniversary of the grant, and 20%
on each subsequent anniversary.
401(k) Profit Sharing Plan
Patient Infosystems adopted a 401(k) Profit Sharing Plan. The 401(k) plan
is available to all employees who have attained age 21. An employee may
contribute a portion of their wages on a pre-tax basis, subject to limitations
specified under the Internal Revenue Code. Under the terms of the 401(k) plan,
Patient Infosystems may make a discretionary matching contribution equal to a
percentage of the employee's contribution to the 401(k) plan and a discretionary
amount determined annually by Patient Infosystems and divided among eligible
participants based upon an employee's annual compensation in relation to the
aggregate annual compensation of all eligible participants. Contributions are
allocated to each employee's individual account and are, at the employee's
election, invested in one, all or some combination of the investment funds
available under the 401(k) plan. Employee contributions are fully vested and
non-forfeitable. Any matching or discretionary contributions vest 25% for each
year of service. To date, Patient Infosystems has not made any matching
contributions under the 401(k) plan.
Compensation of Directors
All Directors are reimbursed for expenses incurred in connection with
attending meetings, including travel expenses to such meetings. Patient
Infosystems' Directors are eligible to participate in Patient Infosystems' Stock
Option Plan. Pursuant to the Stock Option Plan, non-employee Directors of
Patient Infosystems receive a one-time grant of a non-qualified stock option to
purchase 36,000 shares of Patient Infosystems' common stock at an exercise price
equal to fair market value per share on the date of their initial election to
the Board of Directors. Such non-qualified stock option vests as to 20% of the
option grant on the first anniversary of the grant, and 20% on each subsequent
anniversary, is exercisable only during the non-employee director's term and
automatically expires on the date such director's service terminates. Upon the
occurrence of a change of control, as defined in the Stock Option Plan, all
outstanding unvested options immediately vest.
Compensation Committee Interlocks and Insider Participation
Patient Infosystems currently does not have an acting compensation
committee. During the fiscal year ended December 31, 2002 no officers or
employees of Patient Infosystems participated in deliberations of the Board of
Directors concerning executive officer compensation. None of Patient
Infosystems' executive officers serves as a member of the Board or compensation
committee of any entity that has one or more executive officers serving on
Patient Infosystems' Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of Patient Infosystems common stock as of March 31, 2003 for (i) each
person or entity who is known by us to own beneficially more than five percent
of our common stock; (ii) each Named Executive Officer; (iii) each director of
Patient Infosystems; and (iv) all directors and executive officers as a group.
Beneficial Owner (1) Number of Shares Percent of
(2) Class (2)
---------------- ----------
John Pappajohn (3) 4,197,495 36.85%
Derace L. Schaffer (4) 2,487,307 22.22%
Edgewater Private Equity Fund II, L.P.,
900 North Michigan Avenue, 14th Floor
Chicago, IL 60611 970,000 8.85%
Roger Louis Chaufournier (5) 281,000 2.50%
Christine St. Andre (6) 180,000 1.62%
Kent A. Tapper (7) 115,100 1.04%
--------------------------------
All directors and executive officers as a group (5 persons) 8,230,902 67.44%
(1) Unless otherwise noted, the address of each of the listed persons is c/o
Patient Infosystems at 46 Prince Street, Rochester, New York 14607.
(2) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of the date hereof are deemed outstanding. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite
such stockholder's name. The percentage beneficial ownership is based on
10,956,024 shares of common stock outstanding as of March 31, 2003.
(3) Includes 360,000 shares held by Halkis, Ltd., a sole proprietorship owned
by Mr. Pappajohn, 360,000 shares held by Thebes, Ltd., a sole
proprietorship owned by Mr. Pappajohn's spouse and 360,000 shares held
directly by Mr. Pappajohn's spouse. Mr. Pappajohn disclaims beneficial
ownership of the shares owned by Thebes, Ltd. and by his spouse. Includes
options to purchase 36,000 shares that are either currently exercisable or
that become exercisable within 60 days of March 31, 2003 and 400,000 common
stock equivalents for 50,000 shares of Series C Preferred Stock
beneficially owned as of March 31, 2003. Does not include 32,268,550 shares
of Patient Infosystems common stock resulting from the conversion of
$4,135,000 in debt and $382,597 of accrued interest. Such shares will be
issued upon approval of Patient Infosystems' stockholders of the amendment
of the certificate of incorporation to increase the authorized capital
stock.
(4) Includes 288,000 shares held by Dr. Schaffer's minor children. Also
includes 36,000 shares that are issuable upon the exercise of options that
are either currently exercisable or that become exercisable within 60 days
of March 31, 2003 and 200,000 common stock equivalents for the 25,000
shares of Series C Preferred Stock beneficially owned as of March 31, 2003.
Does not include 2,878,586 shares of Patient Infosystems common stock
resulting from the conversion of $347,500 in debt and $55,502 of accrued
interest. Such shares will be issued upon approval of Patient Infosystems'
stockholders of the amendment of the certificate of incorporation to
increase the authorized capital stock.
(5) Includes options to purchase 281,000 shares that are either currently
exercisable or that become exercisable within 60 days of March 31, 2003.
Does not include 119,000 shares subject to outstanding options that are not
exercisable within 60 days of March 31, 2003.
(6) Includes options to purchase 180,000 shares that are either currently
exercisable or that become exercisable within 60 days of March 31, 2003.
Does not include 120,000 shares subject to outstanding options that are not
exercisable within 60 days of March 31, 2003.
(7) Includes options to purchase 115,000 shares that are either currently
exercisable or that become exercisable within 60 days of March 31, 2003.
Does not include 21,000 shares subject to outstanding options that are not
exercisable within 60 days of March 31, 2003.
Equity Compensation Plan Information
The following table gives information with respect to the equity securities
that are authorized for issuance under Patient Infosystems' compensation plans
as of December 31, 2002.
