FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 2-98314-W
MEDICAL ADVISORY SYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 52-1233960
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8050 Southern Maryland Blvd., Owings, MD 20736
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number (301)855-8070
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
(Title of class)
(Title of class)
Check whether the issuer: (1) 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 of this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year:
$3,514,135 for the fiscal year ending October 31, 1998.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act):
$13,601,948 based on stock closing price on January 21, 1999.
3,819,938 Shares of Common Stock ($ 0.005 par value per share) were
outstanding at December 31, 1998.
PART I
Item 1. Description of Business.
Medical Advisory Systems, Inc. (the "Company" or
"MAS") is a Delaware corporation incorporated on December 1, 1981, with
its principal office located in Owings, Maryland. Its mailing address is:
8050 Southern Maryland Blvd., Owings, Maryland 20736 (telephone:
301-855-8070).
The Company provides medical assistance products and
services. The products and services offered by the Company include:
* 24-hour-a-day medical information to the public via the Internet under an
exclusive contract with America's Doctor, Inc., which provides real-time
live online chats between physicians and Internet users.
* 24-hour-a-day medical information to individuals, groups, and associations
via 800/900 telephone numbers.
* 24-hour-a-day medical advice to ships at sea through a worldwide
telecommunications system, and ancillary services including training
programs, medical records maintenance, and medical cost containment
services;
* 24-hour-a-day call center services and assistance to Health Maintenance
Organizations (HMO's), multi-national corporations and the international
travel industry, and;
* customized pharmaceutical and medical supply kits which are sold to the
maritime and aviation industries.
The Company provides services from its 24 hour-a-day
Call Center located in Owings, Maryland. The Company utilizes an agent in
Hong Kong to maintain relations with maritime customers. The Company
participates in a world-wide network of 24-hour call centers in 24 countries
and utilizes other centers in the network to provide certain services outside
the U.S.
a. History.
The Company began operations at the beginning of 1982
to take advantage of the privatization opportunity created by the U.S.
Government's decision to dismantle the U.S. Public Health Hospital and
Clinic System, thereby disenfranchising U.S. seafarers of free health care.
Revenues during the initial years only partially covered substantial losses
incurred first to establish and then to enhance the Company's operational
medical advice system. The Company has now operated at a profit for 9
consecutive years.
Key to acceptance of the Company's maritime medical
advice services was the Company's ability to demonstrate the
cost-effectiveness of those services. Since modern vessels can be operated
with relatively few people (e.g., a crew of 18-25 for a supertanker),
physicians are not required to be aboard. Consequently, in the event of a
medical emergency, a ship usually diverts from its charted course to
facilitate an airlift evacuation for a victim of an accident or illness.
Unnecessary diversions are made when trained medical personnel are not
available to determine whether or not a medical emergency really exists. The
cost of a diversion to a shipping concern can be high. The Company proved
that by eliminating just one unnecessary diversion in ten years, its customers
benefited from the Company's services, since the cost of such a diversion
exceeded the fee which the Company charged for a ship during the period.
The Company succeeded in the maritime industry by identifying and
fulfilling a real need in a professional manner which is cost beneficial.
During fiscal year 1993, the company entered into an
agreement with SACNAS International of Paris, France to market services
under the trademark name, "Mondial Assistance," in the U.S., Canada, and
Mexico. A newly formed company, Assistance Services of America (ASA)
Inc., was organized and incorporated in November of 1993 to promote the
joint marketing effort. The company and SACNAS International each have
50% ownership of ASA. Travel Assistance services are being marketed to
HMO's, multi-national corporations and insurance companies. Services
include medical consultation and logistical support for individuals traveling
outside of their home country. ASA collects fees from the subscribing
company. Service fees are paid to MAS for cases in North America and to
SACNAS International for cases outside North America.
During the first quarter of FY 1998, the Company entered
into an agreement with SACNAS International (SACNAS), the 50%
shareholder of ASA. The agreement grants SACNAS an option to purchase
100% of the Company's shares in ASA for $2,000,000 during the period
January 1, 1998 through December 31, 1999. At the time SACNAS
exercises its option, SACNAS shall tender to the Company the 305,378
shares of the Company shares that SACNAS owns. The Company's shares shall
be sold by SACNAS to the Company for $122,151 and the proceeds
shall be used to offset the $2,000,000 purchase of the Company's ASA
shares. The Company has the option to retain 8% of total ASA shares while
allowing SACNAS to retain their 305,378 Company shares. If the Company
exercises this option, the SACNAS option to purchase the remaining ASA
shares shall be reduced to $1,680,000.
Provided SACNAS has not exercised the option agreement,
beginning January 1, 1998, and at the end of each quarter, SACNAS shall
forgive 1/8th of the $500,00 unsecured loan to the Company along with
interest accrued to that date. Any loan amount forgiven including both
principal and interest shall be credited to the option price.
If SACNAS does not elect to exercise the option
agreement during the term provided, the remaining principal balance of the
$500,00 loan not forgiven plus any accrued interest, shall be forgiven in its
entirety. During FY 98 the Company wrote down $187,500 of the outstanding
$500,000 loan and accumulated interest.
The company is continuing to consolidate ASA financial
results during the option period.
In July 1998, the company entered into a "Call Center
Service Agreement" with America's Doctor, Inc. to provide real time online
chats between doctors at the Company Call Center in Owings, Maryland and
America's Doctor users via the Internet. America's Doctor, Inc. is an anchor
tenant on the America Online Health Page where it initially promotes the
physician chat services. The Company began providing the service for
America's Doctor in September 1998. The Company purchased an equity
interest in America's Doctor, Inc. in 1998.
In May 1998, the Company incorporated the wholly
owned subsidiary Doc-Talk L.L.C. Doc-Talk will begin operating in
FY1999 as an adjunct to the Internet chat service capability of the Call
Center. Doc-Talk has created its own web site which will be hyper-linked to
the America's Doctor web site allowing visitors to browse Doc-Talk and
evaluate the benefits of speaking over the telephone directly with a physician
at the Call Center. Doc-Talk has secured both 800 and 900 telephone
service and will be marketing its services via the Internet, to associations,
and through network marketing organizations.
b. Segments.
Revenues from the Company's medical assistance services can be
broken down as follows:
Percent of Revenues
Years Ended October 31, 1997 and October 31, 1998
1997 1998
---- ----
Internet "Chat" Services ------ 21%
Maritime Response Services 29% 22%
Pharmaceutical Sales 19% 14%
Assistance 42% 29%
Training 6% 3%
Clinic Services 1% 2%
Other/Ancillary Services/Interest/Fees 3% 11%
_____ _____
100% 100%
Internet "Chat" Services.
A specially trained and monitored staff of physicians, supported by
pharmacists and dieticians, operates out of the Company's newly developed
state-of-the-art Call Center in Owings, Maryland to provide medical
information via the Internet. The Company's services are provided to
America's Doctor, Inc. under an exclusive "Call Center Service Agreement."
America's Doctor operates a web site and is an anchor tenant of the main
health page of America Online, the largest Internet service provider in the
U.S., currently having over 14 million subscribers.
From the Center, a staff of over 100 physicians provides real time
online chats directly with users seeking general medical information. The
physicians do not practice medicine or in any way suggest specific treatment
or consultation to the users, but seek to provide reasonable answers to
medically-related questions. The Call Center physicians have immediate
access to the America's Doctor electronic medical library and can
electronically send printed information to users upon request. The
physicians are also able to provide local health care information on behalf of
organizations that sponsor the America's Doctor web page. The service is
provided 24-hours/day 365 days a year, and currently over 2,000 chats per
day are handled.
Maritime Response Services.
