U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
MEDICAL INDUSTRIES OF AMERICA, INC.
(Name of small business issuer in its charter)
FLORIDA 65-0158479
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1903 S. CONGRESS AVE., SUITE 400, BOYNTON BEACH, FLORIDA 33426
(Address of principal executive offices, including zip code)
(561) 737-2227
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock
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 to this Form 10-KSB. ( )
State issuer's revenue for its most recent fiscal year. $1,312,143
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the last sales price on April 10, 1997 was $11,018,364.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. At April 10, 1997, there
were 4,197,472 shares of common stock outstanding.
.
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MEDICAL INDUSTRIES OF AMERICA, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-KSB
PART I
PAGE
Item 1 Description of Business 3
Item 2 Description of Properties 16
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 19
Item 6 Management's Discussion and Analysis 20
Item 7 Financial Statements 23
Item 8 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 23
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 25
Item 10 Executive Compensation 27
Item 11 Security Ownership of Certain Beneficial Owners and
Management 30
Item 12 Certain Relationships and Related Transactions 31
Item 13 Exhibits and Reports on Form 8-K 35
SIGNATURES
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Medical Industries of America, Inc., f/k/a Heart Labs of America, Inc.,
was incorporated in September 1989 in the State of Florida and has its principal
executive offices at 1903 S. Congress Ave., Suite 400, Boynton Beach, Florida
033426, telephone number (561)737-2227. Unless the context otherwise requires,
all references to the "Company" include Medical Industries of America, Inc. and
its wholly-owned subsidiaries.
The Company's wholly-owned subsidiaries include: Cortex Diagnostic
Services, Inc., HLA Acquisition Corp. d/b/a KVM Rehabilitation, U.S.
BioInnovations, Inc., Managed Home Recovery, Inc., Acrotronics Rehabilitation
Services, Inc., Essential Care Medical Centers, Inc., Essential Care Medical
Centers #2, Inc., Essential Care Medical Centers #3, Inc., Essential Care
Medical Centers #4, Inc., Essential Care Medical Centers #5, Inc., Essential
Care Medical Centers #6, Inc., Essential Care Medical Centers #7, Inc., CJ
Holdings, Inc. d/b/a AR Mediquest, Sysdacomp, Inc. and Florida Physicians
Internet, Inc. These subsidiaries operate the Company's four separate divisions:
cardiac catheterization, continuous passive motion, clinical care and
neurological testing.
During the past three years, the Company has undergone several material
changes, but the foundation of the Company has always remained constant, mobile
cardiac catheterization laboratories. The Company is focusing its efforts on
expanding it mobile cardiac catheterization division by operating additional
mobile laboratories.
In September 1996, the shareholders of the Company voted to change the
name of the Company from Heart Labs of America, Inc. to Medical Industries of
America, Inc.
On October 31, 1996, the Company effectuated a 1-for-20 reverse stock
split of its common shares and preferred shares which reduced the authorized
number of common shares from 160,000,000 to 8,000,000 and outstanding number of
common shares from 20,199,511 to 1,009,975.
On January 9, 1997, the Company effectuated a purchase agreement with
Florida Physicians Internet, Inc. ("FPII"), a group medical practice
specializing in cardiac and neurological related treatments. The Company is
currently finishing the documentation on the purchase, but has assumed all
operational responsibility as of January 9, 1997. See Item 1. "Description of
Business - Florida Physicians Internet, Inc."
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BUSINESS OPERATIONS
CARDIAC CATHETERIZATION
The Company began providing mobile cardiac catheterization services in
February 1990 and currently operates three mobile cardiac catheterization
laboratories ("Mobile Labs").
In September 1993, the Company's Mobile Labs were the first mobile
laboratories to be accredited by the Joint Commission on Accreditation of Health
care Organizations ("Joint Commission"). During 1996, the Company went through a
standard review, which was extensive in nature, of the medical procedures and
operations of the Mobile Labs to become reaccredited. The recertification is
effective through September 1999.
Cardiac catheterization is a relatively low-risk, widely used diagnostic
procedure which utilizes catheters, contrast agents and sophisticated
radiological instrumentation to provide clinical evaluation of the functioning
of the heart and major blood vessels. The entire cardiac catheterization
procedure generally lasts less than an hour and has a complication rate of less
than .01%. Most low risk cardiac catheterization procedures are performed on an
outpatient basis.
