<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________________ to __________________
Commission file number: 0-5667
SEAL HOLDINGS CORPORATION
(Name of small business issuer in its charter)
DELAWARE 65-0769296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 N. DIXIE HIGHWAY
SUITE 411
FORT LAUDERDALE, FLORIDA 33334
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (954) 771-1772
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Class A Common
Stock, par
value $.20
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its fiscal year ended December 31, 1999 were $0.
The aggregate market value of the common equity held by non-affiliates as of
February 29, 2000 was approximately $4.3 million based on the $3.375 closing bid
price for the common stock quoted on the OTC Bulletin Board on such date. For
purposes of this computation, all executive officers and directors of the
registrant have been deemed to be affiliates. Such determination should not be
deemed to be an admission that such directors and officers are, in fact,
affiliates of the registrant.
The number of shares of Class A Common Stock of the issuer outstanding as of
February 29, 2000 was 32,066,919. The number of shares of Class B Common Stock
of the issuer outstanding as of February 29, 2000 was 25,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the issuer's Proxy Statement for its Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934,
which will be filed with the Commission subsequent to the date hereof, are
incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes __ No _X_
<PAGE>
EXPLANATORY NOTE
The effective date of the report included in the Report of Independent Certified
Public Accountants with respect to the ninth paragraph of Note 1 and Note 10 was
inadvertently listed as "March 24, 2000". The correct date is March 30, 2000.
The Report of Independent Certified Public Accountants was included on page F-2
to the financial statements filed pursuant to Part III, Item 13.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Reference is made to the Index set forth on Page F-1 of this Annual
Report on Form 10-KSB/A.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SEAL HOLDINGS CORPORATION
By: /s/ Cecilio M. Rodriguez
Cecilio M. Rodriguez,
Chief Financial Officer and Treasurer
Dated: April 11, 2000
<PAGE>
"Exhibit F"
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.............................. F-3
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 ... F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999 and 1998............................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998... F-7
Notes to Consolidated Financial Statements................................................ F-8
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Seal Holdings Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Seal Holdings
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Seal Holdings
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
West Palm Beach, Florida
March 1, 2000, except for
the second paragraph of Note 13 as to which the
date is March 27, 2000, and the ninth paragraph
of Note 1 and Note 10 as to which the date is March 30, 2000.
F-2
<PAGE>
Seal Holdings Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------------
<S> <C> <C>
Assets
Current assets
Cash $ 462,802 $ -
Net assets of discontinued operations - 9,348,649
Prepaid expenses and other current assets 47,878 -
------------------------------------
Total current assets 510,680 9,348,649
Property and equipment, net 169,198 -
Investment in Camber Companies, LLC 1,845,245 -
Other assets 8,852 -
------------------------------------
Total assets $2,533,975 $9,348,649
====================================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Seal Holdings Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 111,222 $ -
Accrued professional fees 162,225 -
Accrued compensation and related liabilities 290,794 -
Other liabilities 15,000 -
------------------------------------
Total liabilities 579,241 -
Commitments and contingencies
Shareholders' equity:
Subscribed Class A Common stock 550,000 -
Preferred stock, par value $.001 per share; 25,000,000 shares
authorized, 2,170 and no shares issued and outstanding at December
31, 1999 and 1998, respectively 2,170,000 -
Common stock, par value $.001 per share; no shares authorized or
outstanding at December 31, 1999, 50,000 shares authorized, 1,000 shares
issued and outstanding at December 31, 1998. - 1
Class A common stock, par value $.20 per share; 99,975,000 shares authorized,
32,001,769 issued, and 31,916,919 outstanding at December 31, 1999. No
shares authorized or outstanding at December 31, 1998. 6,400,354 -
Class B common stock, par value $.20 per share, 25,000 shares authorized,
