Form 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to_____________
Commission file number 0-20356
HEART LABS OF AMERICA, INC.
(exact name of small business issuer as specified in its charter)
Florida 65-0158479
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1903 S. Congress Avenue, Suite 400, Boynton Beach, Florida 33426
(Address of principal executive offices)
(561)737-2227
(Issuer's telephone number)
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 report(s), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 20,199,511 shares of common
stock, no par value, were outstanding as of August 13, 1996.
<PAGE>
HEART LABS OF AMERICA, INC.
10-QSB- QUARTER ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
FORM 10-QSB FORM 10-QSB FORM 10-QSB
PART NO. ITEM NO. DESCRIPTION PAGE NO.
<S> <C> <C> <C> <C>
I. FINANCIAL INFORMATION
1. Financial Statements
- Condensed Consolidated Balance
Sheet as of June 30, 1996 3
- Condensed Consolidated Statements of Operations
and Accumulated Deficit for the Six
Months Ended June 30, 1996 and 1995. 4
- Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 30, 1996
and 1995. 5
Condensed Consolidated Statements of
Operations for the Three Months ended
June 30, 1996 and 1995 7
- Notes to Condensed Consolidated Financial
Statements 8
2. Management's Discussion and Analysis
or Plan of Operations 11
II. OTHER INFORMATION
1. Legal Information 13
2. Changes in Securities 14
3. Default Upon Senior Securities 14
4. Submission of Matters to a Vote of Security
Holders 14
5. Other Information 14
Signatures
</TABLE>
2
HEART LABS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30,
1996
Assets (unaudited)
-----------
Current Assets:
Cash .................................................. 386,498
Trade accounts receivable, net of allowance ........... 568,256
for doubtful accounts of $18,692
Notes receivable ...................................... 1,832,749
Inventory ............................................. 37,273
Income tax receivable ................................. 80,198
Prepaid expenses and other current assets ............. 1,119,827
-----------
Total current assets ........................................... 4,024,801
Property & Equipment:
Mobile cardiac catheterization laboratories
and medical equipment ............................ 2,908,443
Building .............................................. 564,266
Furniture and office equipment and other assets ....... 1,310,487
-----------
4,783,196
Less: accumulated depreciation and amortization ...... (2,861,964)
-----------
1,921,232
Other Assets:
Notes receivable ...................................... 72,444
Investment in Westmark Group Holdings, Inc. ........... 2,855,365
Goodwill, net ......................................... 1,438,440
Other assets .......................................... 255,999
-----------
4,622,248
-----------
Total assets ................................................... 10,568,281
===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ...................................... 373,359
Accrued liabilities ................................... 261,603
Dividends payable ..................................... 44,957
Stock payable ......................................... 325,000
Current portion of long term debt ..................... 1,427,572
Current portion of capital lease obligations .......... 449,358
-----------
Total current liabilities ...................................... 2,881,849
Long term liabilities:
Long-term debt, net of current portion ................ 157,566
Capital lease obligations, net of current portion ..... 95,546
Minority interest ..................................... 15,588
-----------
Total long term liabilities ........................... 268,700
Shareholders' equity:
Preferred Stock--Series B, $10 stated value ........... 1,020,000
Preferred Stock--Series C, $10 stated value ........... 3,932,900
Common Stock, no par value, authorized 20,000,000 ..... 16,466,861
shares; issued and outstanding 19,499,885
Accumulated deficit ................................... (14,002,029)
-----------
Total shareholders' equity ..................................... 7,417,732
-----------
Total liabilities and shareholders' equity ..................... 10,568,281
===========
3
Six Months Ended
June 30,
(Unaudited)
1996 1995
----------- ----------