Generally, a team of cardiovascular technicians and registered nurses
trained in cardiac catheterization are assigned to each of the Company's Mobile
Labs. The Company's personnel is directly supervised by a physician employed by
the health care facility at which the Mobile Lab is operating. Movement of the
Company's Mobile Labs typically occurs at night via a driver employed by the
Company. The driver sets up the Mobile Lab upon arrival so it is operational
when the Company's personnel arrive on the following scheduled day.
The Company's Mobile Labs are divided into three rooms; a laboratory
area where the catheterization procedure is performed; a monitoring room where
the Company's technologist and the operating cardiologist can monitor the
procedure and view the results; and a processing room where the film of the
procedure is developed. All waste, medical or other, generated by the Mobile Lab
is disposed of by the health care facility at which the Mobile Lab is operating
in accordance with such facility's procedures.
The Company relies upon equipment warranties and fixed-fee contracts
provided by independent service organizations for equipment maintenance.
Consequently, the Company's business might be adversely affected if its
suppliers cease providing maintenance services. A service contract generally
provides that maintenance be performed outside of regular hours, thereby
minimizing interruptions to a client's schedule.
The medical equipment included in the Company's Mobile Labs is purchased
from major manufacturers or leased from third party lessors. Although the
Company does not expect current mobile cardiac catheterization technology to
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become obsolete in the near future, it believes that the equipment in its Mobile
Labs can be readily adapted to incorporate new technologies. Currently, one
Mobile Lab has been upgraded by adding digital subtraction angiography. This
equipment allows physicians to perform additional procedures and thus increasing
the Company's potential to increase revenues.
The profitability of the Company's mobile cardiac catheterization
business is substantially dependent on the degree to which the Company can
utilize its equipment. Failure to obtain or maintain contracts providing for
sufficient utilization of its Mobile Labs at profitable rates could have a
material adverse effect on the Company's financial condition and results of
operations.
Fees for cardiac catheterization are based on a number of factors, the
most important of which is the cost of equipment utilized and related direct
operating expenses. Other factors in establishing fees include, among other
things, general economic conditions, competitive conditions in the client's
market and the rate of reimbursement provided to the client by private health
care insurers and Medicare.
Currently, the Company provides mobile catheterization services to
facilities in Central and South Florida through three Mobile Labs. Initially,
the Company offered its Mobile Lab services for a fixed fee. Increased
competition has driven the Company to offer non-fixed fee contracts, based on
utilization of the Mobile Labs with minimum guarantees. During 1996, the Company
had two fixed fee contracts that accounted for 71% of total cardiac
catheterization revenue. One contract expired in February 1997 and the other
will expire in April 1997. These contracts have been replaced with other
contracts.
Currently, the Company has three, one year non-fixed fee contracts and
provides services to hospitals on an as needed basis. The Company has been
successful to date in maintaining sufficient utilization of its Mobile Labs to
meet the equipment costs and direct operating expenses of the Mobile Labs. In
the event that the utilization of its Mobile Labs decreases or one or more of
its customers terminate or fail to renew their existing contracts, the Company
will be required to market the Mobile Labs to other customers. If the Company is
unable to acquire sufficient customers to utilize the Mobile Labs, the financial
condition of this division would be materially adversely affected.
The Company's mobile cardiac catheterization division derives its
revenues from contracts with hospitals which in turn bill for the technical
component of the Company's services. A hospital's motivations for providing
cardiac catheterization services through the Company and the fee it is willing
to pay depends upon the profitability of the service. Consequently, the rate at
which insurance companies, Medicare or other third party payers are willing to
reimburse or pay for such services indirectly affects the fees the Company can
charge. Any widespread application of restricted payment or reimbursement
schedules could adversely affect the Company's mobile cardiac catheterization
division.
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In March 1997, the Company entered into an asset purchase agreement
whereby it sold one of its Mobile Labs. See Item 6. Managements Discussion and
Analysis.
FLORIDA PHYSICIANS INTERNET, INC.