Number of securities
remaining available for
Number of Securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column)
- ------------------------------- ------------------------- ------------------------ ---------------------------
Equity compensation plans
approved by security holders 1,115,140 $0.76 301,780
- ------------------------------- ------------------------- ------------------------ ---------------------------
Equity compensation plans not
approved by security holders - - -
Total 1,115,140 $0.76 301,780
Item 13. Certain Relationships and Related Transactions.
In 2002, Patient Infosystems borrowed $1,170,000 from Mr. Pappajohn,
bringing the total borrowed from Mr. Pappajohn to $4,730,000. Proceeds from
these loans were used to support Patient Infosystems' operations. The interest
rate on these loans is 9.5% per year. Patient Infosystems has borrowed an
additional $600,000 from Mr. Pappajohn subsequent to January 1, 2003. The
interest on the loans after January 1, 2003 is 7.5%
Patient Infosystems did not borrow any additional amounts from Dr. Schaffer
in 2002. The total borrowed from Dr. Schaffer is $347,500. Proceeds from these
loans were used to support Patient Infosystems operations. The interest rate on
this loan is 9.5% per year.
The loans from Mr. Pappajohn and Dr. Schaffer are demand notes that total
$5,077,500 as of December 31, 2002 and are secured by the assets of Patient
Infosystems.
On June 11, 2002, the Board of Directors of Patient Infosystems approved
the conversion of up to $4,642,500 in debt and $438,099 of accrued interest owed
to Mr. Pappajohn and Dr. Schaffer into 36,289,993 shares of Patient Infosystems
common stock using a value of $0.14 per share of common stock. The average value
of Patient Infosystems common stock based upon an average closing price for a
period immediately before June 11, 2002 was $0.1354 per share. On August 7,
2002, Patient Infosystems paid $160,000 of the outstanding debt. As a result,
$4,482,500 in debt and $438,099 of accrued interest will be converted into
35,147,136 shares of Patient Infosystems common stock. Patient Infosystems'
Certificate of Incorporation authorized Patient Infosystems to issue up to
20,000,000 shares of common stock, 10,956,024 of which were issued and
outstanding and 2,217,320 of which were reserved for issuance under outstanding
options, warrants and upon conversion of outstanding convertible preferred
stock. Giving effect to this debt conversion transaction will require an
amendment to Patient Infosystems' Certificate of Incorporation to authorize
additional shares of common stock. Accordingly, this debt conversion transaction
cannot occur unless and until the stockholders of Patient Infosystems approve
this amendment.
Patient Infosystems has expended significant amounts to expand its
operational capabilities including increasing its administrative and technical
costs. While Patient Infosystems has curtailed its spending levels, to the
extent that revenues do not increase substantially, Patient Infosystems' losses
will continue and its available capital will diminish further. Patient
Infosystems' operations are currently being funded by loans being made by Mr.
Pappajohn, a director of Patient Infosystems. There can be no assurances that
Patient Infosystems can borrow the additional amounts needed to fund its
operations. In such instance, if Patient Infosystems is unable to identify any
additional sources of capital, it will likely be forced to cease operations. As
a result of the above, the Independent Auditors' Report on Patient Infosystems'
consolidated financial statements includes an emphasis paragraph indicating that
Patient Infosystems' recurring losses from operations raise substantial doubt
about Patient Infosystems' ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In December 1999, Patient Infosystems established a credit facility for
$1,500,000 guaranteed by Dr. Schaffer and Mr. Pappajohn. In consideration for
their guarantees, Patient Infosystems granted to Dr. Schaffer and Mr. Pappajohn
warrants to purchase an aggregate of 375,000 shares of common stock for $1.5625
per share. In March 2000, the facility was increased by $1,000,000 under
substantially the same terms and also guaranteed by the same Board members
resulting in a total amount due of $2,500,000 as of December 31, 2001 and 2000.
Additional warrants to purchase an aggregate of 250,000 shares of common stock
for $2.325 per share, were granted to Dr. Schaffer and Mr. Pappajohn for their
guarantee of this additional line of credit.
On March 28, 2001, Patient Infosystems entered into an Amended and Restated
Credit Agreement with Wells Fargo Bank, N.A., which extended the term of Patient
Infosystems' credit facility to March 31, 2002 under substantially the same
terms. Dr. Schaffer and Mr. Pappajohn guaranteed this extension. In
consideration for their guarantees, the Company re-priced 625,000 warrants
previously granted in connection with prior guarantees to $0.05 per share,
effective April 1, 2001.
On June 28, 2002, Patient Infosystems and Wells Fargo agreed on an addendum
to the Amended and Restated Credit Agreement that extends the credit facility by
an additional $500,000, increasing the total credit to $3,000,000. Mr. Pappajohn
and Dr. Schaffer also guaranteed the extended credit facility.
In 2002, Patient Infosystems borrowed $1,170,000 from Mr. Pappajohn,
bringing the total borrowed from Mr. Pappajohn to $4,730,000. Proceeds from
these loans were used to support the Patient Infosystems' operations. The
interest rate on these loans is 9.5% per year. Patient Infosystems has borrowed
an additional $600,000 from Mr. Pappajohn subsequent to January 1, 2003. The
interest on the loans after January 1, 2003 is 7.5%
The Company did not borrow any additional amounts from Dr. Schaffer in
2002. The total borrowed from Dr. Schaffer is $347,500. Proceeds from these
loans were used to support Patient Infosystems' operations. The interest rate on
this loan is 9.5% per year.
The loans from Mr. Pappajohn and Dr. Schaffer are demand notes that total
$5,077,500 as of December 31, 2002 and are secured by the assets of Patient
Infosystems.
On June 6, 2001, Patient Infosystems issued a total of 2,319,156 shares of
unregistered common stock to Mr. Pappajohn and Dr. Schaffer as consideration for
their continued financial support of Patient Infosystems.