Revenue:
Revenue from operations ................ 1,601,629 2,726,226
Interest income ........................ 67,282 3,915
----------- ----------
Total revenue ................ 1,668,911 2,730,141
Expenses:
Cost of services ....................... 776,754 1,720,837
General and administrative expenses .... 2,199,149 1,343,968
Depreciation and amortization .......... 498,637 502,362
Interest expense ....................... 134,742 134,103
----------- ----------
Total expenses ............... 3,609,282 3,701,270
Other expenses:
Other loss ............................. (187,792) --
Loss on sale of equipment .............. (3,441) (16,074)
----------- ----------
Total other expenses ......... (191,233) (16,074)
Net loss .......................................... (2,131,604) (987,203)
(Accumulated deficit)-beginning of year ........... (11,870,425) (3,027,082)
Dividends declared:
Preferred stock ($.06 per share in 1995) ...... -- (29,364)
----------- ----------
(Accumulated deficit)-June 30, 1996 .............. (14,002,029) (4,043,649)
=========== ==========
Loss per common share ............................. (0.18) (0.45)
=========== ==========
Weighted average common shares outstanding,
excluding contingently issuable shares ....... 12,012,296 2,197,425
=========== ==========
4
SIX MONTHS ENDED
JUNE 30
(UNAUDITED)
1996 1995
----------- ---------
Operating activities:
Net loss ............................................ (2,131,604) (987,203)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................ 498,637 502,362
Minority Interest ........................... (16,292) (3,026)
Changes in assets and liabilities:
Trade accounts receivable ................. 134,257 (512,186)
Inventory ................................. (22,243) 43,740
Income tax receivable ..................... -- 57,118
Prepaid expenses and other current assets . (363,390) (13,521)
Other assets .............................. (181,482) (6,051)
Accounts payable .......................... (451,731) 472,251
Accrued liabilities ....................... (119,168) 9,331
----------- ---------
Net cash used in operating activities .... (2,653,016) (437,185)
Investing activities
Issuance of notes receivable ........................ (2,389,212) --
Purchase of goodwill ................................ (364,402) (2,395)
Purchase of Donn Wells, MD .......................... (75,000) --
Loss in equity of investment ........................ 181,480 --
Purchase of property and equipment .................. (208,127) (159,120)
----------- ---------
Net cash used in investing activities ... (2,855,261) (161,515)
Financing activities
Payment of note payable ............................. (183,369) --
Issuance of common stock ............................ 3,773,128 45,654
Issuance of preferred stock ......................... 3,932,900 --
Stock payable ....................................... 325,000 --
Payments of capital lease obligations ............... (340,864) (369,171)
Proceeds from note payable .......................... -- 759,092
Payments of long term debt .......................... (1,636,451) (46,602)
----------- ---------
Net cash provided by financing activities 5,870,344 388,973
Net increase (decrease) in cash ..................... 362,067 (209,727)
Cash at the beginning of period ..................... 24,431 216,348
----------- ---------
Cash at the end of period ........................... 386,498 6,621
=========== =========
Supplemental information:
Interest paid ....................................... $ 122,029 $ 44,131
=========== =========
5
HEART LABS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing
and financing activities:
In June 1996, the Company issued a promissory note in the amount
of $700,000 for commissions related to future acquisitions. The $700,000
has been recorded in prepaid expenses and other current assets.
Noncash aspects of the acquisition of
Donn Wells, M.D. medical center
Fair value of assets acquired 48,448
Fair value of common stock
issued at acquisition 175,000
Cash paid at acquisition 75,000
Assets acquired and related obligations incurred
in connection with capital lease obligations 21,247
During the 1st quarter of 1996, the Company converted $700,000
of its advances to+A56 Westmark Group Holdings, Inc. to Westmark
Group Holdings, Inc. preferred stock.