On January 9, 1997, the Company effectuated a purchase agreement with
Florida Physicians Internet, Inc. ("FPII"). The Company is currently finishing
the documentation on the purchase, but has assumed all operational
responsibility as of January 9, 1997. Florida Physicians Internet, Inc. is a
group medical practice specializing in cardiology, neurology, pulmonology,
pediatrics, and internal medicine. The practice consists of seven offices and
eight physicians covering Orange, Osceola, Polk, and Lake Counties of Florida.
This physician group is led by Dr. A. Razzak Tai, MD, FACCP,ACCP,MRCP .
Dr. Tai, its president, practices all aspects of non-invasive and
diagnostic cardiology, angiography, nuclear and internal medicine. He is long
established and highly regarded in the local medical community and is an
excellent referral source for other physicians who can be added to the group
practice.
With over 6,000 active patients generating a gross revenue of
$2,400,000, FPII serves to expand its services into other areas. Revenue from
FPII is derived from a variety of sources, including, but not limited to,
capitated contracts with health maintenance organizations, governmental
agencies, insurance companies and fee for service patients. The Company plans to
utilize a Mobile Lab at FPII facilities.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
government regulation. In addition to the referral and reimbursement regulations
discussed below, regulations include certificate of need, licensure of health
care facilities, services and equipment, and restrictions on physician
investments in health care entities to which they refer patients. Although the
Company believes that its current operations comply with applicable regulations,
there can be no assurance that the subsequent adoption of laws or
interpretations of existing laws will not regulate, restrict or otherwise
adversely affect the Company's business.
The laws and regulations applicable to financial arrangements in the
health care industry are complex and may be subject to varying interpretations.
This section summarizes the principal federal and state statutes and regulations
which are applicable to the Company's business.
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OMNIBUS BUDGET RECONCILIATION ACT OF 1993
On August 10, 1993, President Clinton signed into law the Omnibus Budget
Reconciliation Act of 1993 ("OBRA `93") which contained numerous provisions that
significantly affect health care providers who participate in the Medicare and
Medicaid programs. The principal impact of OBRA `93 in the health care area is
(i) to expand the existing prohibition against the referral of patients to
entities with which the referring physician has a financial relationship
(self-referral), and (ii) to curtail the cost of the Medicare program by
limiting reimbursement.
SELF-REFERRAL. OBRA `93 expanded the then-existing prohibition against
"self-referral" for clinical laboratory services to eleven "designated health
services." The "designated health services" for which self-referral is
prohibited are: (a) clinical laboratory, (b) physical therapy, (c) occupational
therapy, (d) radiology services (including magnetic resonance imaging,
computerized axial tomography scans and ultrasound services), (e) radiation
therapy services and supplies, (f) durable medical equipment and supplies, (g)
parenteral and enteral nutrients, equipment and supplies, (h) prosthetics,
orthotics, and prosthetic devices and supplies, (i) home health services, (j)
outpatient prescription drugs, and (k) inpatient and outpatient hospital
services.
A significant exception to the self-referral prohibition is the
exception for referrals within a group practice. The rule provides that a
physician in a group practice may be paid a productivity or performance bonus so
long as the bonus is NOT related to the volume or value of referrals by that
physician. This provision appears to be the first attempt by the federal
government to subject compensation payments within a BONA FIDE group practice to
the prohibitions of the Medicare and Medicaid Anti-Fraud and Abuse Amendments
and the self-referral restrictions.
SAFE HARBOR
Recent federal and state legislation has prohibited or severely
restricted ownership of health care facilities by physicians who refer their
patients to such facilities. Under OBRA, physicians can no longer refer Medicare
beneficiaries to clinical laboratories in which they have an ownership interest
or compensation arrangement. OBRA does, however, provide an exception from this
ownership prohibition for registered securities of a publicly traded company
having total stockholder equity exceeding $75,000,000. In addition, the "safe
harbor" regulations adopted by the Office of Inspector General, US Department of
Health and Human Services, provide a safe harbor from the Medicare and Medicaid
Anti-Fraud and Abuse Amendments, Section 1128B of the federal Social Security
Act, if certain standards are met. For example, investment interests must be
obtained on terms equally available to the public through trading on a national
exchange or over-the-counter market, in a publicly traded corporation having in
excess of $50,000,000 in undepreciated net tangible assets related to furnishing
health care products and services.