On June 11, 2002, the board of directors of Patient Infosystems approved
the conversion of up to $4,642,500 in debt and $438,099 of accrued interest owed
to Mr. Pappajohn and Dr. Schaffer into 36,289,993 shares of Patient Infosystems'
common stock using a value of $0.14 per common share. The average value of
Patient Infosystems' common stock based upon an average closing price for a
period immediately before June 11, 2002 was $0.1354. As of December 31, 2002,
Patient Infosystems' Certificate of Incorporation authorizes Patient Infosystems
to issue up to 20,000,000 shares of common stock, 10,956,024 of which were
issued and outstanding and 2,217,340 of which were reserved for issuance under
outstanding options, warrants and upon conversion of outstanding convertible
preferred stock. Giving effect to this debt conversion transaction will require
an amendment to Patient Infosystems' Certificate of Incorporation to authorize
additional shares of common stock. Accordingly, this debt conversion transaction
cannot occur unless and until the stockholders of Patient Infosystems approve
this amendment. A date for a meeting of the stockholders of Patient Infosystems
has not yet been established.
Item 14. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, Patient Infosystems' chief executive officer
and principal accounting officer have concluded that Patient Infosystems'
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
ensure that information required to be disclosed by Patient Infosystems in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) Changes in Internal Controls.
There were no significant changes in Patient Infosystems' internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following financial statements and schedules are filed at the end of
this annual report, beginning on page F-1. Other schedules are omitted
because they are not required or are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
Index to Financial Statements Page
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Schedule II - Valuation and Qualifying Accounts S-1
(b) Reports on Form 8-K.
Patient Infosystems did not file any current reports on Form 8-K during the
fourth quarter of the fiscal year ended December 31, 2002.
(c) Exhibits.
Exhibit # Description of Exhibits
3.1 * Certificate of Incorporation
3.2 * By-Laws
4.1 ** Patient Infosystems, Inc. Amended and Restated Stock Option Plan
4.2 *** Certificate of Designations, Powers, Preferences and Relative,
Participating, Optional or Other Special Rights, and the
Qualifications, Limitations Thereof of the Series C Preferred Stock
of Patient InfoSystems,Inc.
10.15 + Asset Purchase Agreement dated as of September 29, 1998 among
Patient Infosystems Acquisition Corp., Patient Infosystems and
HealthDesk Corporation.
10.16 + Amendment to Asset Purchase Agreement dated as of December 1, 1998
among Patient Infosystems Acquisition Corp., Patient Infosystems and
HealthDesk Corporation.
10.17 + Second Amendment to Asset Purchase Agreement dated as of February 1,
1999 among Patient Infosystems Acquisition Corp., Patient
Infosystems and HealthDesk Corporation.
10.19 + Consulting Agreement dated as of March 8, 1999 between Patient
Infosystems and John V. Crisan.
10.20 + Lease Agreement dated as of February 22, 1995 between Patient
Infosystems and Conifer Prince Street Associates.
10.21 + First Addendum to Lease Agreement dated as of August 22, 1995
between Patient Infosystems and Conifer Prince Street Associates.
10.22 + Second Addendum to Lease Agreement dated as of November 17, 1995
between Patient Infosystems and Conifer Prince Street Associates.
10.23 + Third Addendum to Lease Agreement dated as of March 28, 1996 between
Patient Infosystems and Conifer Prince Street Associates.
10.24 + Fourth Addendum to Lease Agreement dated as of October 29, 1996
between Patient Infosystems and Conifer Prince Street Associates.
10.25 + Fifth Addendum to Lease Agreement dated as of November 30, 1996
between Patient Infosystems and Conifer Prince Street Associates.
10.26 + Sixth Addendum to Lease Agreement dated as of November 24, 1997
between Patient Infosystems and Conifer Prince Street Associates.
10.30 ++ Seventh Addendum to Lease Agreement dated as of June 16, 1999
between Patient Infosystems and Conifer Prince Street Associates.
10.31 ++ Lease Agreement dated as of July 2, 1999 between Patient Infosystems
and Cadena Properties Limited.
10.32 ++ Lease Agreement dated as of August 1, 1999 between Patient
Infosystems and Michele M. Hoey and John E. Hoey.
10.33 ++ Revolving Note dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.34 ++ Credit Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.35 ++ Security Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.36 ++ Arbitration Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.37 ++ Financing Statement executed by Patient Infosystems and Norwest
Bank Iowa, National Association.
10.38 ++ First Amendment to Credit Agreement dated as of March 21, 2000
between Patient Infosystems and Norwest Bank Iowa, National
Association.
10.39 ++ Note Modification Agreement dated as of March 21, 2000 between
Patient Infosystems and Norwest Bank Iowa, National Association.
10.41 *** Form of Subscription Agreement dated on or about March 31,
2000 between Patient Infosystems and John Pappajohn, Derace
Schaffer, Gerald Kirke and Michael Richards for Series C 9%
Cumulative Convertible Preferred Stock.
10.42 *** Form of Registration Rights Agreement dated on or about
March 31, 2000 between Patient Infosystems and John Pappajohn,
Derace Schaffer, Gerald Kirke and Michael Richards for Series
C 9% Cumulative Convertible Preferred Stock.
10.43 *** Eighth Addendum to Lease Agreement dated as of December 8, 2000
between Patient Infosystems and Conifer Prince Street Associates.
10.44 *** Termination of Lease Agreement dated as of January 24, 2001 between
Patient Infosystems and Michele M. Hoey and John E. Hoey.
10.45 *** Amended and Restated Credit Agreement dated as of March 28, 2001
between Patient Infosystems and Wells Fargo Bank Iowa, National
Association.
10.46 *** Revolving Note dated as of March 28, 2001 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.47 *** Form of Promissory Notes payable to Dr. Schaffer and Mr. Pappajohn.
10.48 *** Form of Security Agreements with Dr. Schaffer and Mr. Pappajohn.
10.49 *** Ninth Addendum to Lease Agreement dated as of January 7, 2002
between Patient Infosystems and Conifer Prince Street Associates.
10.50 # Letter of Agreement dated as of March 25, 2002 between Patient
Infosystems, John Pappajohn and Derace Schaffer.