6
HEART LABS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
(Unaudited)
1996 1995
------------ -----------
Revenue:
Revenue from operations ................... $ 840,844 $ 1,388,517
Interest income ........................... 52,306 --
------------ -----------
Total revenue ...................... 893,150 $ 1,388,517
Expenses:
Cost of services .......................... 449,646 902,381
General and administrative expenses ....... 1,214,753 738,489
Depreciation and amortization ............. 278,561 261,253
Interest expense .......................... 49,714 93,665
------------ -----------
Total expenses ..................... 1,992,674 1,995,788
Other expenses:
Other loss ............................... (34,383) 0
Loss on sale of equipment ................ 0 (16,074)
------------ -----------
Total other expenses ............... (34,383) (16,074)
Net loss ...................................... (1,133,907) (623,345)
============ ===========
Loss per common share ......................... (0.08) (0.28)
============ ===========
Weighted average common shares outstanding,
excluding contigently issuable shares ...... 14,405,548 2,208,654
============ ===========
7
HEART LABS OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
Heart Labs of America, Inc. (the "Company"), incorporated in the State of
Florida on September 29, 1989, commenced operations on February 27, 1990. The
Company's operations consist of mobile cardiac catheterization services to
hospitals on a shared user basis, managed care centers, and management
information systems. Hospital and Management information systems ("HIS/MIS")
which aid in operating hospital and medical office practices as well as
performing billing and collection services.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements are unaudited. These
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to state fairly the consolidated financial
position and consolidated results of operations as of and for the periods
indicated. These consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements and notes thereto for year
ended December 31, 1995, included in the Company's Form 10-KSB as filed with the
Securities and Exchange Commission.
Loss per Common Share
Loss per common share is calculated by dividing net loss by the weighted average
common shares outstanding, excluding contingently issuable shares. Contingently
issuable shares, are considered common stock equivalents and have been excluded
from the primarily loss per share computation since the conditions for their
issuance have not been met. The effect of contingently issuable shares on fully
diluted earnings per common share is anti-dilutive. Also, stock purchase
warrants underlying 710,000 common shares, Directors stock options underlying
60,000 shares, employee stock options underlying 400,000 common shares and other
stock options underlying 150,000 common shares have been excluded from the
primary earnings per share computation since the conditions from common stock
issuance have not been met and their effect on fully diluted earnings per common
share is anti-dilutive.
8
Estimates
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2 - Income Taxes
The Company accounts for income taxes in accordance with FAS 109, accounting for
income taxes.
Note 3 - Continuing Operations
The consolidated financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company's ability to continue
as a going concern continues to depend upon its ability to obtain profitable
operations and to realize its investment in Westmark Group Holdings, Inc. If the
Company is unsuccessful in its efforts, it may be unable to meet its
obligations, making it necessary to undertake such other actions as may be
appropriate to preserve asset values.
Note 4 - Stock Transactions
During the first and second quarter of 1996, the Company sold 834,500 shares of
it's Series C convertible preferred stock for $10 per share in a private
placement of its securities to offshore investors under Regulation S. The
Company raised $8,345,000 less costs associated with the raise of $1,122,400 for
a net of $7,222,600. During the 1st and 2nd quarter, 760,500 shares were
presented for conversion. The conversion of the 760,500 shares required that
20,269,674 common shares be issued. To date, the Company has issued 9,602,763
common shares, with 10,666,911 common shares remain to be issued. Due to
insufficient authorized shares, the Company was unable to issue all of the
common shares necessary to fulfill the terms of the conversion. The Company
intends to increase the authorized number of common shares by shareholder vote
at the Company's annual shareholder's meeting, however no assurances can be
placed on the shareholders approving the increase in the authorized common
stock.
In February 1996, the company sold 357,143 shares of its common stock to
offshore investors in a private placement. Net proceeds to the Company were
$357,185.
In March 1996, the Company converted $700,000 of its advances to Westmark Group
Holdings, Inc. to 200,000 shares of Westmark's Series C Preferred Stock.
9
Note 5 - Business Acquisitions/Dispositions
In April 1996, the Company acquired 100% of the outstanding common stock of
Greenworld Technologies, Inc., ("Greenworld"). Greenworld is the owner of
world-wide licensing rights to the Talon RMS product, a product which lowers
emergency and operating room temperatures while, at the same time, reducing
energy costs. Consideration for the purchase included (1) the funding of 4
lawsuits involving the Talon Refrigerant Management System ("Talon RMS"); (2)
issue to seller, ECS International, Inc. ("ECS") 50,000 shares of the Company's
preferred stock ($250,000 par value) and 100,000 shares of the Company's common
stock; (3) provide $100,000 to Greenworld for operating capital; (4) provide up
to $300,000 to establish the Talon RMS patent worldwide; (5) grant ECS options
to purchase 900,000 shares of the Company's common stock at $1.50 per share and
(6) cancel a bridge loan note in the amount of $100,000.