A staff of physicians and communication specialists
operates out of the Company's state-of-the-art Call Center in Owings,
Maryland to provide medical advice to people in remote locations, anywhere
in the world, 24-hours-a-day, 365-days-a-year. All assistance is provided
exclusively through telecommunications systems utilizing telephones,
satellite, high frequency radio, fax and telex.
Subscribers to the Company's medical advice service are
provided with two standardized and up-to-date manuals which have been
developed by the Company: a "Medical Protocol Manual" and a
"Pharmaceutical Manual". When a call for medical assistance is received,
the caller is guided through the Medical Protocol Manual as prompted by the
physician in order to identify the symptoms of the patient. Once the
physician has ascertained the nature of the problem, proper procedures and
treatment can be advised making use of the Pharmaceutical Manual to assist
the caller in identifying the proper medicines and supplies. The physician
can help determine whether a patient can be treated on board or whether
shore care is warranted as soon as possible. When the caller identifies
himself, a database enables the physician to examine medical records, if
available, and to identify whether or not pharmaceuticals are on board. The
center currently receives an average of fifteen to twenty case calls each
24-hour period.
In a typical case, four or more contacts are made between
the caller and the physician to enable the patient's condition to be monitored
and the case resolved. Every call received by the Company is documented
and timed, and a case report is written and signed by the staff physicians.
Reports are forwarded to the subscriber for insurance purposes and company
records. A copy of the report is also included in the patient's MAS medical
history file.
The Company charges for its maritime medical advice
services according to one of two methods. The subscriber can elect to have
unlimited service for a rated flat annual fee or to have the service available
on a timed per-minute basis. Subscribers are responsible for all
communication costs. Most U.S. maritime customers have flat-fee contracts
which have terms of one to three years.
Pharmaceutical Sales.
The Company sells a variety of kits containing
pharmaceutical and medical supplies. Included in the kits are both
prescription and nonprescription medications and controlled substances.
The kits are designed following US Government and international guidelines
and include the Company's Pharmaceutical Manual, which provides
information on proper storage, use and inventory control. All medications
are specially labeled for use in the Company's system. The Company directly
supplies pharmaceuticals to its maritime and airline customers through the
Company's warehouse facility whose inventory includes various commonly
needed pharmaceuticals and supplies. This internalization of the supply
function has resulted in greater profitability for the Company and greatly
improved service for its customers, who often have time-critical supply
needs.
Assistance.
A major market for the Company's services is the
international travel insurance and assistance industry. Since 1991 the
Company has functioned as a correspondent for SACNAS International
(trade name Mondial Assistance), a Paris based assistance corporation with
branch offices in 24 countries. The Company provides medical consultation
and logistical support for Mondial subscribers who become ill or injured
while traveling in North America. Services include coordination of medical
care, physician consultation, translation assistance, claims handling, and
cost containment. The Company charges a fee for consultation and additional
fees if the traveler requires special arrangements or other logistical
services.
During fiscal year 1993, the company entered into an
agreement with SACNAS International to market services under the
trademark name, "Mondial Assistance," in the U.S., Canada, and Mexico. A
subsidiary company, Assistance Services of America (ASA) Inc., was
organized and incorporated in November of 1993 to promote the joint
marketing effort. The Company and SACNAS International each have 50%
ownership of ASA. Assistance services are being marketed to HMO's,
multi-national corporations and insurance companies. Services include
medical consultation, logistical support, and access to the Mondial
Assistance worldwide network of correspondents for individuals traveling
outside of their home country. ASA collects fees from the subscribing
company. Service fees are paid to MAS for cases in North America and to
SACNAS International for cases outside North America. During the first
quarter of FY 1998, the Company entered into an agreement with SACNAS
International (SACNAS), the 50% shareholder of ASA. The agreement
grants SACNAS an option to purchase 100% of the Company's shares in
ASA for $2,000,000 during the period January 1, 1998 through December
31, 1999. At the time SACNAS exercises its option, SACNAS shall tender
to the Company the 305,378 shares of the Company shares that SACNAS
owns. The Company's shares shall be sold by SACNAS to the Company for
$122,151 and the proceeds shall be used to offset the $2,000,000 purchase of
the Company's ASA shares. The Company has the option to retain 8% of
total ASA shares while allowing SACNAS to retain their 305,378 Company
shares. If the Company exercises this option, the SACNAS option to
purchase the remaining ASA shares shall be reduced to $1,680,000.
Provided SACNAS has not exercised the option agreement,
beginning January 1, 1998, and at the end of each quarter, SACNAS shall
forgive 12.5% of the $500,000 unsecured loan to the Company along with
interest accrued to that date. Any loan amount forgiven including both
principal and interest shall be credited to the option price.
If SACNAS does not elect to exercise the option
agreement during the term provided, the remaining principal balance of the
$500,00 loan not forgiven plus any accrued interest, shall be forgiven in its
entirety. During the FY98 the Company wrote down $187,500 of the
outstanding $500,000 loan and accumulated interest.
The company is continuing to consolidate ASA financial
results during the options period.
Training.
MAS provides emergency medical response training
programs for seafarers. Seafarers are trained to administer emergency first
aid at sea in conjunction with the Company's radio / satellite / telephone
medical advice services. Training also includes discussions of other MAS
services that are important to the seafarer's occupational health and welfare.
The training is performed both at Company facilities and at customer
locations, including on board ship.
Clinic Services.
The Company has established a network of approximately
200 U.S. clinics and hospitals through which it provides clinic services.
Through this network the Company coordinates pre-placement and periodic
physical examinations and U.S. Coast Guard required alcohol and drug
testing. The Company receives fees for each examination and for entering
medical reports in the Company's depository of more than 20,000 health
records. The Company also provides other work, health and safety
recommendations to employers. In 1998 the Company began operating a
clinic for out-patient health services at its headquarters building.
c. Markets.
Internet "Chat" Services
The Internet is considered the "super-highway" for
information. Subscribers gain access to the Internet through service
providers. The largest provider in the U.S. is America Online (AOL) which
currently has over 14 million subscribers. America's Doctor, Inc. has an
exclusive contract with AOL to be an anchor tenant on the AOL Health
Page. Through a "Call Center Service Agreement," the Company has an
exclusive contract to provide medical information for America's Doctor to
AOL subscribers. Under the terms of the agreement, the Company may not
provide competing "chat" services to other Internet providers. Therefore, the
Company's Internet market, as it relates to physician keyboard chats, is
limited to users provided by the America's Doctor contract through the
America's Doctor web site.
The Company is not limited from any other types of
electronic or "e" commerce on the Internet and may use its exposure on the
America's Doctor web site to promote direct voice medical information
services.
Maritime.
The maritime market consists of three primary segments.
One market segment consists of privately-owned U.S. flag ships which
transport U.S. goods to and from ports within the United States. In this
group, there are approximately 400 deep draft vessels for which evacuations
due to medical emergencies are complicated and expensive. Over 90% of
the companies that operate these vessels utilize the services of the Company.
Approximately one-third of these customers have adopted the Company's
pharmaceutical program since it was introduced in late 1983. The Company
also has contracts with towing, research, and commercial fishing vessels.
A second market segment consists of ships owned by U.S.
and foreign companies which carry U.S. goods under flags of registry other
than the U.S. flag. Over 95% of all U.S. goods are shipped on the
approximately 10,000 vessels which fall in this category. The Company has
contracts with over 300 of these ships having domiciles in 15 countries. The
Company also provides services to U.S. flag ships which are owned by or
affiliated with the U.S. Government.