10.51 # Second Amended and Restated Credit Agreement dated as of March 28,
2002 between Patient Infosystems and Wells Fargo Bank Iowa, National
Association.
10.52 # Revolving Note dated as of March 28, 2002 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.53 # Security Agreement dated as of March 28, 2002 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.54 ## Addendum to Amended and Restated Credit Agreement dated as of June
28, 2002 between Patient Infosystems and Wells Fargo Bank Iowa,
National Association.
10.55 ## Agreement for Purchase and Sale of Assets dated as of September 23,
2002 between Patient Infosystems and American CareSource
Corporation.
10.56 Tenth Addendum to Lease Agreement dated as of June 24, 2002 between
Patient Infosystems and Conifer Prince Street Associates.
10.57 Eleventh Addendum to Lease Agreement dated as of December 30, 2002
between Patient Infosystems and Conifer Prince Street Associates.
10.58 Letter of Agreement dated as of March 28, 2003 between Patient
Infosystems, John Pappajohn and Derace Schaffer.
10.59 Second Addendum to Second Amended and Restated Credit Agreement
dated as of March 28, 2003 between Patient Infosystems and Wells
Fargo Bank, National Association.
10.60 Modification Agreement dated as of March 28, 2003 between Patient
Infosystems and Wells Fargo Bank, National Association.
21.1 *** Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ------------------------------
* Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registration Statement on Form S-1 filed
on July 3, 1996 and incorporated herein by reference.
** Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registration Statement on Form S-8 filed
on May 3, 2000 and incorporated herein by reference.
*** Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on April
2, 2001 and incorporated herein by reference.
+ Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on April
13, 1999 and incorporated herein by reference.
++ Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on March
30, 2000 and incorporated herein by reference.
# Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on April
10, 2002 and incorporated herein by reference.
## Previously filed with the Securities and Exchange Commission
as an Exhibit to the Quarterly Report on Form 10-Q filed on
November 14, 2002 and incorporated herein by reference.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PATIENT INFOSYSTEMS, INC.
By: /s/Roger L. Chaufournier March 31, 2003
----------------------------- --------------
Roger L. Chaufournier Date
Director, President, and Chief Executive Officer
Pursuant to the requirements the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/Roger L. Chaufournier March 31, 2003
----------------------------- --------------
Roger L. Chaufournier Date
Director, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/Kent A. Tapper March 31, 2003
----------------------------- --------------
Kent A. Tapper Date
Vice President Financial Planning
(Principal Financial and Accounting Officer)
By: /s/Derace L. Schaffer March 31, 2003
----------------------------- --------------
Derace L. Schaffer, M.D. Date
Chairman of the Board
By: /s/John Pappajohn March 31, 2003
----------------------------- --------------
John Pappajohn Date
Director
Certification of Annual Report
I, Roger L. Chaufournier, certify that:
1. I have reviewed this annual report on Form 10-K of Patient Infosystems,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/Roger L. Chaufournier
--------------- ----------------------------------------
Name: Roger L. Chaufournier
Title: President and Chief Executive Officer
Certification of Annual Report
I, Kent Tapper, certify that:
1. I have reviewed this annual report on Form 10-K of Patient Infosystems,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/Kent Tapper
--------------- ----------------------------------------------
Name: Kent Tapper
Title: Vice President Financial Planning
Principal Financial and Accounting Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Patient InfoSystems, Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheets of Patient
Infosystems, Inc. and subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2002. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Patient Infosystems, Inc. and
subsidiary at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations, negative working capital and stockholders' deficit raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning this matter are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Deloitte & Touche LLP
Rochester, New York
January 17, 2003
(March 28, 2003 as to Note 3)
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 5,011 $ 29,449
Accounts receivable (net of doubtful accounts allowance of $55,000and $37,217) 441,216 273,791
Prepaid expenses and other current assets 105,827 88,449
Notes receivable 200,000 -
---------------------------------
Total current assets 752,054 391,689
PROPERTY AND EQUIPMENT, net 285,747 498,472
Other assets - 8,934
Intangible assets (net of accumulated amortization of $443,258 and $299,685) 179,465 323,038
---------------------------------
TOTAL ASSETS $ 1,217,266 $ 1,222,133
---------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 379,004 $ 111,018
Accrued salaries and wages 208,752 176,618
Accrued expenses 351,621 477,205
Accrued Interest 713,554 282,530
Borrowings from directors 5,077,500 3,907,500
Deferred revenue 157,074 123,140
---------------------------------
Total current liabilities 6,887,505 5,078,011
LINE OF CREDIT 3,000,000 2,500,000
COMMITMENTS (Note 7)
STOCKHOLDERS' DEFICIT:
Preferred stock - $.01 par value: shares authorized: 5,000,000
Series C, 9% cumulative, convertible
issued and outstanding: 100,000 1,000 1,000
Common stock - $.01 par value: shares authorized:
20,000,000; issued and outstanding: 10,956,024 109,560 109,560
Additional paid-in capital 24,132,153 24,222,153
Accumulated deficit (32,912,952) (30,688,591)
---------------------------------
Total stockholders' deficit (8,670,239) (6,355,878)
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,217,266 $ 1,222,133
---------------------------------
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------
2002 2001 2000
REVENUES $ 2,355,677 $ 1,586,443 $ 2,139,262
-------------------------------------------------------
COSTS AND EXPENSES:
Cost of revenue 1,914,464 2,420,151 3,906,010
Sales and marketing 746,353 813,975 1,425,990
General and administrative 1,282,683 2,028,804 2,329,585
Research and development 105,614 190,731 305,543
-------------------------------------------------------
Total costs and expenses 4,049,114 5,453,661 7,967,128
-------------------------------------------------------
OPERATING LOSS (1,693,437) (3,867,218) (5,827,866)
Other expense, net (530,924) (598,087) (211,340)
-------------------------------------------------------
NET LOSS (2,224,361) (4,465,305) (6,039,206)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (90,000) (90,000) (617,500)
-------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,314,361) $ (4,555,305) $ (6,656,706)
=======================================================
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.21) $ (0.47) $ (0.82)
=======================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,956,024 9,770,501 8,135,635
-------------------------------------------------------