In addition, the Company agrees that once Greenworld gross sales exceed
$100,000,000, it will transfer 51% of Greenworld back to ECS and distribute the
other 49% to its shareholders as a dividend.
In July 1996, the Company sold Greenworld Technologies, Inc. to GTB Company, a
company whose president was the former general counsel to the Company.
Consideration for the sale included (a) a note payable to the Company in the
amount of $380,000; (b) the forgiveness of a $700,000 promissory note owed by
the Company pursuant to an Agreement signed in June 1996 (See Part II. Other
Information), to Bradley T. Ray, a former consultant to the Company and (c) a
royalty of 7% of the gross sales of Greenworld Technologies, Inc. for a period
of two years, and 5% of the gross sales of Greenworld Technologies, Inc. for an
additional three years.
In May 1996, the Company acquired the assets and business operations of Donn
Wells, M.D. medical center. Consideration for the sale included $75,000 in cash
and the issuance of 256,293 shares of the Company's common stock.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
During 1995, the Company principally derived its revenues from its mobile
cardiac catheterization and its Continuous Passive Motion ("CPM") operations.
The acquisitions of Technomed expanded the Company's medical services to include
managed care medical centers ("medical centers") and management information
systems and hospital information systems.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 30, 1995
Total revenues decreased 39% to $1,668,911 for the six months ended June
30, 1996 from $2,730,141 for the six months ended June 30, 1995. The decrease is
attributable to a loss in revenue from the sale of the CPM and Neurological
testing divisions in 1995. For the six months ended June 30, 1995, the CPM and
Neurological testing divisions accounted for 77% or approximately $2,099,000 of
revenue from operations. The decrease in revenue from the CPM and Neurological
testing divisions is partially offset by the additional revenue generated by the
medical centers and the HIS/MIS operations, $961,208 for the six months ended
June 30, 1996.
Cost of Services, which includes medical supplies, technical and sales
personnel salaries and benefits and other expenses directly associated with the
Company's services decreased to $776,754, 48% of revenue from operations, from
$1,720,837, 63% of revenue from operations, for the six months ended June 30,
1996 and 1995, respectively. The decrease is due to the sale of the CPM division
in 1995. The CPM division was labor intensive and was marketed by a salaried
sales force, thus increasing cost of services.
General and Administrative expenses increased 63% to $2,199,149 for the
six months ended June 30, 1996 principally as a result of an increase in
professional fees of $362,024 which accounted for 42% of the total increase in
general and administrative expense. The professional fee increase is principally
due to various consulting agreements.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996
AND JUNE 30, 1995.
Total revenues decreased 36% to $893,150 for the three months ended June
30, 1996 from $1,388,517 for the three months ended June 30, 1995, principally
as a result of the loss in revenue from the sale of the CPM and Neurological
testing divisions in 1995. The decrease in revenue from the CPM and Neurological
testing division is offset by the increase of $493,955 from the medical centers
and from the HIS/MIS operations.
11
Cost of Services, which includes medical supplies, technical and sales
personnel salaries and benefits and other expenses directly associated with the
Company's services decreased to $449,646, 53% of revenue from operations, from
$902,381, 64% of revenue from operations, for the three months ended June 30,
1996 and 1995, respectively. This decrease is due to the sale of the CPM
division in 1995. The CPM division was labor intensive and was marketed by a
salaried sales force, thus increasing cost of services.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital surplus of $1,142,952 at June 30, 1996
compared to working capital deficit of $1,631,056 at June 30, 1995. This surplus
is the result of the Company selling, during the first quarter of 1996, 834,500
shares of it's Series C Convertible Preferred Stock for $10 per share. The
Company raised $8,345,000 less costs associated with the raise of $1,122,400.