The third market segment encompasses the balance of the
world's oceangoing vessels and numbers around 75,000 vessels/units. The
Company's ongoing effort to sell to this market is enhanced by the effort
made to sell to the second market segment as most of the companies operate
vessels both in the U.S. and worldwide. The further development of less
expensive satellite communication equipment also makes this market more
accessible. Although large in number, the ships comprising the second and
third market segments historically are infrequent users of the service. This,
coupled with relatively high marketing costs led the Company into other
markets such as assistance, in which its response capabilities can be
marketed at higher margins.
Assistance
The assistance industry was founded and developed in
Europe during the 1960's and 1970's. Due to the close proximity of borders
and the variety of languages, there was a need to provide specialized claims
handling services for European international travelers who purchased travel
insurance. Insurance underwriters found that proper claims handling
required the availability of 24-hour call centers, language services, and
foreign medical correspondents. Assistance companies were formed to
provide these specialized services on behalf of multiple underwriters.
Subsequently services were expanded to provide specialized and immediate
claims handling for multiple types of insurance policies and manufacturers'
warranties. Examples include road-side assistance, legal assistance, home
assistance, family assistance, and medical assistance. Assistance is now a
multi-billion dollar industry in Europe.
In the U.S., assistance services have not been developed to
the same extent as in Europe. However, based on population statistics, and
extrapolating from the experience of other Mondial Assistance branch
offices, the Company estimates the potential North American assistance
market to be in excess of one billion dollars.
There are three major types of clients to which the
Company's subsidiary, Assistance Services of America, has been able to sell
assistance services: insurance companies, multi-national corporations, and
HMO's. Insurance companies purchase assistance services to gain access to
the Company's specialized 24-hour claims handling capabilities. The
availability of such services allows the insurance company to offer more
attractive programs to policyholders while monitoring claims and controlling
costs. Multi-national corporations are faced with the challenge of providing
medical and operational services to their employees in foreign countries.
The Company's specialized services function as an additional employee
benefit and allow the client to control risk. HMO's provide managed health
care by designating preferred health care providers or by employing doctors
directly. However, enrollees who travel may not have direct access to these
doctors. The Company's services allow HMO's to monitor and control
claims for enrollees who travel outside the HMO catchment area.
d. Competition.
The Company competes in the Internet medical
information business with potentially many service providers including
hospitals and other physician groups who either now operate a web site, or
who could launch a competing web site to deliver medical information. The
Company believes its strategic affiliation with America's Doctor and its
contract with America OnLine provides it with a competitive advantage,
however, there can be no assurance that a company with far greater financial
resources will not commence operations on the Internet and generate greater
competition than now exists.
The Company competes in the medical advice market
with a few foreign government-operated entities outside of the United States.
The Company also knows of a few U.S. companies as well as several
hospitals in the U.S. that provide radio medical advice to ships at sea.
While the Company believes it has a competitive advantage, the barriers to
entry into the Company's major market are relatively low, and there can be no
assurance that a company with far greater financial resources will not
commence operations similar to those of the Company and generate
competition that does not now exist.
There are several pharmaceutical suppliers, both
domestically and internationally, which market extensively to the maritime
market. The Company competes effectively by providing a well-managed
pharmaceutical program that is fully integrated with the Company's medical
advice service.
There are several domestic and foreign companies which
provide services similar to the Company's assistance program. These
companies have significant financial resources and are capable of competing
effectively with the Company's products. The Company has elected to rely
upon its French partner, SACNAS International, which operates similar
services in 24 countries to lead in the development of this market. The
Company's strength rests in its ability to provide cost effective quality
assistance services.
e. Regulation.
There is at this time, very little government regulation
regarding the Internet. There can be no assurances that in the future
regulations would not be adopted which would affect the current operation
on the Internet. The Company takes care to monitor its Internet services to
insure that only medical information is provided to Internet users.
Physicians providing Internet "chats" do not engage in the practice of
medicine and are trained and monitored to limit their chat activity to general
medical information only.
The Company has been licensed by the Federal
Communications Commission to operate a limited coast, high frequency and
single side band ("SSB") radio station. The monitoring of "controlled
substances" by Company physicians is regulated by the Drug Enforcement
Administration. The Company holds licensure from the Drug Enforcement
Administration and the Maryland Board of Pharmacy for the distribution of
pharmaceuticals. The Company does not hold any direct medical licenses,
but utilizes the services of licensed physicians.
f. Insurance.
The Company maintains liability insurance for its opera-
tions. Physician personnel are provided through professional associations of
physicians which are covered by a comprehensive professional liability
insurance policies.
g. Personnel.
The Company contracts with Hall & Associates, P.A. for
the services of physicians for the Company's 24-hour-a-day medical advice
operations for a fixed annual fee and with Hall & AmDoc, Associates, P.A.
and Hall & DocTalk, Associates, P.A. for 24-hour-a-day medical
information services for various service fees. The Company also pays the
premiums on professional liability insurance covering personnel associated
with Hall & Associates, P.A., Hall & AmDoc Associates, P.A., and Hall &
DocTalk Associates, P.A. The Company does not directly employ its own
physicians. See Item 12. The Company employs 37 people (27 in
management and administration, and 10 communications coordinators) and
believes its relationship with its employees is satisfactory. The Company has
1 full-time physician and over 100 part-time physicians and medical
professionals contracted to provide services to the Company.
Item 2. Description of Property.
The headquarters of the Company consists of a newly
constructed 12,000 square foot custom designed Call Center and
administrative office plus two original buildings containing
approximately 5,000 square feet, located on 1.44 acres of commercial
land in Owings, Maryland, approximately twenty miles from
Washington, D.C. The Company enjoys approval to construct
approximately 6,000 additional square feet of office space at the
headquarters site, when and if needed, without additional site
improvements. The Company's Call Center is staffed 24-hours-a-day.
The property is owned by the Company and is secured by a mortgage of
only $129,000. To finance the newly constructed call center the
Company received a $500,000 loan at 5% simple interest from
SACNAS International, which SACNAS has agreed to forgive as part of
the consideration for its option to purchase an increased equity interest
in ASA from the Company.
The medical Call Center is staffed by physicians, a
Medical Director, multi-lingual communications coordinators, call center
manager, and an experienced support staff. The center is equipped with a
bank of commercial telephone lines, inbound WATS lines, telex, fax,
electrocardiogram sending and receiving capabilities and a high-frequency
single side band ("SSB") radio station. The radio station is licensed by the
Federal Communications Commission (see Item 1, "Regulation") and can
operate on five specially designated frequencies that are free of other
traffic. This capability affords the Company voice communication from Hawaii
to Italy with high reliability. Arrangements made with radio relay stations
located in Berne, Switzerland; Singapore; Durban, South Africa; Bahrain;
and Sidney, Australia give the Company worldwide communications
capabilities. All radio and telex equipment is supported with backup
equipment and the Call Center uses a generator to maintain continuous
operations in case of a power failure. The Company maintains a commercial
insurance policy on all buildings and equipment, which in the opinion of
management, is adequate to cover the Company's exposure.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal
proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 20, 1996 the Company held an annual
meeting of stockholders. In preparation for the meeting the Company issued
an information statement but did not seek proxies. Individuals holding
1,934,207 shares of common stock (50.7% of 3,816,933 shares issued) were
in attendance at the meeting. All four members of the Board of Directors
stood for re-election.
A motion was made and duly seconded to increase the
authorized shares of Common Stock from six million to ten million shares.
The motion was passed by unanimous vote with 1,9347,207 shares
represented in favor of the resolution.
By unanimous vote of those present the following
individuals were re-elected as Directors of the Company, constituting the
entirety of the Board of Directors:
1. Ronald W. Pickett
2. Thomas M. Hall
3. Judith P. Hoyer
4. Jean-Paul Babey
No other matters were submitted to a vote of the stockholders.