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity(Deficit)
Balance at January 1, 2000 8,040,202 $ 80,402 - $- $21,970,341 $(19,634,080) $2,416,663
Compensation expense related to
issuance of stock warrants and
options - - - - 1,042 - 1,042
Debt issuance costs in the form
of stock warrants 475,000 475,000
Issuance of Series C Preferred Stock - - 100,000 1,000 999,000 1,000,000
Beneficial conversion feature of
Series C Convertible Preferred Stock - - - - 550,000 (550,000) -
Exercise of stock options 180,000 1,800 - - 23,220 - 25,020
Dividends on
Series C Convertible Preferred Stock - - - - (67,500) - (67,500)
Net loss for the year ended
December 31, 2000 - - - - - (6,039,206) (6,039,206)
----------------------------------------------------------------------------------
Balance at December 31, 2000 8,220,202 82,202 100,000 1,000 23,951,103 (26,223,286) (2,188,981)
Compensation expense related to
issuance of stock 2,319,156 23,191 - - 329,482 - 352,673
Debt issuance costs in the form
stock warrants - - - - 35,735 35,735
Immaculate exercise of stock warrants 416,666 4,16 - - (4,167) -
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Net loss for the year ended
December 31, 2001 - - - - - (4,465,305) (4,465,305)
-----------------------------------------------------------------------------------
Balance at December 31, 2001 10,956,024 109,560 100,000 1,000 24,222,153 (30,688,591) (6,355,878)
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Net loss for the year ended
December 31, 2002 - - - - - (2,224,361) (2,224,361)
-----------------------------------------------------------------------------------
Balance at December 31, 2002 10,956,024 $ 109,560 100,000 $ 1,000 $24,132,153 $(32,912,952) $(8,670,239)
-----------------------------------------------------------------------------------
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
OPERATING :
Net loss $ (2,224,361) $ (4,465,305) $ (6,039,206)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 374,099 695,369 1,222,153
(Gain) loss on sale of property (400) 4,772 21,337
Loss on investments - 200,000 -
Compensation expense related to issuance of stock warrants and - 352,673 1,042
options
(Increase) decrease in accounts receivable (167,425) 137,645 238,843
(Increase) decrease in prepaid expenses and other current assets (17,378) 77,718 35,897
Increase (decrease) in accounts payable 267,986 (122,527) (262,988)
Increase (decrease) in accrued salaries and wages 32,134 460 (14,074)
(Decrease) increase in accrued expenses (215,584) 198,745 98,426
Increase in accrued interest 431,024 232,429 49,868
Increase (decrease) in deferred revenue 33,934 (38,821) (56,239)
--------------------------------------------------
Net cash used in operating activities (1,485,971) (2,726,842) (4,704,941)
--------------------------------------------------
INVESTING:
Property and equipment additions (8,867) (9,240) (16,404)
Proceeds from sale of property and equipment 400 800 20,024
Increase in notes receivable (200,000) - -
Decrease in other assets - - 44,011
--------------------------------------------------
Net cash (used in) provided by investing activities (208,467) (8,440) 47,631
--------------------------------------------------
FINANCING:
Proceeds from issuance of common and preferred stock, net - - 1,025,020
Borrowings from directors 1,170,000 2,736,500 1,171,000
Proceeds from line of credit 500,000 - 2,000,000
--------------------------------------------------
Net cash provided by financing activities 1,670,000 2,736,500 4,196,020
--------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,438) 1,218 (461,290)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,449 28,231 489,521
--------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,011 $ 29,449 $ 28,231
--------------------------------------------------
Supplemental disclosures of non-cash information:
Fair value of stock purchase warrants issued in conjunction with
guarantees by certain board members of borrowings on the line
of credit - $ 35,735 $ 475,000
==================================================
Dividends declared on Series C Convertible Preferred Stock $ 90,000 $ 90,000 $ 67,500
==================================================
Value of beneficial conversion feature on Class C Convertible
Preferred Stock recognized as a dividend - - $ 550,000
==================================================
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Patient Infosystems, Inc. (the "Company") designs and
develops health care information systems and services to manage, collect
and analyze patient-related information to improve patient compliance with
prescribed treatment protocols. Through its various patient compliance
programs for disease state management, the Company provides important
benefits for the patient, the health care provider and the payor.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Patient Infosystems Canada, Inc., which
ceased operations in January 2001. Significant intercompany transactions
and balances have been eliminated in consolidation.
Going Concern - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. As shown in the accompanying consolidated financial statements,
the Company incurred a net loss for 2002 of $2,224,361 and had negative
working capital of $6,135,451 and a stockholders' deficit of $8,670,239 at
December 31, 2002. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability of assets and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependant upon
its ability to generate sufficient cash flow to meet its obligations, to
obtain additional financing and, ultimately, to attain successful
operations.
Management is currently assessing an acquisition of a business and the
Company's operating structure for the purpose of reducing ongoing expenses,
increasing sources of revenue and is negotiating the terms of additional
debt or equity financing. In addition, recent successes in outcomes from
disease management programs are being leveraged in an attempt to increase
revenues from sales.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
amounts could differ from those estimates.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, borrowings from directors and the line
of credit. The fair value of instruments is determined by reference to
various market data and other valuation techniques, as appropriate. Unless
otherwise disclosed, the fair value of short-term financial instruments
approximates their recorded values due to the short-term nature of the
instruments.
Revenue Recognition and Deferred Revenue - The Company's principal source
of revenue to date has been from contracts with various pharmaceutical
companies and managed care organizations for the development and operation
of disease management programs for chronic diseases, disease management
programs and other health care information system applications. Deferred
revenue represents amounts billed in advance of delivery under these
contracts.
Development Contracts - The Company's long-term program development
contracts require payment from the customer at the time that the contract
is executed. Development contract revenue is recognized on a percentage of
completion basis, in accordance with the ratio of total development cost
incurred to the estimated total development costs for the entire project.