During the first and second quarter of 1996, the Company advanced Westmark
an aggregate of $2,428,593 in the form of advances and one-year promissory
notes. In the first quarter of 1996, the Company converted $700,000 of its
advances into 200,000 shares of Westmark Group Holdings, Inc.
Series C preferred stock.
In May 1996, the Company purchased the assets and business operations of
Donn Wells, MD medical center located in Fort Lauderdale, Florida. Consideration
for the sale included $75,000 in cash and 256,293 shares of the Company's common
stock.
During the second quarter of 1996, the Company opened four medical
centers, three located in Broward and Dade Counties and the other located in
Port Charlotte, Florida.
The Company's ability to continue as a going concern continues to depend
upon its ability to obtain profitable operations, realize its investment in
Westmark Group Holdings, Inc. ("Westmark") and reduce corporate overhead. If the
Company is unsuccessful in its efforts, it may be unable to meet its obligations
and will be required to sell some of its assets or businesses to meet its
obligations and may not be able to continue its operations without seeking
protection from its creditors under the bankruptcy laws.
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January 1995, Thera-Kinetics, Inc. ("TK"), a competitor of the
Company's CPM division filed actions against the Company's wholly owned
subsidiary, U.S. BioInnovations, Inc. and three of its employees in the United
States District Court for the Eastern District of Virginia-Alexandria Division.
The complaint, alleged, among other things, violations by the employees (each of
whom was previously employed by TK) of restrictive covenants, tortuous
interference by the Company's subsidiary and misappropriation of trade secrets
and confidential information. In July 1995, the Company settled the lawsuit with
TK by selling substantially all of its Continuous Passive Motion operations to
TK. Consideration for the sale included a promissory note for $250,000 and the
assumption of approximately $400,000 in equipment leases. Currently, TK has not
assumed any of the leases and is in default on its promissory note. TK alleges
that the Company failed to deliver certain equipment under this Settlement
Agreement. The Company currently is considering all of the remedies available to
enforce the provisions of the settlement agreement.
In December 1995, Codise, Inc. ("Codise") filed a complaint in the 11th
Judicial Circuit in and for Dade County, Florida. The complaint names HLOA
Diagnostic, Inc., the former name of the Company's neurological testing
subsidiary, Cortex Diagnostic Services, Inc. Codise filed its lawsuit against
the Company for failure to redeem stock issued by the Company as partial
consideration for the purchase of assets of Codise, Inc. The Company contends
that it was misled in connection with the 1993 redemption payment and that
Codise is not entitled to any further consideration. Codise is seeking $65,190
in damages. The Company presently has a motion to dismiss pending. In the event
that the motion is denied the Company intends to vigorously defend the lawsuit
and to file a counter claim seeking recovery of the excess redemption payment
paid for 1993.
In February 1996, a lawsuit was filed in the Circuit Court for Broward
County, Florida by Oakmont Financial against the Company alleging default under
an equipment lease and asking for damages in the amount of $50,000, attorney's
fees, and costs. The case is presently in the discovery stage. This lawsuit
relates to medical equipment that was used in the CPM division that was sold in
1995.
In April 1996, suit was filed in the Court of Common Pleas for Somerset,
Pennsylvania against the Company alleging default and conversion under an
equipment lease guarantee relating to its former subsidiary, BioInnovations.
Damages are requested in excess of $25,000, including attorney fees and costs.
In July 1996, this suit was settled.
In August 1996, suit was filed in Circuit Court of Broward County, Florida
against the Company seeking approximately $36,000 for past services. The Company
is currently reviewing the suit and what action it will take.
13
ITEM 2 CHANGES IN SECURITIES
NONE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
NONE
ITEM 5 OTHER INFORMATION
ESSENTIAL CARE MEDICAL CENTERS, INC. AND PRIME DENTAL CARE, INC.