Judith P. Hoyer deceased in 1997 and the Board seat remains vacant.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
There is a limited public trading market for the Company's Common Stock
on the "Bulletin Board" in the over-the-counter market, and there were 248
shareholders of record on January 21, 1999. The closing prices for the
Common Stock have been:
Bid
High Low
November 1, 1996 to January 31, 1997 1/4 1/4
February 1, 1997 to April 30, 1997 1/4 1/4
May 1, 1997 to July 31, 1997 1/4 1/4
August 1, 1997 to October 31, 1997 1/4 1/4
November 1, 1997 to January 31, 1998 5/16 1/4
February 1, 1998 to April 30, 1998 7/16 3/8
May 1, 1998 to July 31, 1998 1 5/8 .40
August 1, 1998 to October 31, 1998 1 1/8 1/2
On January 21, 1999, the Common Stock closed at $7.25.
The Company has never paid a cash dividend on its common stock.
Item 6. Management's Discussion and Analysis of Financial Condition.
Results of Operation.
The Company's consolidated net income for fiscal year 1998 was
$529,663 ($0.14 per share), compared to $357,903 ($.09 per share) for 1997,
an increase of 32.4%. The increase of $171,760 is primarily due to the
addition of Internet revenues and recognition of tax benefits from operating
loss carry forwards. FY 1998 represents the ninth consecutive profitable year
for the Company.
The Company's introduction into the medical Internet arena has
increased the Company's profitability. During the 4th quarter of 1998 the
Company received gross revenues of $721,463 from Internet activities
related to its new Internet services.
The Company's other business consists of maritime response
services, sales of pharmaceuticals and training services provided to maritime
customers. Revenue from maritime response services is derived primarily
from providing medical advice to ships. Total revenue from contracts from
medical advice to ships at sea during fiscal 1998 was $773,759 as compared
to revenues of $756,246 reported in fiscal 1997.
1998 pharmaceutical sales of $500,819 represent an increase of
2% when compared to the previous year's sales of $491,637. Net
pharmaceutical revenue, excluding freight, was $153,583 in fiscal year 1998
compared to $155,777 in fiscal 1997.
Profits from training services were $110,719 in fiscal 1998
compared to $153,834 in 1997, a decrease of 38.9%. This decrease was due
primarily to delays in ongoing training programs as the Company's
customers implemented new training standards required by the International
Maritime Organization.
The Company reported sales of $1,019,150 and net revenue of
$917,850 from assistance services in fiscal 1998, compared to $1,101,096
and $1,005,801 respectively for fiscal 1997, a decrease in reported sales of
8%. The decrease in sales is the result of the decline in a major contract
during 1998, held by the Company's subsidiary ASA.
Salaries and wages were $1,079,963 in fiscal 1998 compared to
$759,332 in fiscal 1997, an increase of 30%. The increase reflects the
addition of staff to support the Company's new Internet call center, plus
additions to the Company's marketing, accounting, information technology,
and administrative departments. In conjunction with this the Company's
other selling, general and administrative expenses increased by 12.9% to
$871,965 in fiscal 1998 from $759,402 in fiscal 1997.
Liquidity and Capital Sources.
Cash provided by operations was $463,938 in 1998 as compared to
$281,247 in fiscal 1997. The ratio of current assets to current liabilities
was 1.44 to 1 at the end of fiscal 1998 as compared to 1.26 to 1 at the end of
fiscal 1997. The cash flow from ongoing operations is sufficient to meet the
Company's current and anticipated short-term liabilities. During 1998 the
Company obtained a $500,000 unsecured line of credit from a local bank.
The Company has not drawn on this line of credit.
Impact of Inflation and Changing Prices.
The Company's costs are comprised primarily of staff salaries and
physician fees. Salaries and wages were $1,079,963 in fiscal 1998 and
759,332 in fiscal 1997 an increase of $320,631. These increases reflect both
increases in the number of employees from the prior year and increases in
salaries due to a tightening labor market. Medical staffing costs increased
by $299,442 in fiscal year 1998 due to the addition of the America's Doctor
chat service.
Item 7. Financial Statements.
Financial statements and supplementary data required by
this item are included at Part IV, item 14.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons.
Listed below are the directors and executive officers of the
Company. Directors are elected for one year terms or until their successors
are elected and qualified. Officers hold office until their successors are
elected and qualified or until their earlier resignation or removal.
Age at
Name Positions with Company January 21,1999
Ronald W. Pickett Chairman of the Board of 51
Directors & President,
President of DocTalk, L.L.C.
Thomas M. Hall, M.D., M.I.M. Chief Executive Officer, 46
President of Assistance Services
of America, Inc.,
President of Hall & Associates, P.A.,
Chief Physician of the Company,
President Hall & Am Doc
Associates, P.A., and
Hall and DocTalk, Associates, P.A.
Jean-Paul Babey Director 43
Robert P. Crabb Secretary 51
Dale L. Hutchins, Ph.D. Executive Vice President, 37
Chief Operating Officer of Doc-
Talk, L.L.C.
Robert C. Snyder Chief Financial Officer, 42
Treasurer
Ronald W. Pickett is the founder of the Company,
Chairman of the Board of Directors and President. He has been an officer
and director of the Company since its inception in 1981. A graduate of
Gordon College, Mr. Pickett has engaged in various entrepreneurial
activities for 30 years.
Thomas M. Hall, M.D.,M.I.M., a graduate of George
Washington University School of Medicine, "with distinction", has served as
President of Hall & Associates, P.A., and its predecessor firm since April,
1988, as Chief Physician of the Company since 1982, and as Chief Executive
Officer of the Company since July 1992. Dr. Hall has been a director of the
Company since March, 1992. As Chief Executive Officer of the Company,
Dr. Hall supervises all day-to-day operations. As Chief Physician, Dr. Hall
is in charge of the medical personnel utilized in the Company's medical
information, advice and training operations. Dr. Hall is a diplomat of the
National Board of Medical Examiners, the American Board of Internal
Medicine, and the American Board of Preventive Medicine (Certified
Occupational Medicine Specialist). He is a member of Phi Beta Kappa and
Alpha Omega Alpha honor societies. Dr. Hall also holds a Masters degree
in International Management from the University of Maryland.
Jean-Paul Babey, an electronic engineer, is a graduate of
Centrale School, Lilles (France) 1979, and received an MBA at ISA, Paris
(France) in 1981. After having worked as a Consultant for 5 years, Mr.
Babey has served as International Director for Mondial Assistance Group
(headquarters in Paris, France) since April 1987. Additionally, Mr. Babey is
the Managing Director of Mondial Assistance UK Limited (London,
England) since January 1993. Mr. Babey is also a director of ASCI
Incorporated (Ireland) and DIMA Incorporated (Netherlands).
Robert P. Crabb, has over 30 years of sales, marketing
and public and private corporate management experience, including 15
years with the Metropolitan Life Insurance Company where he played
an integral role in the company's development and implementation of
its marketing and training programs. His entrepreneurial expertise
includes marketing and financial consulting and commercial and
residential real estate development. Mr. Crabb serves the MAS Board
the Directors as Corporate Secretary and Director of Corporate
Development and he is the Vice President of Marketing for Doc-Talk
L.L.C. Mr. Crabb studied Accounting and Finance at Benjamin
Franklin University in Washington, D.C. and Business Finance and
Estate Planning at the University of North Carolina.
Dale L. Hutchins, Ph.D., Executive Vice President,
joined the company in 1982. Dr. Hutchins functions as the Executive
Vice President of the company. He also serves as the Chief Operating
Officer of DOC-TALK, L.L.C. He has 18 years of experience in
management, operations, and marketing. Dr. Hutchins also has
considerable import, export, foreign product/capability representation,
and counter-trade experience. He holds a Ph.D. in business
administration, as well as varied medical certifications. He is active in
a wide range of charitable, industry, technology, and civic organizations.