issued and outstanding at December 31, 1999. No shares authorized or
outstanding at December 31, 1998. 5,000 -
Additional paid-in capital 18,249,770 20,276,784
Accumulated deficit (25,370,930) (10,928,136)
Treasury stock, at cost, 84,850 and no shares at December 31, 1999 and
1998, respectively. (49,460) -
------------------------------------
Total shareholders' equity 1,954,734 9,348,649
------------------------------------
Total liabilities and shareholders' equity $ 2,533,975 $ 9,348,649
====================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Seal Holdings Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998
------------------------------------
<S> <C> <C>
Revenue $ $ -
-
------------------------------------
- -
------------------------------------
Expenses:
Salaries and benefits 359,158 -
Professional fees 306,073 -
General and administrative 112,357 -
------------------------------------
Total expenses 777,588 -
------------------------------------
Loss from continuing operations (777,588) -
Discontinued operations:
Loss from discontinued operations (14,835,321) (8,780,116)
Gain on disposal of discontinued operations 1,170,115 -
------------------------------------
Net loss $(14,442,794) $ (8,780,116)
====================================
Loss attributable to common stockholders basic and diluted $(14,520,447) $ (8,780,116)
====================================
Basic and diluted loss attributable to common stockholders per share:
Loss from continuing operations $ (0.04) $ -
Loss from discontinued operations (0.61) (0.85)
------------------------------------
Net loss $ (0.65) $ (0.85)
====================================
Weighted average shares outstanding 22,300,143 10,318,419
====================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Seal Holdings Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Class A and Class B
Common Stock Preferred Stock
---------------------------------------------- Additional
Par Paid-in Accumulated Treasury
Shares Value Shares Amount Capital Deficit Stock Total
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997 1,000 $ 1 - $ - $ 1,979,305 $ (2,148,020) $ - $ (168,714)
Contributed capital - - - - 18,297,479 - - 18,297,479
Net loss - - - - - (8,780,116) - (8,780,116)
-------------------------------------------------------------------------------------------------------
Balance at December 31,
1998 1,000 1 - - 20,276,784 (10,928,136) - 9,348,649
Contributed capital - - - - 2,600,000 - - 2,600,000
Reverse Merger
transaction: Receipt
of Seal Holdings
Corporation common
shares, net of costs
of $115,500 (Number
of common shares
includes 1,383,350
shares of Class A
Common Stock and
25,000 shares of
Class B Common Stock) 1,408,350 281,670 - - 1,436,669 - (49,460) 1,668,879
Issuance of Seal
Holdings Corporation
shares in exchange
for OH, Inc. common
stock 10,318,419 2,063,684 2,000,000 2,000 20,811,101 - - 22,876,785
Receipt of OH, Inc.
common stock in
exchange for Seal
Holdings Corporation
Common Stock (1,000) (1) - - (22,876,784) - - (22,876,785)
Conversion of preferred
stock into common
stock 20,000,000 4,000,000 (2,000,000) (2,000) (3,998,000) - - -
Sale of Series B
preferred stock - - 2,170 2,170,000 - - - 2,170,000
Shares issued in
exchange for
investment banking
services 300,000 60,000 - - - - - 60,000
Subscribed Class A
common stock - - - - 550,000 - - 550,000
Net loss - - - - - (14,442,794) - (14,442,794)
-------------------------------------------------------------------------------------------------------
Balance at December 31,
1999 32,026,769 $6,405,354 2,170 $2,170,000 $18,799,770 $(25,370,930) $(49,460) $ 1,954,734
=======================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Seal Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998
------------------------------------
<S> <C> <C>
Operating activities
Net loss $(14,442,794) $ (8,780,116)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 6,225 -
Gain on disposal of discontinued operations (1,170,115) -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (47,878) -
Other assets (8,852) -
Accounts payable 111,222 -
Accrued compensation and related liabilities 290,794 -
Accrued professional fees 162,225 -
Other liabilities 15,000 -
------------------------------------
Net cash used in operating activities (15,084,173) (8,780,116)
Investing activity
Purchases of property and equipment (122,198) -
------------------------------------
Net cash used in investing activity (122,198) -
Financing activities
Proceeds from issuance of preferred stock 2,170,000 -
Subscribed Class A Common Stock 550,000 -
------------------------------------
Net cash provided by financing activities 2,720,000 -
Discontinued operations:
Operating activities 1,059,588 490,685
Investing activities (2,639,037) (4,703,307)