In October 1995, the Company acquired through a Share Exchange Agreement,
Essential Care Medical Centers, Inc. ("Essential") and Prime Dental Care, Inc.
("Prime"). This Agreement was amended May 8, 1996. Pursuant to the terms of the
Amended Exchange Agreement, the Company was required to issue 575,526 shares of
its common stock. for 100% Essential and 100% of Prime outstanding common stock.
In addition, two parcels of real property with building improvements were
purchased for an additional 252,132 shares. Should Prime and Essential have
pre-tax earnings of $350,000 for their fiscal year ended July 31, 1996, the
Company will issue 375,000 shares of Technomed at $1.00 per value, convertible
preferred stock, convertible into shares of the Company's common stock, to one
of the Prime/Essential shareholders. If the pre-tax earnings are less than
$350,000, the number of preferred shares to be issued will decrease
proportionately. The Company originally was required to issue an additional
375,000 shares of Technomed convertible preferred stock to Harry Kobrin, the
other Prime/Essential shareholder, however, since Mr. Kobrin was appointed as
the Company's Executive Vice President and as such is no longer in control of
the day-to-day operations of Prime/Essential, he has waived his rights to the
convertible preferred shares. The Company will compensate Mr. Kobrin for his
performance in 1996 through the issuance of stock options to purchase 264,000
shares at $.375 per share.
Essential and Prime are healthcare clinics located in the South Florida
area. Essential and Prime have several contracts with area Health Maintenance
Organizations ("HMO"). In addition, the Company has opened or is in the process
of opening four additional Essential centers in Florida. These Centers will be
staffed on a per diem basis instead of a salaried basis, thereby reducing their
costs. In addition to the new Essential Centers discussed below, the Company
plans to rehabilitate one of its buildings in order to open a hospice to serve
the AIDS population. The Clinical Care division currently and in the future will
derive its revenues from a variety of sources. The main source of revenue is and
will be managed care contracts. The revenue from these contracts is generated by
the amount of patients contracted to the Centers from various HMO's. The
Clinical Care division, to a lesser extent, also generates revenue on a fee for
service basis whereby the Company will be paid at the time services are
rendered.
14
SYSDACOMP
Sysdacomp has been in operation since 1982. It provides data processing
services to the healthcare industry. Sysdacomp's products include: hospital
financial software which serves as an accounting package for the hospital,
hospital order entry software that networks all departments in the hospital for
ordering all patient services and Physician Practice Management software for all
functions necessary in a physicians office, including scheduling.
In addition to the hospital software, Sysdacomp provides collection
software and processing services for collection agencies and healthcare billing
services. Services for the collection agencies include: Complete account
activity history on line, letter printing and mailing, accounting reports and
credit reporting. Billing services include: Printing and mailing of the billing
forms, electronic submission of claims and accounts receivable management
services.
In June 1996, the Company was informed by the prior shareholders of
Sysdacomp (the "Prior Holders") that Technomed, prior to its acquisition by the
Company, had breached the Agreement pursuant to which Technomed acquired
Sysdacomp. The alleged breaches are: (i) failure to issue the correct number of
shares to the Prior Holders, (ii) failure to merge Sysdacomp with Technomed and
Technomed with the Company; and (iii) failure of the company to register or buy
back the Heart Lab shares issued to the Prior Holders pursuant to the Company's
acquisition of Technomed.
The Company is presently negotiating with the Prior Holders to rescind the
transaction. The Company does not believe that such recession will have a
material adverse impact on the Company's financial condition.
WESTMARK GROUP HOLDINGS, INC.
In November 1995, the Company signed a Share Exchange Agreement with
Westmark Group Holdings, Inc. ("Westmark"). Westmark is a publicly traded
company (NASDAQ-WGHI). This Share Exchange Agreement gave the Company 49%
interest or 1,298,388 shares of Westmark common stock in Westmark in exchange
for $1,210,000 in cash and cash equivalents a note in the amount of $315,000 and
200,000 shares of the Company's Series B preferred stock, with a stated value of
$10. The Stock Exchange Agreement provides that the Company's ownership
position, equal to 49%, will not be diluted and that Westmark is obligated to
issue additional shares to maintain such ownership position. Westmark owns
and/or operates three wholly owned subsidiaries. Also see Item 12. "Certain
Relationships and Related Transactions".