Robert C. Snyder, Chief Financial Officer, Joined
MAS in May of 1996. Mr. Snyder has over 20 years of accounting
experience working in the private sector of Washington D.C. His
experience includes senior financial and administrative director for
several rapid growth software R&D companies and director of three
Maryland based non-profit organizations. He brings to MAS the talents
necessary to provide for the successful and controlled financial growth
of the Company. Mr. Snyder has degrees from the University of
Maryland in Accounting, Business Administration and Economics and
is a licensed USCG Captain.
Item 10. Executive Compensation.
The following is a table which summarizes the
compensation awarded to, earned by, or paid to executive
officers of the Company for services to the Company for the
fiscal years ended October 31, 1997 and 1998:
SUMMARY COMPENSATION TABLE
Annual Compensation
______________________________________________________________________________
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation
______________________________________________________________________________
Thomas M. Hall, M.D., M.I.M. 1998 $ 61,538 $110,231 (2) $ 83,260 (3)
CEO and 1997 $ 50,000 $ 95,105 (2) $ 85,694 (3)
Chief Physician (1) 1996 $ 50,000 $ 65,135 (2) $ 87,625 (3)
Ronald W. Pickett 1998 $ 86,538 0 0
Chairman of the Board, 1997 $ 50,000 0
President and Treasurer 1996 $ 50,000 0 0
Robert P. Crabb 1998 $ 3,231 $ 36,175 (4)
Dale L. Hutchins, Ph.D. 1998 $ 55,230 $ 8,077 0
Robert C. Snyder 1998 $ 44,623 $ 5,000 0
(1) Dr. Hall also receives income from the Company as an
independent contractor and independent commissioned sales agent, as detailed
in notes (2) and (3) below. Dr. Hall is required to pay certain of his own
business and travel expenses related to this income.
(2) Received as an independent commissioned sales agent,
representing a percentage of the Company's gross sales of certain
travel-related medical advisory services.
See Item 12. "Certain Relationships and Related Transactions."
(3) Received as an independent contractor through the
Company's agreement with Hall & Associates, P.A., under which Hall &
Associates, P.A. provides the Company with medical staff personnel.
See Item 12. "Certain Relationships and Related Transactions."
(4) Received as an independent consultant to DocTalk, L.L.C.
through Susquehanna Development Corporation which is controlled by Mr. Crabb.
No person (other than the Chief Executive Officer) who
served as an executive officer of the Company at the end of the fiscal year
ended October 31, 1997 had total annual salary and bonus for that year in
excess of $100,000. But see Item 12. "Certain Relationships and Related
Transactions."
Directors who are not officers of the Company receive
$250 for each meeting of the Board of Directors or committee of the Board of
Directors that they attend. Officers of the Company do not receive additional
compensation for attending board meetings.
Dr. Hall, Mr. Pickett, Mr. Crabb, Dr. Hutchins, and Mr. Snyder
have written employment contracts with the Company.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Beneficial Ownership. As of December 31, 1998, the Company
was aware that the following persons owned beneficially more than 5% of its
Common Stock:
No. Shares
Name and Address Owned Beneficially Percent of Class
Thomas M. Hall, M.D., M.I.M. 1,182,750* 31%
8050 Southern Maryland Boulevard
Owings, MD 20736
Ronald W. Pickett 637,568** 16.7%
8050 Southern Maryland Boulevard
Owings, MD 20736
SACNAS International 305,378 8%
2, rue Fragonard
Paris XVII, France
Robert P. Crabb 100,000*** 2.6%
583 Lombard Road
Rising Sun, MD 21911
Dale L. Hutchins, Ph.D 68,111**** 1.8%
8050 Southern Maryland Boulevard
Owings, MD 20736
Robert C. Snyder 30,000***** 0.8%
8050 Southern Maryland Boulevard
Owings, MD 20736
* Includes immediately exercisable options to purchase 200,000
shares of MAS common stock at $.50 per share.
** Includes 304,678 shares owned by family members, associates,
and 332,890 shares beneficially owned by Ronald W. Pickett and Cynthia P.
Pickett (his spouse).
*** Consists of 100,000 options to purchase shares of MAS
common stock at $0.50/share. Per the terms of a consulting agreement
between the Company and Mr. Crabb, 1/3 of the options vested on July 1,
1998, 1/3 will vest upon renewal of the consulting agreement on July 1,
1999, and 1/3 will vest upon renewal of the agreement on July 1, 2000.
**** Includes immediately exercisable options to purchase 50,000
shares of MAS common stock at $0.50/share.
***** Consists of 30,000 options to purchase shares of MAS common
stock at $0.50/share. Per the terms of an employment agreement between the
Company and Mr. Snyder, 6,000 of the options vested on May 8, 1998 and
6,000 will vest on each subsequent anniversary date through May 8, 2002
based on continued satisfactory employment.
The following table sets forth the beneficial ownership of shares of
Common Stock of the Company as of January 1, 1999 for each director and
executive officer and for all directors and executive officers as a group:
No. Shares
Name Owned Beneficially Percent of Class
Thomas M. Hall, M.D., M.I.M. 1,182,750* 31%
8050 Southern Maryland Blvd.
Owings, Maryland 20736
Ronald W. Pickett 637,568** 16.7%
8050 Southern Maryland Boulevard
Owings, MD 20736
Jean-Paul Babey 305,378*** 8%
SACNAS International
2, rue Fragrant
Paris XVII, France
Robert P. Crabb 100,000**** 2.6%
583 Lombard Road
Rising Sun, Maryland 21911
Dale L. Hutchins, Ph.D. 68,111***** 1.8%
8050 Southern Maryland Boulevard
Owings, MD 20736
Robert C. Snyder 30,000****** 0.8%
8050 Southern Maryland Boulevard
Owings, MD 20736
All directors and executive officers
as a group (6 individuals) 2,323,807 60.9%
* Includes immediately exercisable options to purchase
200,000 shares at $.50 per share.
** Includes 304,678 shares owned by family members,
associates, and 332,890 beneficially owned by Ronald W.
Pickett and Cynthia P. Pickett (his spouse).
*** Consists of 305,378 shares held in the name SACNAS
International, as to which Mr. Babey shares voting and
investment power, but of which Mr. Babey disclaims
beneficial ownership.
**** Consists of 100,000 options to purchase shares of MAS
common stock at $0.50/share. Per the terms of
a consulting agreement between the Company and Mr.
Crabb, 1/3 of the options vested on July 1, 1998, 1/3 will
vest upon renewal of the consulting agreement on July 1,
1999, and 1/3 will vest upon renewal of the agreement on
July 1, 2000.
***** Includes immediately exercisable options to purchase
50,000 shares of MAS common stock at $0.50/share.
****** Consists of 30,000 options to purchase shares of MAS
common stock at $0.50/share. Per the terms of
an employment agreement between the Company and Mr.
Snyder, 6,000 of the options vested on May
8, 1998 and 6,000 will vest on each subsequent
anniversary date through May 8, 2002 based on
continued satisfactory employment.
Item 12. Certain Relationships and Related Transactions.
a. Medical Staffing
The Company has an agreement with Hall & Associates,
P.A. to provide the Company with medical personnel as needed to staff its
maritime and international travel operations. The Company pays Hall &
Associates, P.A. fees in equal amounts every two-week pay period for
personnel provided, plus reimbursement for professional liability insurance,
the direct costs of any extra physicians for coverage of the call center,
training costs and incidental expenses. The agreement with Hall &
Associates derives from a written agreement with the predecessor of Hall &
Associates, Vaillancourt Associates, P.A., which was executed in 1982. The
written agreement has been modified by oral agreement on several occasions.