Financing activities 14,528,622 12,992,738
------------------------------------
Net cash provided by discontinued operations 12,949,173 8,780,116
Net change in cash 462,802 -
Cash at beginning of period - -
------------------------------------
Cash at end of period $ 462,802 $ -
====================================
Supplemental disclosure of non cash investing and financing activities
Equipment acquired through capital leases $ - $ 1,111,742
====================================
Contribution of property, equipment and other assets by sole shareholder $ - $ 5,198,195
====================================
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
Seal Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. The Company
Seal Holdings Corporation ("Seal" or the "Company") is a holding company focused
on the acquisition of, and strategic investments in, companies providing
services in health care and life sciences (with particular interest in
information technology companies with Internet applications). During 1999, Seal,
as further described below, went through a reverse merger followed by a
disposition of the assets acquired through the reverse merger. Accordingly, the
December 31, 1999 balance sheet and the statements of operations, cash flows and
shareholders' equity presented herein for the year ended December 31, 1999 are
those of Seal, with any balances or transactions which resulted from the reverse
merger (and subsequent disposal) shown as a discontinued operation. The December
31, 1998 balance sheet and statements of operations, cash flows and
shareholders' equity are those of OH, Inc. ("OHI"), the entity which, for
accounting purposes, was the accounting acquirer, even though the Company
elected to use the name Seal Holdings Corporation for periods subsequent to the
effective date of the reverse acquisition. Earnings per share for periods prior
to the reverse acquisition have been restated to reflect the number of
equivalent shares received by the OHI stockholder as a result of the reverse
acquisition even though OHI became a wholly-owned subsidiary of Seal.
During March 2000, the Company completed its first investment since the disposal
of OHI (as described below), a 21% interest in Healthology, LLC, ("Healthology")
an online media company. See Note 13, Subsequent Event.
The Company also has a 6% interest in Camber Companies LLC, a company
specializing in multidisciplinary, musculoskeletal care.
Reverse Acquisition
Effective on April 2, 1999, Seal (which for periods prior to April 2, 1999 is
referred to herein as the "Acquiree") and OHI, whose primary operating assets
consisted of a comprehensive outpatient diagnostic and surgery center (the
"Oakridge Center"), entered into an Agreement and Plan of Exchange whereby 1,000
shares of OHI Common Stock (which represented 100% of OHI's outstanding Common
Stock) was exchanged for 10,318,419 shares of the Acquiree's common stock and
2,000,000 shares of the Acquiree's convertible preferred stock, which was equal
to 91% of the outstanding common stock of the Acquiree on a fully diluted basis
(including outstanding options to purchase Acquiree shares) on that date.
Accordingly, the acquisition has been treated for financial reporting purposes
as a reverse acquisition, with OHI (the "Acquirer") as the accounting acquirer.
As a result of the aforementioned transaction, the number of Class A Common
Shares authorized to be issued by the Acquiree was increased from 14,975,000 to
99,975,000.
F-8
<PAGE>
Seal Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Reverse Acquistion (continued)
The net assets received from the Acquiree in the reverse acquisition were
recorded at their fair value of $1,784,374, less acquisition costs of $115,500.
The Acquirer also received 1,408,325 shares of Acquiree Class A and Class B
Common Stock. The results of the Acquiree's operations are included in the
Company's consolidated statements of operations from the effective date of the
reverse acquisition.
Discontinued Operations
On September 30, 1999, Seal sold its wholly-owned subsidiary, OH, Inc., which
includes the Oakridge Center, to an investor group comprised of certain members
of OHI's management (the "Oakridge Group"). The Oakridge Center constituted the
only active business operation of the Company during 1999 and 1998. The Company
has no ownership interest in the Oakridge Group. The Company's primary
consideration was the assumption by the Oakridge Group of all of OHI's
liabilities. The Oakridge Group has assumed these liabilities without any
recourse to the Company and the Company has not guaranteed any portion of the
liabilities assumed by the Oakridge Group. As a result, Seal recorded a gain of
$1,170,115, which was equal to the equity deficiency of OHI on the date of
disposition.