Losses, if any, are recognized in full as identified. The Company's program
enhancements are short-term in nature and therefore, revenue is recognized
upon delivery of the enhancement.
Program Operations - The Company's program operation contracts call for a
per-enrolled patient fee to be paid by the customer for a series of program
services as defined in the contract. The timing of customer payments varies
by contract, but typically occurs in advance of the associated services
being provided. Revenues from program operations are recognized ratably as
the program services are delivered.
Licenses - Revenue derived from software license fees is recognized when
the criteria established by Statement of Position 97-2, Software Revenue
Recognition, is satisfied. License fees associated with hosting
arrangements (e.g. arrangements that include the right of the customer to
use the software stored on the Company's hardware), are recognized ratably
over the hosting period when such fees are fixed and determinable. Hosting
fees with payment terms extending past one year are recognized as payments
become due.
Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid debt instruments with original maturities of three months or less.
Concentrations of Credit Risk - Financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
cash and cash equivalents and accounts receivable. The Company places its
cash and cash equivalents with high credit quality institutions.
The Company operates in only one business segment and its current contracts
are concentrated in a small number of customers, consequently, the loss of
any one of its customers could have a material adverse effect on the
Company and its operations. During the years ended December 31, 2002, 2001
and 2000, approximately $1,552,943 (66%), $955,931 (60%), and $1,030,139
(48%) respectively, of the Company's revenues arose from contracts with two
customers. One of these customers, which accounts for 50%, 34% and 17% of
the Company's revenues for the years ended December 31, 2002, 2001 and
2000, respectively, terminated its service agreement with the Company
effective January 1, 2003. At December 31, 2002 and 2001, accounts
receivable included balances of $305,788 and $210,829, respectively, from
contracts with these customers.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 10 years.
Asset Impairment - The Company regularly assesses all of its long lived
assets for impairment and recognizes a loss when the carrying value of an
asset exceeds its fair value. The Company determined that no impairment
loss of long lived assets need be recognized for applicable assets in 2002,
2001 and 2000.
Intangible Assets - Intangible assets represent a purchased software asset
being used in the delivery of the Company's web based services that is
being amortized over 4 years using the straight-line method.
Research and Development - Research and development costs are expensed as
incurred.
Income Taxes - Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and net operating loss and tax credit
carryforwards.
Net Loss Per Share - The calculations for the basic and diluted loss per
share were based on loss available to common stockholders of $(2,314,361),
$(4,555,305) and $(6,656,706) and a weighted average number of common
shares outstanding of 10,956,024, 9,770,501 and 8,135,635 for the years
ended December 31, 2002, 2001 and 2000 respectively. The computation of
fully diluted loss per share for 2002, 2001 and 2000 did not
include1,915,140, 2,037,540 and 2,126,880 shares of common stock,
respectively, which consist of outstanding convertible preferred shares,
options and warrants because the effect would be antidilutive due to the
net loss in those years.
Retirement Plan - The Company has a retirement plan that qualifies under
Section 401(k) of the Internal Revenue Code. This retirement plan allows
eligible employees to contribute a portion of their income on a pretax
basis to the plan, subject to the limitations specified under the Internal
Revenue Code. The Company's annual contribution to the plan is at the
discretion of the Board of Directors. The Company made no contributions to
this plan in 2002, 2001 and 2000.
New Accounting Pronouncements - New accounting pronouncements that became
effective for the Company in 2002 did not have any material impact on the
Company's consolidated financial statements, other than certain new
disclosure requirements regarding options.
Stock-Based Compensation - In 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This standard
provides alternative methods of transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, the standard also requires prominent disclosures in the
Company's financial statements about the method of accounting used for
stock-based employee compensation, and the effect of the method used when
reporting financial statements.
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation". As permitted by SFAS
No. 123, the Company continues to measure compensation for such plans using
the intrinsic value based method of accounting, prescribed by Accounting
Principles Board ("APB"), Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the date of
grant for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
2002 2001 2000
Net loss attributable to common
shareholders - as reported $ (2,314,361) $ (4,555,305) $ (6,656,706)
Net loss - pro forma $ (2,818,135) $ (4,992,091) $ (6,929,601)
Net loss per share - basic
and diluted - as reported $ (0.21) $ (0.47) $ (0.82)
Net loss per share - basic
and diluted - pro forma $ (0.26) $ (0.51) $ (0.85)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using an assumed risk-free interest
rates of 3.63% for the year ended December 31, 2002, 4.71% for the year
ended December 31, 2001 and 5.28% for the year ended December 31, 2000 and
an expected life of 7 years. The assumed dividend yield was zero. The
Company has used a volatility factor of 1.78 for the year ended December
31, 2002, 1.24 for the year ended December 31, 2001 and 1.33 for the year
ended December 31, 2000. For purposes of pro forma disclosure, the
estimated fair value of each option is amortized to expense over that
option's vesting period.
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
2002 2001
--------------------- ---------------------
Computer software $ 665,286 $ 663,887
Computer equipment 1,168,446 1,160,978
Telephone equipment 362,887 362,887
Leasehold improvements 41,504 41,504
Office furniture and equipment 354,329 354,329
--------------------------------------------
2,592,452 2,583,585
Less accumulated depreciation 2,306,705 2,085,113
--------------------------------------------
Property and equipment, net $ 285,747 $ 498,472
--------------------------------------------
3. Debt
Line of Credit - In December 1999, the Company established a credit
facility for $1,500,000 guaranteed by Derace Schaffer and John Pappajohn,
two directors of the Company. In consideration for their guarantees, the
Company granted to Dr. Schaffer and Mr. Pappajohn warrants to purchase an
aggregate of 375,000 shares of common stock for $1.5625 per share. In March
2000, the facility was increased by $1,000,000 under substantially the same
terms and also guaranteed by the same Board members resulting in a total
amount due of $2,500,000 as of December 31, 2001 and 2000. Additional
warrants to purchase an aggregate of 250,000 shares of common stock for
$2.325 per share, were granted to Dr. Schaffer and Mr. Pappajohn for their
guarantee of this additional line of credit. The fair value of the warrants
were recorded as debt issuance costs, which have been fully amortized as of
March 31, 2001. The value ascribed to the warrants granted in 1999 and 2000
were calculated based on the application of the Black Scholes option
pricing model which incorporates current stock price, expected stock price
volatility, expected interest rates, and the expected holding period of the
warrant.