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At the current time, the Company does not qualify for the applicable
public company exemptions or safe harbor, as described above, and therefore the
Company's physicians and other shareholders will not be able to refer patients
and other business to the health care businesses operated by the Company. This
may materially adversely impact the Company's clinical care operations.
MEDICARE ANTI-FRAUD AND ABUSE AMENDMENTS
Financial arrangements between health care businesses and physicians or
others who make or influence referrals, furnish products or services, or
otherwise generate business which is paid for in whole or in part by the
Medicare and/or Medicaid programs are the subject of increasing federal
scrutiny. Section 1128B(b) of the Social Security Act, the Medicare and Medicaid
Anti-Fraud and Abuse Amendments ("Section 1128B") prohibits the offer,
solicitation or acceptance of any form of remuneration as an inducement to refer
patients, products or services that are paid for in whole or in part by the
Medicare or Medicaid program. Violation of Section 1128B may be punished by
fines, imprisonment and exclusion from participation in the Medicare and
Medicaid programs. In addition to being broadly worded, the provisions of
Section 1128B have been interpreted expansively by the federal courts.
PENDING FEDERAL LEGISLATION
The Company anticipates that additional legislation will be proposed,
and ultimately adopted, at both the federal and state levels, restricting or
prohibiting physician ownership of health care facilities to which they refer
patients.
FLORIDA PATIENT SELF-REFERRAL ACT OF 1992
During its 1992 session, the Florida Legislature passed into law the
Patient Self-Referral Act of 1992 ("Self-Referral Act"). The Self-Referral Act
is far broader than OBRA since it is applicable to all types of health care
services and to all patients (not just Medicare and Medicaid beneficiaries).
Under the Self-Referral Act, "designated health services" are defined as
clinical laboratory, physical therapy, comprehensive rehabilitative,
diagnostic-imaging and radiation therapy services. The Company plans to purchase
and operate facilities that provide some or all of these designated health
services. All health care products and services not enumerated above, are
classified as "other health services."
Under the Self-Referral Act, a physician is prohibited from referring a
patient for designated health services to an entity in which the physician is an
investor.
The Self-Referral Act also prohibits the referral by a physician of a
patient for other health services to an entity in which that physician is an
investor, unless the ownership of the entity meets one of two tests:
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1. The physician's investment interest is in the registered securities of a
publicly traded corporation whose shares are traded on a national exchange
or over-the-counter market and which has total assets at the end of its most
recent fiscal quarter in excess of $50,000,000 or
2. For entities that do not qualify under the first test, no more than 50% of
the value of the investment interests in the entity may be held by
investors who are in a position to make referrals to the entity, and the
terms under which an investment interest is offered must be the same for
referring investors and non-referring investors. In addition, the terms
under which an investment interest is offered may not be related to the
investor's volume of referrals to the entity. Finally, the investor must
not be required to make referrals or be in the position to make referrals
to the entity as a condition for becoming or remaining an investor.
Entities that meet either test must also meet two additional tests.
First, the entity may not lend to or guarantee a loan to an investor who is in a
position to make referrals if the investor uses any part of that loan to obtain
the investment interest. Second, distributions of profits and losses to
investors must be directly proportional to their capital investment.
The Self-Referral Act also imposes certain disclosure obligations on the
Company and referring physicians. Under the Self-Referral Act, a physician may
not refer a patient to an entity in which he or she is an investor unless,
before doing so, the patient is given a written statement disclosing, among
other things, the physician's investment interest in the entity to which the
referral is made. The Self-Referral Act also imposes disclosure obligations on
the entities to which physicians refer patients.
Since the Company plans to purchase and operate facilities that provide
some or all of the "designated health services" and intends to network its
medical services, the Self Referral Act, and OBRA will have a significant
adverse impact on the Company's proposed plan of operations and may necessitate
(i) a change in the way the Company acquires its clinical care facilities (ii) a
change in the corporate structure (i.e., a spin-off of the clinical care
companies coupled with an initial public offering in order to qualify for the
federal and state "Safe Harbor Standards"), (iii) a secondary offering for the
Company (in order to qualify for the federal and state "Safe Harbor Standards"
or (iv) a merger with a company with substantially more assets than the Company
(in order to qualify for the "Safe Harbor" standards).