Ronald W. Pickett, the Chairman, President and second largest shareholder
of the Company, is the Treasurer of Hall & Associates, but has no direct or
indirect financial interest in Hall & Associates. Thomas M. Hall, M.D.,M.I.M.,
who was elected Chief Executive Officer of the Company on July 16, 1992
and is the largest shareholder of the Company, controls Hall & Associates,
P.A. Prior to being elected CEO, Dr. Hall served as Chief Physician of the
Company, and he continues to serve the Company as Chief Physician.
b. Subsequent Event
On December 4, 1998 two new Professional Associations
were created: Hall & AmDoc Associates, P.A., and Hall & DocTalk
Associates, P.A. The company plans to enter into agreements with these
Professional Associations to provide medical staffing for its programs with
America's Doctor, Inc., and Doc-Talk, L.L.C., respectively. Ronald W.
Pickett, the Chairman, President and second largest shareholder of the
Company, is the Treasurer of Hall & AmDoc, Associates, P.A., and Hall and
DocTalk Associates, P.A., but has no direct or indirect financial interest in
either Professional Association. Thomas M. Hall, M.D., M.I.M., who is the
chief executive officer of the company and the largest shareholder, controls
the two new professional associations.
Item 13. Exhibits List and Reports on Form 8-K.
(a) A list of the exhibits filed as part of this report is found in
the Exhibits Index .
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICAL ADVISORY SYSTEMS, INC.
Date: By:
Ronald W. Pickett
Chairman of the Board
President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: By:
Ronald W. Pickett
Chairman of the Board
President
Date: By:
Thomas M. Hall, M.D., M.I.M.
Chief Executive Officer
Director
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
Date: By:
Jean-Paul Babey
Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
1. An annual report for fiscal year 1997 has not yet been sent to the
Company's stockholders.
2. The Company will distribute an annual report to security holders
subsequent to the filing of this Form.
EXHIBITS INDEX
Sequential
Exhibit No. Description of Exhibit Page Number
3(a) Restated Certificate of Incorporation, N.A.
filed as Exhibit 3(a) to Registration
Statement on Form S-18 (No. 2-98314) on
June 7, 1985*
3(b) Certificate of Amendment of certificate N.A.
of incorporation dated Sept. 8, 1988,
filed as Exhibit 3(a)(2) to Annual
Report on Form 10-K on March 28, 1990*
3(c) Bylaws, as amended, filed as Exhibit N.A.
3(b) to Registration Statement on Form S-18
(No. 2-98314) on June 7, 1985*
4 Form of Common Stock Certificate, filed N.A.
as Exhibit 4 to Amendment No. 1 to
registration Statement on Form S-18
(No.33-02991) on February 28, 1986*
10(a) Letter dated December 2, 1988 evidencing N.A.
agreement between Medical Advisory Systems,
Inc. and Hall and Associates, P.A. with respect
to provision of medical services to Customers
of Medical Advisory Systems, Inc., filed as
Exhibit 10(c) to Form 8 amending Annual
Report on Form 10-K on April 18, 1989*
10(b) Joint Venture Agreement dated June 21, 1993 between N.A.
SACNAS International and Medical Advisory Systems,
Inc., Agreement between the Company and filed as
Exhibit 10(b) to Annual Report on Form 10-KSB on
March 15, 1994*
11 Statement regarding Computation of earnings or E-1
loss per share
*Incorporated herein by reference.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
OCTOBER 31, 1998
FORMING A PART OF ANNUAL REPORT
PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-KSB
OF
MEDICAL ADVISORY SYSTEMS, INC
MEDICAL ADVISORY SYSTEMS, INC.
Index to Financial Statements
Page
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheet at October 31, 1998 F-4
Consolidated Statements of Earnings for the two years
in the period ended October 31, 1998 F-6
Consolidated Statements of Stockholders' Equity for
the two years in the period ended October 31, 1998 F-7
Consolidated Statements of Cash Flows for the two
years in the period ended October 31, 1998 F-8
Notes to Consolidated Financial Statements F-9
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Advisory Systems, Inc.
We have audited the accompanying consolidated balance sheet of
Medical Advisory Systems, Inc. and subsidiaries as of October 31, 1998
and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the years ended October 31, 1998 and 1997. These
financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based upon our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. 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 our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Medical Advisory
Systems, Inc. and subsidiaries as of October 31, 1998, and the results of its
operations and its cash flows for the years ended October 31, 1998 and
1997, in conformity with generally accepted accounting principles.
/s/ STEFANOU & COMPANY, LLP
STEFANOU & COMPANY, LLP
Certified Public Accountants
McLean, Virginia
January 28, 1999
F-3
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 579,331
Accounts receivable, less allowance for doubtful
receivable of $ 77,744 907,720
Inventory, at lower of cost or market 26,745
Current deferred tax asset (Notes A and F) 37,015
Prepaid expenses 6,802
---------
Total current assets 1,557,613
PROPERTY AND EQUIPMENT-AT COST:
(Notes A and C)
Land 65,078
Building and improvements 918,699
Furniture, fixtures and equipment 675,537
---------
1,659,314
Less accumulated depreciation 644,259
---------
1,015,055
OTHER ASSETS:
Investment (Note B) 660,000
Deferred income taxes (Notes A and F) 387,739
---------
1,047,739
---------
$ 3,620,407
=========
See accompanying notes to consolidated financial statements
F-4
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1998
LIABILITIES
CURRENT LIABILITIES:
Current maturities of long-term debt (Notes C and D $ 315,617
Accounts payable and accrued expenses 437,249
Deferred income 327,565
----------
Total current liabilities 1,080,431
LONG-TERM DEBT, less current maturities (Note C) 134,069
COMMITMENTS AND CONTINGENCIES (NOTE J)
JOINT VENTURER'S INTEREST (NOTE A) (24,706)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, par value, $ 1.75 per share;
1,000,000 shares authorized; none used -
Common stock, par value, $ .005 per share;
10,000,000 shares authorized; 3,819,938
shares issued (Notes E and K) 19,415
Additional paid-in-capital 3,824,778
Accumulated deficit (1,369,997)
-----------
2,474,796
Less 65,940 shares of common stock held in treasury-at cost ( 43,583)
-----------
2,430,613
-----------
$ 3,620,407
===========
See accompanying notes to consolidated financial statements
F-5
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED OCTOBER 31,
Revenues: 1998 1997
Internet call center services $ 721,463 $ -
Maritime response services 773,759 756,246
Assistance services 1,019,150 1,101,096
Pharmaceutical sales 500,819 491,637
Maritime clinic systems 44,704 33,736
Medical clinic services 9,679 -
Training 110,719 153,294
Other 62,532 65,309
Interest 56,467 44,971
--------- ---------
3,299,292 2,646,289
Cost and expenses:
Pharmaceuticals 347,236 335,860
Medical professional services 323,902 321,260
Maritime clinic system 28,632 20,420
Medical clinic services 32,739 -
Training 24,945 29,425
Internet call center services 323,204 -
Salaries and wages 976,812 759,332
Selling, general and administrative 894,769 759,402
Depreciation 86,624 84,725
Interest 34,848 29,562
--------- ---------
3,073,711 2,339,986
--------- ---------
Operating income 225,581 306,303
Extinguishment of debt (Note C and D) 214,843 -
Income tax benefit (Notes A and F) 36,058 55,567
Earnings before joint Venturer's interest 476,482 361,870
Joint Venturer's interest loss (income) 53,181 (3,967)
--------- ---------
NET EARNINGS $ 529,663 $ 357,903
========= =========
Earnings per common share
(basic and assuming dilution) $ .14 $ .09
========== ==========
Weighted average common shares outstanding $3,819,938 $3,819,938
See accompanying notes to consolidated financial statements
F-6
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998 AND 1997
Common Stock Additional Accumulated Treasury Stock
Shares Amount Paid-in Deficit Shares Amount Total
Capital
Balance at 3,882,873 $19,415 $3,824,778 $(2,257,563) 65,940 $(43,583)$1,543,047
Nov 1,1996
Net earnings - - - 357,903 - - 357,903
--------- ------- ---------- ----------- ------ -------- ----------
Balance at 3,882,873 19,415 3,824,778 (1,899,660) 65,940 (43,583) 1,900,950
Oct 31,1997