The activities of OHI prior to October 1, 1999 are shown as discontinued
operations in the accompanying financial statements. Revenue from discontinued
operations was $6,446,000 and $3,152,000 for the years ended December 31, 1999
and 1998, respectively and is included as part of the loss from discontinued
operations in the accompanying statements of operations. In addition, the net
assets of OHI at December 31, 1998 are recorded in the accompanying balance
sheet as the net assets of discontinued operations and consist of the following:
Cash $ 1,238,460
Accounts receivable, net of allowance for
uncollectible accounts of $325,000 607,546
Inventory 302,317
Other current assets 339,971
Property and equipment, net 10,766,426
Other assets 260,425
Accounts payable (1,478,742)
Accrued professional fees (571,997)
Accrued compensation and related liabilities (497,829)
Due to affiliates (321,281)
Other liabilities (184,905)
Obligations under capital leases and loans (1,111,742)
-----------
$ 9,348,649
===========
F-9
<PAGE>
Operating Losses and Cash Flow Deficiencies
Through December 31, 1999, the Company experienced significant operating losses
and deficiencies in cash flows from its discontinued operations, and, to a
lesser extent, from its continuing operations, and acquisition activities.
During 1999, the Company's majority shareholder and certain affiliates funded
the cash flow deficiencies. As a result of the sale of OHI, the Company's
operating losses and cash requirements have been significantly reduced.
Nevertheless, the Company expects to continue to incur losses and expenses as it
carries out its acquisition strategy. These financial statements have been
prepared assuming that the Company will continue as a going concern. Until the
Company has enough operations or other revenue generating activities to be self
sufficient, the Company will remain dependent upon other sources of capital. In
the past, such capital has come from the Company's majority shareholder.
On September 30, 1999, Dr. M. Lee Pearce, the Company's majority shareholder,
agreed to provide Seal with funding of up to $10,000,000 which will be used to
fund these losses and expenses and future acquisitions as approved by the Board
of Directors (the "Funding Commitment"). Through December 31, 1999, the Company
had received $550,000 of the Funding Commitment and an additional $3.5 million
was received by March 30, 2000 which was used primarily to fund the Healthology
acquisition. In addition, Management of the Company is pursuing various business
alternatives to enable the Company to continue meeting its current and projected
commitments and obligations, or will attempt to further reduce the amount of
such liabilities to a manageable level.
2. Summary of Significant Accounting Policies
Consolidation
The accompanying financial statements include the accounts of Seal Holdings and
its subsidiaries, all of which are wholly owned, and the predecessor companies
described above. All significant intercompany accounts and transactions are
eliminated in consolidation.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from 3-8 years.
F-10
<PAGE>
The carrying value of the Company's assets is reviewed by management if the
facts and circumstances suggest that it may be impaired. If this review
indicates that these costs will not be recoverable, as determined based on the
expected undiscounted cash flows of the entity over the remaining amortization
period, the carrying value of these costs is reduced by the estimated shortfall
of discounted cash flows.
Income Taxes
Prior to the reverse acquisition described in Note 1, OHI, with the consent of
its shareholder, had elected to be treated as an S corporation under the
provisions of the Internal Revenue Code. Consequently, in lieu of corporate
income taxes, the sole shareholder was taxed on the Company's taxable income.
Following the reverse acquisition, the Company became a C corporation and,
accordingly, has adopted the asset and liability method of accounting for income
taxes as prescribed under SFAS 109 "Accounting for Income Taxes" ("SFAS 109").
No provision for income taxes has been recorded due to losses to date. The
Company has recorded a valuation allowance for the deferred tax assets which
have resulted from its operating losses as discussed further in Note 11.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Financial Instruments
The carrying values of cash and accounts payable are reasonable estimates of
their fair value due to the short-term nature of these financial instruments.
Stock Based Compensation
The Company accounts for employee stock options using the intrinsic value method
as prescribed by Accounting Principles Board Option No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). The Company follows the disclosure
provisions of Statement of Financial Accounting Standards, No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") and for valuing common stock
equivalents issued to non employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
corporation's stock at the date of the grant over the exercise price of the
option.