CERTIFICATE OF NEED
Some states, including Florida, require a "certificate of need" ("CON")
prior to the acquisition of medical equipment or provision of cardiac
catheterization services by the Company's hospital customers. In Florida, a
certificate of need is required for cardiac catheterization services only if the
hospital wishes to provide such services to inpatients. Typically, obtaining a
CON approval is a costly and lengthy process, and may involve adversarial
proceedings brought by competing
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facilities. The hospital or health care provider, rather than the Company, must
apply for and obtain the CON, where required. As a result, the Company is unable
to control or accurately predict whether and how many potential customers will
obtain CON's. The Company's ability to provide cardiac catheterization services
to hospitals and health care providers is dependent upon those entities
obtaining a CON for such services.
LICENSES
Although the Company's cardiac catheterization services generally are
not subject to health care licensing requirements (it contracts directly with
hospitals), the Company must adhere to the same standards as the hospitals it
contracts with including standards for sanitation, safety and personnel
qualifications. The Company is also required to register its X-ray equipment and
pay annual registration fees to state radiation control agencies. The Company
believes that its cardiac catheterization operations are in compliance with
applicable registration and hospital license requirements.
LEGISLATIVE DEVELOPMENTS
There are presently efforts underway on both the federal and state
levels to enact major reforms of the U.S. health care system. Proposals include
cost containment measures through health care alliances and improved access to
insurance coverage for the working uninsured or unemployed. The State of Florida
has enacted the "Health Care Reform Act of 1992" (the "Florida Health Plan"),
which is designed to create a managed competition model for health care delivery
in Florida based on quality, geographic coverage and reduced costs. The Company
cannot predict what effect, if any, the Florida Health Plan or any future
federal or state health care reform legislation will have on the Company.
OTHER STATES; OTHER REGULATORY MATTERS
The Company anticipates that it will be doing business in states besides
Florida. The Company will be subject to the laws of each state that it does
business in, including among others, the laws regulating the corporate practice
of medicine self-referrals, licensing, and the division of fees between licensed
physicians and non-physicians.
DISCONTINUED OPERATIONS
HOSPITAL INFORMATION SYSTEMS/MANAGEMENT INFORMATION SYSTEMS
In August 1995, the Company acquired, through a Share Exchange Agreement
with Technomed, Inc. shareholders, three of which were affiliated with the
Company prior to the transaction, two companies that specialize in hospital and
management information systems: CJ Holdings, Inc. d/b/a A/R Mediquest ("A/R
Mediquest") and Sysdacomp, Inc. ("Sysdacomp"). A/R Mediquest's and Sysdacomp's
hospital and management information systems provide software
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support for hospital and medical office operations as well as performing billing
and collection services for professional organizations, hospitals, doctors,
medical practices and medical networks. See Item 12. "Certain Relationships and
Related Transactions". In December 1996, the Board of Directors voted to focus
the Company's energies on its core business, mobile cardiac catheterization and
to discontinue these operations. In connection with this decision, the Board
began negotiations to sell A/R Mediquest and Sysdacomp to the former owners of
Sysdacomp.
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 resolve this matter. The Company does not believe that such
rescission will have a material adverse impact on the Company's financial
condition.
CLINICAL CARE - ESSENTIAL CARE MEDICAL
In October 1995, the Company acquired Essential Medical Care Centers,
Inc. ("Essential") and Prime Dental Care, Inc. ("Prime") through a Share
Exchange Agreement. 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% of the Prime and Essential
outstanding common stock. In addition, two parcels of real property with
building improvements were purchased for an additional 252,132 shares.
During 1996, in addition to Essential and Prime, the Company acquired or
opened seven additional medical centers. These additional medical centers were
opened as individual wholly owned subsidiaries of the Company with numerical
numbering by the order in which they were opened (e.g. Essential Care Medical
Center #2, Essential ...#3, Essential ...#4, etc. ). These medical centers were
located throughout Broward and Dade Counties of Florida and provided general
medical care.
Essential #1's main source of revenue is derived from capitated
contracts with Health Maintenance Organizations. The clinical care division, to
a lessor extent, also generated revenue on a fee for service basis, whereby the
Company will be paid at the time services are rendered.
In the 4th quarter of 1996, the Board of Directors of the Company
reviewed the operations and financial condition of the clinical care division
and voted to close down seven of the nine medical centers. It is the Company's
intent that the remaining two medical centers, Essential Care #1 and Essential
Care #5, are to be
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spun off into a separate company that will become publicly traded upon
registration with the Securities and Exchange Commission.