Westmark Mortgage is engaged in the business of originating, purchasing
and selling mortgage loans secured primarily by single family, multi-family and
condominium residences. Westmark Mortgage is registered and/or licensed to
originate, purchase closed loans, underwrite, fund or sell residential mortgage
loans in the states of Alabama, California, Colorado, Florida, Georgia, Hawaii,
Idaho, Indiana, Kansas, Kentucky, Mississippi, Missouri, Montana, Nevada, Ohio,
Oregon, Utah, Washington and Wyoming. Westmark Mortgage pools and sells loans to
third-party investors including the Federal Home Loan Mortgage Corporation
(Freddie Mac or FHLMC), the Federal
15
National Mortgage Association (Fannie Mae), the Department of Housing and Urban
Development (HUD), its lending agency the Government National Mortgage
Association (Ginnie Mae) and various non-conforming mortgage conduits.
Network Capital, a wholly owned subsidiary of Westmark is basically
inactive except for its real estate holdings in California.
In March 1996, Westmark incorporated Westmark Leasing for the purpose of
financing equipment for physicians, labs and testing facilities.
In the first and second quarter of 1996 the Company provided Westmark with
additional financing in an aggregate amount of $2,428,593 to be used for
Westmark's operations and financing activities. The financing was to be provided
in the form of short-term advances which the Company may, at its option, convert
to equity. As of this date, $700,000 of the loan amounts have been converted to
200,000 shares of Westmark's Series C Preferred Stock .
REGULATION S OFFERING
In fiscal 1996, the Company sold an aggregate of 834,500 shares of Series
C preferred stock (the "Preferred") and 357,143 shares of common stock pursuant
to Regulation S Offerings for gross proceeds in aggregate amount of $8,845,000
(net $7,579,785). The Preferred Stock is convertible into shares of the
Company's common stock at the lesser of (i) 75% of the closing bid price of the
Company's common stock, as reported by NASDAQ on the date of the closing of the
Regulation S Offering or (ii) 65% of the average closing bid price for the five
trading days immediately preceding the date of conversion. (During the first and
second quarter the bid price of the Company's common stock fell and the Company
received notices to convert 760,500 shares of Preferred Stock in an aggregate of
20,259,674 shares of common stock.) Although , the Company does not have an
adequate number of shares authorized to effectuate the conversion, it has
negotiated a mutually agreeable solution with the Regulation S subscribers
whereby it will issue the remaining authorized shares to the Regulation S
subscribers, pro rata, and seek shareholder approval to increase the number of
authorized shares of common in order to issue the balance of the converted
shares. Since the Regulation S subscribers have not waived any legal remedies
they may have, the Company may be subject to a lawsuit which if not resolved to
the Company's benefit, could materially impact the Company's financial
condition.
JEAN JOHNSTONE AGREEMENT
In June 1996, the Company entered into an Agreement with Jean Johnstone,
the Company's Chairman of the Board and a director of the Company, whereby among
other things, the Company would facilitate, through a third party the purchase
of 400,000 shares of the Company's common stock from Ms. Johnstone at the
closing bid price per share of the Company's common stock as reported by NASDAQ
on the day prior to purchase. If the purchase price is not at least $284,000.71
the Company will issue Johnstone a convertible debenture in an amount equal to
the shortfall. The Company has agreed to register the shares underlying the
debenture. If a third party purchase cannot be facilitated in 120 days, the
Company will repurchase the shares at a price set forth above by issuance of a
Senior
16
Promissory Note bearing interest at the rate of 8% per annum, paying interest
only, quarterly inarrears, with a balloon payment due June 7, 1997. In addition,
the Company purchased 21,000 shares from Ms. Johnstone at the purchase price of
$.87 for a total purchase price of $18,270.