F-11
<PAGE>
Comprehensive Income
The Company has adopted SFAS No. 130; "Reporting Comprehensive Income", which
requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The items of
other comprehensive income that are typically required to be displayed are
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. There
were no items of other comprehensive income for any periods presented herein.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded in the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The Company does
not expect that the adoption of SFAS No. 133 will have a material impact on its
financial statements because the Company does not currently hold any derivative
instruments.
F-12
<PAGE>
3. Property and Equipment
Property and equipment consists of the following:
December 31,
1999
----
Leasehold improvements $ 17,842
Equipment and software 49,238
Furniture and fixtures 123,049
--------
190,129
Less accumulated depreciation 20,931
--------
$169,198
========
Property and equipment held at December 31, 1998 was used in the discontinued
operations and is included in net assets of discontinued operations in the
accompanying consolidated balance sheet.
4. Commitments and Contingencies
Legal Proceedings
The Company is involved in litigation relating to the offshore supply business
conducted prior to August 14, 1996 by certain inactive subsidiaries of Seal. The
cases are maritime asbestos claims against the Company's subsidiaries. On May 1,
1996, the asbestos claims were administratively dismissed subject to
reinstatement on motion of plaintiff's counsel. It is expected that all of these
cases will be reinstated in the future. The Company is presently unable to
determine what, if any, impact these cases could have upon the Company.
Employment Contracts
The Company has entered into employment contracts with certain key executives.
These contracts are generally for initial periods of up to three years and
include base salary plus bonuses. Employment may be terminated by the Company or
the employee under certain conditions. In addition, the contracts contain
provisions for changes in control, severance and benefits, and non-compete
requirements.
F-13
<PAGE>
5. Related Party Transactions
The Company's majority shareholder, directly or indirectly, owns a number of
real estate entities with which the Company has done or currently does business.
At December 31, 1999, the Company was leasing administrative office space from
one such real estate entity. Future minimum lease payments under this operating
lease agreement are as follows:
Year Ending December 31,
2000 $ 55,098
2001 40,396
2002 40,396
2003 40,396
2004 40,396
------
Total $216,682
========
Rent expense under operating leases was $16,150 and $42,000 for the years ended
December 31, 1999 and 1998, respectively.
One of the Company's directors is a principal in an investment banking firm
providing services to the Company (the "Investment Banking Firm"). In connection
with the Company's agreement with the Investment Banking Firm, the Company has
paid fees and expenses of $465,923 and issued 300,000 shares of Class A Common
Stock during the year ended December 31, 1999. In addition, the Company's
majority stockholder transferred 150,000 shares of his Class A Common Stock to
the Investment Banking Firm in connection with services provided in the Reverse
Acquisition. The agreement with the Investment Banking Firm expires by its terms
on March 31, 2000. Additional placement fees and share purchase rights may be
earned by the Investment Banking Firm upon the occurrence of certain events,
including certain future sales of securities by the Company and when the Company
makes investments which are facilitated by or require the assistance of the
Investment Banking Firm. See Note 13, Subsequent Event.
One of the Company's directors has employment and consulting agreements with the
Company for a term of one year through April 1, 2000. Related salaries and
consulting fees during the year ended December 31, 1999 were $70,530 and
$135,000, respectively. In addition, this director had a note receivable of
$120,000 with related accrued interest of $12,757. These amounts were forgiven
during the first quarter of 1999.
F-14
<PAGE>
6. Stock Based Compensation
Options may be granted to Company employees, directors and consultants under
various stock option plans. All options granted under the plans through December
31, 1999 have been at prices which have been equal to or greater than the fair
market value of the Company's common stock at the date of grant. At December 31,
1999, the Company had reserved 4,700,000 shares of Class A common stock for
possible future issuance under its stock option plans. The options exercised
during 1999 were exercised prior to the reverse acquisition described in Note 1.