On March 28, 2001, the Company entered into an Amended and Restated Credit
Agreement with Wells Fargo Bank, N.A., which extended the term of the
Company's credit facility to March 31, 2002 under substantially the same
terms. Dr. Schaffer and Mr. Pappajohn guaranteed this extension. In
consideration for their guarantees, the Company re-priced 625,000 warrants
previously granted in connection with prior guarantees to $0.05 per share,
effective April 1, 2001. The fair value of these re-priced warrants was
$35,735, which was recorded as a debt issuance cost and a corresponding
increase to additional paid-in capital. The fair value of the re-priced
warrants was determined using the Black Scholes option pricing model.
On June 28, 2002, the Company and Wells Fargo agreed on an addendum to the
Amended and Restated Credit Agreement that extends the credit facility by
an additional $500,000, increasing the total credit to $3,000,000. Mr.
Pappajohn and Dr. Schaffer also guaranteed the extended credit facility.
On March, 28 2003 this line of credit was amended and is due and payable on
January 2, 2004. Accordingly, the amount outstanding at December 31, 2002
is reported as a long-term liability in the accompanying consolidated
balance sheets. Interest is due and payable at maturity at a floating rate
based upon LIBOR plus 1.75% (effective LIBOR rate at December 23, 2002 was
1.4%). There is a commitment fee of 0.25% per annum on the average daily
unused amount of the line of credit to be paid quarterly in arrears. The
line of credit is secured by substantially all of the Company's assets.
Borrowings from directors - In 2002, the Company borrowed $1,170,000 from
Mr. Pappajohn, bringing the total borrowed from Mr. Pappajohn to
$4,730,000. Proceeds from these loans were used to support the Company's
operations. The interest rate on these loans is 9.5% per year. The Company
has borrowed an additional $600,000 from Mr. Pappajohn subsequent to
January 1, 2003. The interest on the loans after January 1, 2003 is 7.5%
The Company did not borrow any additional amounts from Dr. Schaffer in
2002. The total borrowed from Dr. Schaffer is $347,500. Proceeds from these
loans were used to support the Company's operations. The interest rate on
this loan is 9.5% per year.
The loans from Mr. Pappajohn and Dr. Schaffer are demand notes that total
$5,077,500 as of December 31, 2002 and are secured by the assets of the
Company.
On June 6, 2001, the Company issued a total of 2,319,156 shares of
unregistered common stock to Mr. Pappajohn and Dr. Schaffer as
consideration for their continued financial support of the Company. Based
upon recent trading of the Company's common stock at the time of issuance,
the Company assigned a fair market value of $0.15 per share or a total of
$347,873, to these unregistered shares and recognized this amount as an
operating expense during the year ended December 31, 2001.
On June 11, 2002, the board of directors of the Company approved the
conversion of up to $4,642,500 in debt and $438,099 of accrued interest
owed to Mr. Pappajohn and Dr. Schaffer into 36,289,993 shares of the
Company's common stock using a value of $0.14 per common share. The average
value of the Company's common stock based upon an average closing price for
a period immediately before June 11, 2002 was $0.1354. As of December 31,
2002, the Company's Certificate of Incorporation authorizes the Company to
issue up to 20,000,000 shares of common stock, 10,956,024 of which were
issued and outstanding and 2,217,340 of which were reserved for issuance
under outstanding options, warrants and upon conversion of outstanding
convertible preferred stock. Giving effect to this debt conversion
transaction will require an amendment to the Company's Certificate of
Incorporation to authorize additional shares of common stock. Accordingly,
this debt conversion transaction cannot occur unless and until the
stockholders of the Company approve this amendment. A date for a meeting of
the stockholders of the Company has not yet been established.
4. INCOME TAXES
Income tax expense for the years ended December 31, 2002, 2001 and 2000
were: $0, $0 and $13,422, respectively. The 2000 amount represents state
and local income taxes only and are included in general and administrative
expenses in the accompanying consolidated statement of operations for 2000.
Income tax expense for the years ended December 31 differed from the U.S.
federal income tax rate of 34% as a result of the following:
2002 2001 2000
Computed "expected" tax benefit $ (756,283) $ (1,518,203) $ (2,050,624)
Change in the valuation allowance
for deferred tax assets 885,000 1,795,000 2,435,000
State and local income taxes at statutory rates,
net of federal income tax benefit (133,462) (267,918) (372,069)
Other, net 4,745 (8,879) 1,115
------------------------------------------------
- $ - $ 13,422
------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax
liabilities at December 31, are presented below.
Deferred income tax assets: 2002 2001
Accounts receivable, principally due
to allowance for doubtful accounts $ 22,000 $ 15,000
Deferred revenue 63,000 49,000
Compensation 40,000 31,000
Net operating loss carryforwards 12,698,000 11,975,000
Tax credit carryforwards 75,000 75,000
Amortization of intangibles 112,000 37,000
Other 36,000 -
----------------------------------
Total gross deferred income tax assets 13,046,000 12,182,000
Less valuation allowance (12,974,000) (12,089,000)
----------------------------------
Net deferred income tax assets 72,000 93,000
----------------------------------
Deferred income tax liabilities:
Property and equipment, principally due to
differences in depreciation and amortization (42,000) (68,000)
Other (30,000) (25,000)
----------------------------------
Total gross deferred income tax liability (72,000) (93,000)
----------------------------------
Net deferred income tax asset $ - $ -
----------------------------------
Management of the Company has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax
assets. The valuation allowance reduces deferred tax assets to zero, which
represents management's best estimate of the amount of such deferred tax
assets that more likely than not will be realized.