GREENWORLD
In April 1996, the Company acquired 100% of the common stock of
Greenworld Technologies, Inc. ("Greenworld"). Greenworld owns the worldwide
licensing rights to the "Talon RMS" product for the life of the patent and any
reissues thereof. The Talon RMS is a device that works in conjunction with air
conditioning, heat pumps and refrigeration units to lower compression pressures
thereby causing a reduction in energy costs and extending the useful life of the
system's compressor.
As consideration for the purchase the Company agreed to: (i) fund the
cost of four lawsuits involving the Talon RMS in an estimated amount of
approximately $180,000 - $290,000 (ii) issue to the seller, ECS International,
Inc. ("ECS"), 50,000 shares of the Company's preferred stock ($250,000 face
value) and 100,000 shares of the Company's common stock; (iii) provide $200,000
to Greenworld for operating capital; (iv) provide up to $300,000 to establish
the Talon RMS patent worldwide; (v) grant ECS options to purchase 900,000 shares
of the Company's common stock at $1.50 per share and (vi) cancel a Bridge Loan
made by the Company to Greenworld in the amount of $100,000 in February 1996.
In July 1996, the Company sold Greenworld to GTB Company, a company
whose president was 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 owned by the Company pursuant to
an Agreement signed in June 1996 (See Item 12. Certain Relationships and Related
Transactions), payable to Bradley T. Ray, a former consultant to the Company and
(c) a royalty of 7% of the gross sales of Greenworld for a period of two years,
and 5% of the gross sales of Greenworld for an additional three years. As of the
date of this report, GTB Company has defaulted on its payments of the promissory
note. Currently, the Company is seeking all legal remedies available.
WESTMARK GROUP HOLDINGS, INC.
In November 1995, the Company entered into a Share Exchange Agreement
with Westmark Group Holdings, Inc. ("Westmark"), a public company traded on
NASDAQ (NASDAQ-WGHI). This Agreement provided that the Company would receive a
49% interest or 1,298,388 newly-issued shares of Westmark common stock 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 Agreement provides that the Company's 49% ownership
position 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, two of which are inactive. See Item 12. "Certain
Relationships and Related Transactions". The active subsidiary, Westmark
Mortgage, is engaged in the business of originating, purchasing and selling
mortgage loans secured
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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 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.
In the first and second quarters of 1996, the Company provided Westmark
with additional financing in an aggregate amount of $2,453,000 to be used for
Westmark's operations and financing activities. The financing was provided in
the form of short-term advances which the Company may, at its option, convert to
equity. In March 1996, $700,000 of the loan amounts were converted to 200,000
shares of Westmark's Series C Preferred Stock . See Item 12 "Certain
Relationships and Related Transactions".
In January 1997, the Company signed an agreement with Westmark whereby
the Company and Westmark would restructure each other's debt and equity
positions that each company currently holds in each other. Under the terms of
the restructuring agreement, the Company will return 1.2 million common shares
and 200,000 convertible preferred shares of Westmark, valued at $700,000, to
Westmark. Upon receipt, Westmark will retire these securities to the treasury
and consequently reduce its common shares outstanding from 4.7 million to 3.1
million. Conversely, Westmark will return to the Company 200,000 of its Series B
convertible preferred shares, valued at $2,000,000, for retirement to its
treasury, and make a cash payment of up to $2,500,000 and 400,000 common shares
of Westmark. The Company also received a note from Westmark for up to $3,950,000
with a ten year amortization schedule and a balloon payment at the end of 36
months. The note provides for a certain discount based upon the initial cash
payment received from Westmark. Westmark is currently filing a registration
statement to raise sufficient funds to repay the note. The Agreement is based on
Westmark's ability to raise capital; no assurance can be placed on the Agreement
being effectuated.
FLEMMING PHARMACEUTICAL
During 1994, under the prior management and prior Board of Directors,
the Company's Continuous Passive Motion ("CPM") division invested $610,000 in
Flemming Pharmaceutical, Inc. ("Flemming"), a start-up generic and brand name
pharmaceutical company that had the license rights to the product CAPSIN. CAPSIN
is an FDA approved, all-natural lotion made from oleoresins of chili peppers
with the primary ingredient being Capsiacin. CAPSIN is used for the relief of
pain connected with strains, backache, arthritis and general pain management.