Net earnings - - - 529,663 - - 529,663
--------- ------- ---------- ----------- ------ -------- ----------
Balance at 3,882,873 $19,415 $3,824,778 $(1,369,997) 65,940 $(43,583)$2,430,613
Oct 31,1998
========= ======= ========== ============ ====== ======== ==========
See accompanying notes to consolidated financial statements
F-7
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31,
Increase (decrease) in cash and equivalents 1998 1997
Cash flows from operating activities
Net earnings for the year $ 529,663 $ 357,903
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Deferred income taxes (36,058) (57,661)
Equity interest in Joint Venture income
(loss) (53,181) 3,968
Depreciation 86,624 84,725
(Increase) decrease in:
Accounts receivable 136,892 (202,173)
Prepaid expenses and other 7,210 (13,468)
Inventory (4,540) (2,072)
Increase (decrease) in:
Accounts payable and accrued
expenses (163,065) (7,414)
Deferred income (39,607) 125,375
---------- ----------
Net cash provided by operating activities 463,938 289,183
Cash flows used in investing activities:
Capital expenditures, net of disposals (135,149) (269,434)
Decrease in investments (295,031) -
---------- ----------
Net cash used in investing activities (430,180) (269,434)
Cash flows used in financing activities:
Repayments of loans to banks and related parties (184,036) (7,818)
---------- ----------
Net cash, provided (used) in financing activities (184,036) (7,818)
---------- ----------
Net (decrease) increase in cash and equivalents (150,278) 11,931
Cash and equivalents at beginning of year 729,609 717,678
---------- ----------
Cash and equivalents at end of year $ 579,331 $ 729,609
========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
interest $ 12,567 $ 16,789
========= =========
See accompanying notes to consolidated financial statements
F-8
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
NOTE A-SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows.
Basis of Presentation
The consolidated financial statements include the accounts of Medical
Advisory Systems, Inc. (MAS) and its wholly-owned subsidiaries, MAS
Laboratories, Inc. Doc-Talk, LLC, and T.L.C. Inc. Significant
intercompany transactions have been eliminated in consolidation.
The consolidated financial statements also include 100% of the assets,
liabilities and operating results of Assistance Services of America, Inc.
(ASA). Pursuant to a joint venture agreement, the Company formed ASA
and purchased 250 shares (50%) of ASA common stock in fiscal 1994 for
$25,000 in cash. The Joint Venture's Interest reflected on the 1998
consolidated balance sheet and the consolidated statements of earnings
represents the other joint venturer's share (50%) of ASA's equity (deficit)
and results of operations for 1997 and 1998
Business Operations
MAS provides medical advice to ocean-going vessels and other individuals
or entities located outside the continental United States, operates an out-
patient medical clinic and provides medical information service via "chats"
over the internet and telephone. ASA provides medical assistance services
to multi-national corporations, health maintenance organizations, and
insurance companies in Canada and the United States. MAS Laboratories
is currently inactive.
Inventories
Inventories are stated at the lower of cost or market determined by the first-
in, first-out (FIFO) method. Inventories consist of pharmaceuticals
available for sale to contract clients.
Revenue Recognition
Revenues from contracts that provide unlimited services are recognized
ratably over the term of the contract. Revenues from contracts based on
usage are recognized when the services are rendered. Other revenues are
recognized at the time services or goods are provided.
Property and Equipment
For financial statement purposes, property and equipment are depreciated
using the straight-line method over their estimated useful lives (five years
for furniture, fixtures and equipment and 25 years for building and
improvements). The straight line method of depreciation is also used for
tax purposes.
F-9
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
NOTE A-SUMMARY OF ACCOUNTING POLICIES-CONTINUED
Income Taxes
Income taxes are provided based on the liability method for financial
reporting purposes in accordance with the provisions of Statements of
Financial Standards No. 109, "Accounting for Income Taxes". Deferred
and prepaid taxes are provided for on items which are recognized in
different periods for financial and tax reporting purposes.
Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid debt instruments purchased with a maturity date of three
months or less to be cash equivalents.
Impairment of Long-Lived Assets
Effective November, 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 121 (SFAS 121). The Statement requires that
long-lived assets and certain identifiable intangibles held and used by the
Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No.121 also requires assets to be disposed of be
reported at the lower of the carrying amount or the fair value less costs to
sell. Adoption of this statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments and related items which potentially subject the
Company to concentrations of credit risk consist primarily of cash, cash
equivalents and trade receivables. The Company places its cash and
temporary cash investments with high credit quality institutions. At times,
such investments may be in excess of the FDIC insurance limit. The
Company's customers are not concentrated geographically and it
periodically reviews its trade receivables in determining its allowance for
doubtful accounts.
Stock Based Compensation
The Company accounts for stock transactions in accordance with APB
Opinion 25, "Accounting for Stock Issued to Employees." In accordance
with statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation," the Company has adopted the proforma
disclosure requirements.
F-10
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
NOTE A-SUMMARY OF ACCOUNTING POLICIES-CONTINUED
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standard No.
128, "Earnings Per Share," specifying the computation, presentation and
disclosure requirements of earnings per share information. Basic earnings
per share has been calculated based upon the weighted average number of
common shares outstanding. Stock options and warrant's have been
excluded as common stock equivalents in the diluted earnings per share
because they are either antidilutive, or their effect is not material. There
is no effect on earnings per share information for the year ended October 31,
1997 relating to the adoption of this standard.
NOTE B-INVESTMENTS
As of October 31, 1998, the Company has invested $660,000 in
consideration for 32,666 shares of common stock in America's Doctor, Inc.
The Company's investment represents approximately 8% of the outstanding
equity of America's Doctor, Inc. The Company's investment is covered
under the scope of SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities," classified as "available for sale." The value of
this investment approximates book value (See Note J).
NOTE C-LONG-TERM DEBT
Long-term debt at October 31, 1998 consists of the following:
Mortgage loan payable in monthly installments of $ 1,222,
including interest at 8.5% per annum, secured by first
deed of trust on Company's building and land $ 137,186
Note Payable to SACNAS International including
interest at 5% per annum; unsecured (See Note D) 312,500
--------
449,686
Less current portion 315,617
--------
$ 134,069
=========
Aggregate maturities of long-term debt as of October 31, 1998 are as
follows:
Year Amount
---- ------
1999 $ 315,617
2000 3,393
2001 3,693
2002 4,019
2003 and after 122,964
--------
$ 449,686
========
The Company has an unused $500,000 bank credit agreement that extends
until October, 1999.
F-11
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
NOTE D-RELATED PARTY TRANSACTIONS
Hall & Associates, P.A., which is owned by the Company's chief Executive
Officer, Thomas M. Hall, M.D., provides medical professional services to
MAS. Amounts paid to Hall & Associates, P.A. represent fees for
professional services rendered and premiums on professional liability
insurance. During 1998 and 1997, the Company paid Hall & Associates,
P.A. $ 278,534 and $337,922, respectively, in fees and professional liability
insurance premium payments made on Hall & Associates, P.A.'s behalf.