The Company also granted Ms. Johnstone a five-year option to purchase
200,000 shares of the Company's common stock at $1.00 per share. The parties
executed mutual general releases and Ms. Johnstone resigned as Chairman of the
Board and as a Director of the Company.
In April 1996, the Company issued a check to Ms. Johnstone in the amount
of $400,000. This sum was for the following: (I) partial payment for the
repurchase of stock, $13,851; (ii) A/R Mediquest accrued salary $33,603; and
(iii) repayment of her loan to C.J. Holding dba A/R Mediquest, $352,546.
BRADLEY T. RAY AGREEMENT
In June 1996, the Company entered into an Agreement with Bradley Ray, as
consultant to the Company and the son of Ms. Johnstone whereby, among other
things, the Company would facilitate, through a third party the purchase of
300,000 shares of the Company's common stock from Mr. Ray at the closing bid
price per share of the Company's common stock as reported by NASDAQ on the day
prior to purchase. If the purchase price is not at least $214,285.71, the
Company will issue a one-year Convertible Debenture in the amount of the
shortfall. The Company has agreed to register the shares underlying the
Debenture. If a third party purchase cannot be facilitated in 120 days, the
Company will repurchase the shares as the price set forth above by the issuance
of a Senior Promissory Note, bearing interest at the rate of 8% per annum,
paying interest only, quarterly in arrears, with a balloon payment due in June
7, 1997.
In addition, the Company also granted one-year options to purchase 600,000
and 200,000 shares of the Company's common stock at $.34 per share and $.40 per
share respectively. The Company agreed to register the shares underlying the
options.
The Company also issued Mr. Ray a one-year promissory note in the amount
of $700,000 for payment of commissions Mr. Ray earned as a consultant. The Note
will be reduced by the difference between the exercise price of the options and
the bid price as reported by NASDAQ on the day of exercise.
The parties also executed mutual general releases.
In June 1996, the Company entered into a 50-month consulting agreement
with Mr. Ray for a monthly consulting fee of $5,713 per month. In July 1996, the
Company issued Mr. Ray 450,000 shares of the Company's common stock which was
registered with the Securities and Exchange Commission on Form S-8. The 450,000
shares are considered partial payment of Mr. Ray's contract and was issued in
lieu of cash due to the Company's cash restrictions.
17
DISPOSITION OF GREENWORLD
In July 1996, the Company sold its investment in Greenworld Technologies, Inc.
to GTB Company, a company whose president was the Company former general
counsel. Consideration for the sale included (a) a note payable to the Company
in the amount of $380,000; (b) the forgiveness of a $700,000 promissory note
owed by the Company to Mr. Bradley T. Ray, a former consultant to the Company
pursuant to an Agreement dated in June 1996 and (c) a royalty of 7% on the gross
sales of Greenworld Technologies, Inc. for a period of two years and 5% on the
gross sales of Greenworld Technologies, Inc. for an additional three years.
COMMON STOCK
During the third quarter 199,511 common shares over the authorized amount were
incorrectly issued. The Company has canceled 475,000 shares issued pursuant to
an Escrow Agreement with the original shareholders of the Company. The
cancellation of these shares will bring the outstanding shares under the
authorized amount.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
-None
B. The Company filed a Form 8-K/A, (Event of October 24, 1995), reporting
(Item 2. Acquisition or Disposition of Assets) the acquisition of
Essential Care Medical Centers, Inc. and Prime Dental Care, Inc.
C. The Company filed a Form 8-K/A, (Event of August 23, 1995), reporting
(Item 2. Acquisition of Disposition of Assets) the acquisition of
Technomed, Inc.
18
SIGNATURES
In accordance with the requirements 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.
HEART LABS OF AMERICA, INC.
(Registrant)
August 13, 1996 By: /s/ Harry Kobrin
(Date) Harry Kobrin, Executive Vice President & Director
August 13, 1996 By: /s/ Dawn M. Drella
(Date) Dawn M. Drella, Chief Financial Officer
19
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