The Company was granted the world-wide marketing rights to CAPSIN for use above
the neck, primarily for relief of pain connected with the temporomandibular
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joint ("TMJ") disease, which would be marketed along with the CPM division's
TheraPacer product. Terms of this transaction were more specifically set forth
in the Company's 1994 annual report on Form 10-KSB.
In February 1996, the Company recovered 10% of its investment in Faro
Pharmaceutical, Inc. (Flemming changed its name in 1995). The Company is
reviewing the Flemming investment transaction in order to determine if it should
seek legal remedies to recover the unrecovered portion of its investment from
the former directors of the Company.
NEUROLOGICAL TESTING
In July 1995, the Company sold the medical equipment and business
operations of its neurological testing subsidiary, Cortex Diagnostic Services,
Inc., to Neurological Diagnostic Services, Inc. for $50,000, payable as follows:
$25,000 at closing, a $25,000, sixty day Promissory Note bearing interest at the
rate of 10% per annum and the assumptions of lease agreements related to the
medical equipment. The Note was due September 30, 1995, but was not paid until
February 1996.
CONTINUOUS PASSIVE MOTION
During 1994, the Company acquired three companies, KVM Rehabilitation,
U.S. BioInnovations and Managed Home Recovery, Inc. and started one company that
supplied physical rehabilitation products, principally Continuous Passive Motion
("CPM") devices to hospitals, clinics and home care markets.
CPM devices are classified as durable medical equipment and require a
doctor's prescription and/or a letter of medical necessity in order to receive
reimbursement from a provider.
In July 1995, as a result of a lawsuit settlement, the Company sold the
assets, medical equipment and business operations of three of its CPM companies
to Thera-Kinetics, Inc. ("TK"). Consideration for the sale included a $250,000
Promissory Note, bearing interest at the prime rate, payable to the Company in
12 installments of $20,833.33, and the assumption of approximately $400,000 in
equipment leases. As of the date of this Report, TK had not assumed many of the
leases, which has resulted in several lawsuits. See Item 3. Legal Proceedings.
In addition, TK defaulted on its Promissory Note to the Company. The Company is
presently exploring its legal remedies for the purpose of enforcing the
provisions of the settlement agreement and intends to move forward when the
Company has the financial resources and stability to do so.
In September 1995, the Company sold Managed Home Recovery, Inc. ("MHR")
to one of MHR's former owners in connection with the settlement of a lawsuit
brought by that owner in May 1995. Consideration for the sale included $15,000
in cash, the return of 16,071 shares of the Company's common stock, the
forgiveness of a note payable in the amount of $58,736, assumption of certain
liabilities, the assignment and release of a line of credit in the approximate
amount
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of $85,000, a 10% Promissory Note in the aggregate amount of $105,572.27
payable to the Company in installments of $2,000 each month, with the balance
due on November 10, 1997.
PROFESSIONAL LIABILITY INSURANCE
The Company currently maintains general and professional liability
insurance for its operations in the single limit amount and aggregate annual
limit amount of $5,000,000. There is no assurance that potential claims will not
exceed this limit. While the Company's Mobile Labs are at a customer's facility,
they operate only under the direction of licensed physicians on the customer's
staff who direct the procedures, supervise the Company's nurses and
technologists, and interpret the results of the examinations. The Company
requires that its customers carry medical malpractice insurance to cover the
physicians using the Company's Mobile Labs.
COMPETITION
The health care industry in general, and the market for medical services
and equipment in particular, is highly competitive.
With respect to the Company's mobile cardiac catheterization services,
the Company competes not only directly with other contract providers, but also
with health care providers that have their own equipment and with equipment
manufacturers and leasing companies that sell or lease equipment to health care
providers for full-time utilization. Some of the Company's direct competitors
which provide contracted medical services may have access to considerably
greater financial resources than the Company. The Company competes against other
contract providers on the basis of quality of services and equipment, price and
reliability.
In South Florida competition for clinical care division is highly
competitive. The Company competes with three companies that are larger in size
than the Company and may have access to considerably greater financial resources
than the Company. The Company competes by providing more personalized care to
the patients they serve as well as providing patient transportation and
pharmaceutical delivery.