Option activity under the Company's plans is summarized below:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------- ------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,780,000 $1.72 865,000 $1.68
Options granted - - 915,000 1.75
Options exercised (80,000) 1.38 - -
------------------------------------ ------------------------------------
Outstanding at end of year 1,700,000 $1.73 1,780,000 $1.72
==================================== ====================================
Options exercisable at year-end 1,700,000 $1.73 1,780,000 $1.72
Shares available for future grant 4,700,000 1,780,000
</TABLE>
Exercise prices for options outstanding at December 31, 1999 are $1.00 for
40,000 options and $1.75 for 1,660,000 options. The weighted average remaining
contractual life of options outstanding at December 31, 1999 was 5.7 years. The
weighted average fair value per share of options granted by the Company during
1998 was $1.75. The fair value of options granted in 1998 was estimated at the
date of grant using the Black-Scholes valuation method with the following
assumptions; risk free interest rate of 7%, no expected dividends, weighted
average expected life of 8 years, and volatility of .73. No options were granted
during 1999.
F-15
<PAGE>
The Company applies APB 25 and related interpretations in accounting for stock
options granted to employees. Had compensation cost been recognized consistent
with SFAS 123, the Company's net loss and net loss per share attributable to
common stockholders would have been reduced to the pro forma amounts indicated
below (in thousands, except for per share information):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998
------------------------------------
<S> <C> <C> <C>
Net loss As reported $(14,442,794) $(8,780,116)
Pro-forma $(14,442,794) $(9,779,966)
Basic and diluted loss attributable As reported $ (.65) $ (.85)
to common stockholders per share Pro-forma $ (.65) $ (.95)
</TABLE>
7. Loss Per Share
Options were not included in the computation of loss per share for the years
ended December 31, 1999 and 1998 because their effect would have been
anti-dilutive.
<TABLE>
<CAPTION>
Numerator: 1999 1998
---- ----
<S> <C> <C>
Net loss form continuing operations $(777,588) $( - )
Dividends (undeclared) on cumulative preferred stock (77,653) ( - )
------------ -----------
Numerator for basic and diluted loss per share - loss
attributable to common stockholders from continuing
operations $(855,241) ( - )
============ ===========
Net loss from discontinued operations $(13,665,206) $(8,780,116)
------------ -----------
Numerator for basic and diluted loss per share - loss
attributable to common stockholders from discontinued
operations $(13,665,206) $(8,780,116)
============ ===========
</TABLE>
F-16
<PAGE>
<TABLE>
<S> <C> <C>
Denominator:
Denominator for basic and diluted loss per share; Weighted
average shares 22,300,143 10,318,419
---------- ----------
Basic and diluted loss per share from continuing operations $(0.04) $ -
Basic and diluted loss per share from discontinued operations (0.61) (0.85)
---------- ----------
Basic and diluted loss per share $(0.65) $(0.85)
========== ==========
</TABLE>
8. Investment in Camber Companies, LLC
In October 1998, the Acquiree sold the net assets of its wholly-owned
subsidiary, Primary Care Medical Centers of America, Inc. to Camber Companies,
LLC ("Camber") in exchange for a 6% equity investment in Camber with a fair
market value at the date of the transaction of approximately $1,845,000. The
Company accounts for its 6% interest in Camber at cost.
9. Preferred Stock
The Certificate of Incorporation of the Company, as amended, authorizes the
issuance of 25,000,000 shares of Preferred Stock, $.001 par value, of which
2,500 shares have been designated as Series B 10% Cumulative Preferred Stock,
$.001 par value, (the "Series B Preferred Stock"). The Series B Preferred Stock
is nonvoting and nonconvertible. Dividends on the Series B Preferred Stock are
cumulative and accrue at a rate of 10% per annum on the preferred stock's stated
value of $1,000 per share and must be paid before any dividends may be paid on
any other class of common or preferred stock. No other class of common or
preferred stock may be redeemed or repurchased nor may the Series B Preferred
Stock be altered or modified without the approval of the holders of the Series B
Preferred Stock. Effective November 15, 1999, the Company issued, 2,170 shares
of the Series B Preferred Stock to the majority shareholder in exchange for
$2,170,000, which had previously been contributed to the Company. At December
31, 1999, dividends of $77,653 were accumulated on the Series B Preferred Stock.
Such amount will be accrued and charged to retained earnings, if any, or
additional paid-in capital when declared by the Company's Board of Directors.