During fiscal years 1998 and 1997, Thomas M. Hall, M.D., received
$ 110,231 and $ 95,104, respectively, representing a percentage of the
Company's gross sales of certain travel-related medical services.
The Company entered into a cooperative venture with SACNAS
International (trade name- Mondial Assistance) through ASA, the
Company's 50% owned joint venture. Additionally, as a result of its
affiliation with SACNAS International (which is also a shareholder in the
Company), the Company derived net revenues of approximately $189,000
and $160,000 during 1998 and 1997, respectively, exclusive of the joint
venture activities. At October 31, 1998, the net accounts receivable from
various Mondial centers were approximately $247,170.
During 1996 the Company began construction of a new 12,000 square foot
office building. The Company entered into an agreement with a contractor,
whose owners are related to the Company's President and Chairman of the
Board, to develop and construct the building. The amount of the contract,
together with approved change orders was $614,429, which management
believes approximates the market value for the services rendered. The
Company took occupancy of the building in February, 1997.
During 1998, the Company entered into an agreement with SACNAS
International (SACNAS). The agreement grants SACNAS an option to
purchase 100% of the Company's shares in ASA for $2,000,000 during the
period January 1, 1998 through December 31, 1999. At the time SACNAS
exercises its option, SACNAS shall tender to the Company the 305,378
shares of the Company SACNAS owns. The Company's shares shall be
sold by SACNAS to the Company for $122,151 and the proceeds shall be
used to offset the $2,000,000 purchase of the Company's ASA shares. The
Company has the option to retain 8% of total ASA shares while allowing
SACNAS to retain their 305,378 Company shares. If the Company
exercises this option, the SACNAS option to purchase the remaining ASA
shares shall be reduced to $1,680,000.
Provided SACNAS has not exercised the option agreement, beginning
January 1, 1998, and at the end of each quarter, SACNAS shall forgive
12.5% of the $500,000 unsecured loan to the Company (See Note C) along
with interest accrued to that date SACNAS forgave principal and interest of
$214,843 in 1998. Any principal loan amount forgiven shall be credited to
the option price.
If SACNAS does not elect to exercise the option agreement during the term
provided, the remaining principal balance of the $500,000 loan not forgiven
plus any accrued interest, shall be forgiven in its entirety.
SACNAS has not exercised the option agreement as of the date of these
financial statements.
F-12
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
NOTE E-STOCK OPTIONS AND WARRANTS
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to key
employees of the Company.
Number Prices Per Number of
of shares Share Range Shares Exercisable
--------- ----------- ------------------
Outstanding at October 31, 1996 240,000 $.50 240,000
=======
Granted - - -
Exercised - - -
Cancelled - - -
---------
Outstanding at October 31, 1997 240,000 $.50 240,000
=======
Granted 165,000 $.50 -
Exercised - - -
Cancelled - - -
---------
Outstanding at October 31, 1998 405,000 $.50 294,334
=======
The employee stock options scheduled to expire during the period
SACNAS has an option to purchase 100% of ASA's common stock
(January 1, 1998 through December 31, 1999), have been extended to 60
days after SACNAS exercises its option. If SACNAS does not exercise its
option, the employees' stock options that would have otherwise expired,
will be extended to January 31, 2000 (See Note D).
For disclosure purposes the fair value of each stock option grant is
estimated on the date of the grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for stock
options granted during the years ended October 31, 1998 and 1997,
respectively: annual dividends of $0.00 for both years, expected volatility
of 50%, risk free interest rate of 6.0% an expected life from three to five
years for all grants. The weighted-average fair values of the stock options
granted during the years ended October 31, 1998 and 1997 were
immaterial.
If the Company recognized compensation cost for employee stock options
in accordance with SFAS No. 124, the Company's proforma net income
and net income per share would have been unchanged in 1998 and 1997.
NOTE F-INCOME TAXES
The Company files a consolidate U.S. federal income tax return. The
Company determines deferred tax liabilities and assets based on the
difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Components of deferred tax assets as of October 31, 1998 are as follows:
Current
Deferred income $ 17,106
Allowance for doubtful accounts 19,909
-------
Current deferred tax asset 37,015
Noncurrent
Net operating loss carryforwards 387,739
-------
Total deferred taxes $ 424,754
=======
F-13
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
NOTE F-INCOME TAXES-CONTINUED
Deferred income taxes (asset) were increased in 1998 by $36,058 and in
1997 by $57,567.
The Company has sustained profitable operations for the past nine years
and management expects this to continue. Therefore, management believes
it is more likely than not that it can realize deferred tax assets totaling
approximately $ 424,754 over the next five years.
In 1998 and 1997, MAS utilized approximately $ 640,000 and $ 296,000,
of operating loss carryforwards on its tax return. For tax reporting
purposes, unused net operating losses approximate $1,111,000, which
expire as follows:
Year Amount
---- ------
2002 197,000
2003 226,000
2004 316,000
2005 106,000
2006 266,000
---------
$ 1,111,000
=========
The deferred tax asset related to the carryforward is approximately $388,000.
NOTE G- MAJOR CUSTOMERS
Revenue from two major customers approximated $865,446 or 26.2% of
sales for the year ended October 31, 1998. Revenue from two major
customers approximated $518,307 or 19.5% of sales for the year ended
October 31, 1997.
NOTE I-RETIREMENT PLAN
In 1994 the Company adopted a retirement savings plan (Plan) in
accordance with section 401(k) of the Internal Revenue Code. The Plan is
available to all eligible employees, as defined in the Plan's agreement.
Participants are allowed to contribute up to 15% of their annual
compensation to the maximum amounts prescribed by law. The Company
provides for discretionary matching contributions to the Plan equal to a
percentage of the participant's contributions. The Company's contribution
in 1998 and 1997 were $2,993 and $ 2,364, respectively.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company has entered into a Common Stock Purchase Agreement
whereby the Company has agreed to purchase an additional 57,334 shares
of common stock in America's Doctor, Inc. for $1,346,680 in cash which
will increase the Company's ownership interest in America's Doctor, Inc. to
approximately 18% (See Note B).
The Company expects to fund this obligation from internally generated
funds and outside sources.
F-14
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
NOTE K - SUBSEQUENT EVENT
Subsequent to the date of the financial statements, the Company issued
warrants to purchase Company common stock to certain consulting firms as
partial consideration for services being rendered to the Company. The
terms of the warrants are as follows:
Exercise Price per share Number Outstanding Date of Expiration
- ------------------------ ------------------ ------------------
$1.13 15,000 11-30-98
1.13 15,000 12-31-98
3.00 100,000 11-23-01
4.00 100,000 11-23-01
5.00 30,000 03-30-00
An additional 70,000 warrants may be issued at the exercise price of $5.00
per share and expire March 30, 2001 contingent upon the consultant
meeting certain conditions.
F-15
EXHIBITS
EXHIBIT INDEX
Number Description of Exhibit Page
- ------ ---------------------- ----
(11) Computation of Earnings per Common
and Common Share Equivalents E-1
MEDICAL ADVISORY SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARES
For the years ended October 31, 1998 and 1997
1998 1997
---- ----
Shares outstanding at beginning of period 3,819,938 3,819,938
Weighted average of common shares issued
during the period - -
--------- ---------
Weighted average of common shares
outstanding during the period 3,819,938 3,819,938
Stock options and warrants outstanding-not
included as they have no dilutive effect - -
Shares used in computing earnings per
common share 3,819,938 3,816,938
Earnings per common share
($529,663 / 3,819,938) $ .14
=======
Earnings per common share
($357,903 / 3,819,938) $ .09
=======
E-1
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<CASH> 579331
<SECURITIES> 660000
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