At December 31, 2002 the Company has net operating loss carryforwards of
approximately $31,790,000, which are available to offset future taxable
income, if any, which begin to expire in 2010. The Company also has
investment tax credit carryforwards for federal income tax purposes of
approximately $75,000, which are available to reduce future federal income
taxes, if any, which begin to expire in 2010.
5. PREFERRED STOCK
On March 31, 2000, the Company completed a private placement of 100,000
shares of newly issued Series C 9% Cumulative Convertible Preferred Stock
("Series C Preferred Stock"), raising $1,000,000 in total proceeds. These
shares can be converted at any time by the holder into common stock at a
rate of 8 shares of common stock to 1 share of Series C Preferred Stock.
Each share of Series C Preferred Stock has voting rights equivalent to 8
shares of common stock.
The fair market value of the Company's common stock at the time of issuance
of Series C Preferred Stock was $1.9375 per share. The Series C Preferred
Stock is convertible as a price equal to $1.25 per share of common stock
resulting in a discount, or beneficial conversion feature, of $0.6875 per
share. The incremental fair value of $550,000 for the 100,000 shares of
Series C Preferred Stock issued is deemed to be the equivalent of a
preferred stock dividend. The Company recorded the deemed dividend at the
date of issuance by offsetting charges and credits to additional paid-in
capital of $550,000, without any effect on total stockholders' equity. In
addition, as of December 31, 2002, the Company has accrued $247,500 in
dividends since inception, which was payable to the Series C stockholders.
6. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Stock Option Plan") for
the benefit of certain employees, non-employee directors, and key advisors.
The Stock Option Plan authorizes 1,680,000 shares of common stock to be
issued. On May 2, 2000, the Company filed a Form S-8 registering all the
Stock Option Plan shares. Stock options granted under the Stock Option Plan
may be of two types: (1) incentive stock options and (2) nonqualified stock
options. The option price of such grants shall be determined by a Committee
of the Board of Directors (the "Committee"), but shall not be less than the
estimated fair market value of the common stock at the date the option is
granted. The Committee shall fix the terms of the grants with no option
term lasting longer than ten years. The ability to exercise such options
shall be determined by the Committee when the options are granted.
Generally, outstanding options vest at the rate of 20% per year. During
2001, some grants had a portion of the options vest immediately with the
balance of the options vesting at a rate of 20% per year.
A summary of stock option activity follows:
Outstanding Weighted-Average
Options Exercise Price
Options outstanding at December 31, 1999 1,303,760 $ 1.39
Options granted during the year ended December 31, 2000
(weighted average fair value of $1.44) 387,000 $ 1.44
Options forfeited by holders during the year
ended December 31, 2000 (808,880) $ 1.78
Options exercised during the year ended December 31, 2000 (180,000) $ 0.14
-----------------
Options outstanding at December 31, 2000 701,880 $ 1.28
Options granted during the year ended December 31, 2001
(weighted average fair value of $0.19) 536,500 $ 0.19
Options forfeited by holders during the year
ended December 31, 2001 (40,840) $ 1.83
-----------------
Options outstanding at December 31, 2001 1,197,540 $ 0.77
Options forfeited by holders during the year
ended December 31, 2002 (82,400) $ 0.86
-----------------
Options outstanding at December 31, 2002 1,115,140 $ 0.76
=================
Options exercisable at December 31, 2002 717,620 $ 0.64
=================
Options available for grant at December 31, 2002 302,180
=================
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
$.14 - $.99 790,100 6.90 $ .29 550,500 $ 0.28
$1.00 - $1.99 107,040 5.43 $1.52 76,320 $ 1.45
$2.00 - $2.75 218,000 6.52 $2.10 90,800 $ 2.12
-------------- -------------
1,115,140 717,620
============== =============
7. COMMITMENTS
The Company leases office space for its operating facilities under an
operating lease agreement that expires at June 30, 2003. Rent expense under
this operating lease for the years ended December 31, 2002, 2001 and 2000
was $95,508, $136,045 and $189,648 respectively.
At December 31, 2002, future minimum lease payments under this lease totals
$44,225
8. NOTES RECEIVABLE
In December 2002, the Company loaned an entity $200,000, which it received
from Mr. Pappajohn, secured by substantially all the assets of the entity.
The note is due on demand with annual interest of 4.25%. During January
2003, the Company made additional loans of $300,000 to the entity under
substantially the same terms. The Company and the entity have had ongoing
business combination discussions since September 2002 based on an asset
purchase agreement that was entered into at that time.
9. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited interim results of operations
by quarter:
First Second Third Fourth
--------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002:
Revenues $ 499,328 $ 542,716 $ 586,100 $ 727,533
Gross margin 11,475 80,990 118,938 229,810
Net loss (661,521) (556,519) (474,147) (532,174)
Net loss attributable to common stockholders (684,021) (579,019) (496,647) (554,674)
Net loss per common share (0.06) (0.05) (0.05) (0.05)
Year ended December 31, 2001:
Revenues $ 400,027 $ 357,967 $ 353,612 $ 474,837
Gross margin (307,265) (255,450) (223,288) (47,705)
Net loss (1,215,893) (1,337,559) (1,221,361) (690,492)
Net loss attributable to common stockholders (1,238,393) (1,360,059) (1,243,861) (712,992)
Net loss per common share (0.15) (0.15) (0.11) (0.06)
S-1
Schedule II
Patient InfoSystems, Inc.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2002, 2001 and 2000
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
Allowance for Doubtful Accounts: 2002 $ 37,217 $ 59,117 $ 41,334 $ 55,000
2001 $ 48,122 $ 15,447 $ 26,352 $ 37,217
2000 $ 50,000 $ 92,852 $ 94,730 $ 48,122
Deferred Tax Assets Valuation
Allowance: 2002 $ 12,089,000 $ 885,000 - $ 12,974,000
2001 $ 10,294,000 $ 1,795,000 - $ 12,089,000
2000 $ 7,859,000 $ 2,435,000 - $ 10,294,000