F-17
<PAGE>
10. Subscribed Class A Common Stock
Through December 31, 1999, the Company had received $550,000 of the funding
Commitment. An additional $3.5 million was received by March 30, 2000 which was
used primarily to fund the Healthology acquisition. In consideration for these
contributions, the Company issued its majority stockholder 771,428 shares of the
Company's Class A Common Stock at a price of $5.25 per share.
Additionally, as provided in the Funding Commitment, the Company's majority
stockholder has agreed to contribute an additional $5,950,000 to the Company.
The Company has agreed with the majority stockholder that in consideration of
such additional funds, the Company will issue such stockholder additional shares
of the Company's Class A Common Stock at $5.25 per share (An aggregate of
1,133,333 shares when $5,590,000 is contributed).
11. Income Taxes
The Company accounts for income taxes under SFAS 109. Under SFAS 109, deferred
income tax assets and liabilities are determined based upon differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred income taxes are as
follows:
Year ended December 31
1999 1998
---------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 822,457 $ 336,837
Tax credits 193,334 199,272
Stock based compensation 29,991 58,214
Other 5,661 23,393
---------------------------------
Deferred tax assets 1,051,443 617,716
Less valuation allowance (1,051,443) (617,716)
---------------------------------
Net deferred tax assets $ - $ -
=================================
F-18
<PAGE>
A reconciliation from the U.S. Statutory federal income tax rate to the
effective income tax rate (benefit) follows:
U.S. Federal statutory rate 34.00%
State income taxes, net of federal benefit 3.63
Change in valuation allowance (3.00)
Operating losses of discontinued operations (38.65)
Gain on disposition of discontinued operations 3.05
Other .97
---
0.00%
=====
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of the evidence, both positive and negative, management has
determined that a $1,051,443 valuation allowance at December 31, 1999 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in the valuation allowance for the current year
is $433,727. At December 31, 1999, the Company has available net operating loss
carryforwards of approximately $2.2 million, which expire in the years 2000
through 2012.
12. Class B Common Stock
The Company has 25,000 shares of Class B Common Stock outstanding. Such shares
are held by an affiliate of the Company's majority shareholder and enable the
holder to elect a majority of the Board of Directors of the Company, otherwise
the Class B Common Stock is identical to the Company's Class A Common Stock.
13. Subsequent Event
On March 1, 2000, the Company agreed to purchase 3,211,453 shares of the Series
A Convertible Voting Preferred Stock ("Preferred Shares") of Healthology, Inc.,
a Delaware corporation ("Healthology"), pursuant to a Series A Preferred Stock
Purchase Agreement dated March 1, 2000 between the Company and Healthology and
certain related agreements (collectively, the "Healthology Transaction") for
cash in two installments, subject to certain closing conditions. Healthology is
a privately-held, online health media company that produces and distributes
original content generated by health professionals.
F-19
<PAGE>
The total purchase price for the Preferred Shares was $3,211,453, of which
$1,000,000 (for 1,000,000 Preferred Shares) was paid at the initial closing on
March 1, 2000 and $2,211,453 (for 2,211,453 Preferred Shares) was paid at a
second closing on March 27, 2000. After the second closing, the Company holds,
on an as-converted basis, an approximate 21% interest in the outstanding common
stock of Healthology, and an interest of approximately 19% on a fully diluted
basis.
Effective as of March 1, 2000, Healthology's Board of Directors includes two
representatives selected by the Company. The Preferred Shares are convertible at
any time, at the option of the Company, into shares of Common Stock of
Healthology ("Healthology Common Stock"), initially on a one for one basis,
subject to adjustment under certain circumstances (the "Conversion Rate"). The
Preferred Shares are automatically convertible at the Conversion Rate into
Healthology Common Stock upon the consummation by Healthology of a qualified
public offering of its common stock, as defined.
As compensation for services provided to the Company by the Investment Banking
Firm in connection with the Healthology Transaction, 5% of the 3,211,453 shares
acquired were transferred to the Investment Banking Firm. The Company retained
voting control over all such shares.
The Company obtained the funds for the Purchase Price through a capital
contribution from the majority stockholder pursuant to the Funding Commitment,
as described in Note 10 herein.
F-20