The main competitors to FPII's group practice are Med-Partners, Phycor,
and a number of smaller physician lead groups. Phycor is of the size that they
prefer to buy existing group practices of twenty-five or more physicians which
is a market the Company is not in at this time.
MARKETING
Cardiology relies heavily on referrals to perform high-tech procedures.
Most of the marketing for the Mobile Labs is done through word of mouth and is
based on the Company's reputation in the medical community.
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The clinical care division markets through a variety of channels. It has
several contracts with managed care companies in the South Florida area, it's
personnel speak at local functions and the Company supports many local area
events.
The marketing to the physician group practice has taken on various
forms: Referrals from one physician to another, group presentations through
sponsorship of dinner meetings, and personal contact.
EMPLOYEES
As of March 23, 1997, the Company had 54 employees. The Company's
ability to provide its services is dependent upon the Company recruiting, hiring
and retaining qualified technical personnel. To date, the Company has been able
to recruit and retain sufficient qualified personnel. None of the Company's
employees are represented by a labor union. The Company has not experienced any
work stoppages and considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases approximately 6,000 square feet of office space in
Boynton Beach, Florida for its corporate offices at an average monthly net
rental of $4,966 per month over the term of the lease. The lease expires in
April 2001. The Company believes this space is adequate to meet the current
requirements. The Company also leases two other facilities for A/R Mediquest and
Sysdacomp that range from 3,500 to 4,000 square feet and are occupied pursuant
to leases on a month to month basis at an average month net rental of $1,300 and
$2,243 per month. The Company leases space for its Essential Care Centers. The
Company acquired through the Essential transaction two buildings located in the
South Florida area. One of the buildings houses Essential Care Medical Center
and the other building, located in Plantation, Florida was sold in November
1996. The mortgage payment on the remaining building is approximately $2,056 per
month with 5 years left on the Note. The Company, with the consent of its prior
landlord, sublets 3,300 square feet of office space in Boca Raton, Florida,
which previously served as its corporate offices.
ITEM 3. LEGAL PROCEEDINGS
CURRENT OPERATIONS
In August 1996, a lawsuit was filed in the Circuit Court of Broward
County, Florida by G4, Inc. against the Company seeking approximately $36,000
for past computer related services. The case is in the discovery stage.
In January 1997, a demand for arbitration was filed with the American
Arbitration Association of Orlando, Florida by Pyramid Holdings, Inc. The
plaintiff alleged a breach of a consulting agreement in that the Company failed
to
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compensate the plaintiff pursuant to the terms of a 1995 agreement. The
Company intends to vigorously defend this lawsuit.
In February 1997, a lawsuit was filed in the United States District
Court, Southern District of New York, by Tula Business, Inc. et al. The suit
alleges the Company failed to accurately convert preferred shares of common
stock issued pursuant to a transaction exempt from the registration requirements
of the SEC pursuant to Regulation S promulgated under the Securities Act of 1933
as amended ("Regulation S") into shares of common stock. Similar charges were
made by four other shareholders of preferred stock who threatened to file a
lawsuit similar to the one brought by Tula Business, Inc. et al. The plaintiffs
are seeking the issuance of additional shares. Effective April 7, 1997, the
Company entered into a settlement agreement and mutual releases with the
plaintiffs of the Tula Business, Inc. et al lawsuit and four other shareholders
of preferred stock. The terms of the settlement required the Company to issue
2,063,346 unrestricted common shares, the exercise of 144,384 warrants into
common stock at $1.50 per share (for an aggregate of $216,576 received by the
Company) and the payment by the Tula Business, Inc. et al plaintiffs and certain
of the four other claimants of $900,000 to the Company in settlement of its
claims.
On March 4, 1997, a lawsuit was filed against the Company in the
Supreme Court of New York by Glick Enterprises. The suit alleges the Company
failed to accurately convert shares of preferred stock issued pursuant to a
transaction exempt from the registration requirements of the SEC pursuant to
Regulation S promulgated under the Securities Act of 1933 as amended
("Regulation S") into shares of common stock. The plaintiffs are seeking the
issuance of additional shares. On April 2, 1997, the Company's attorneys made a
motion to dismiss three of the four causes of action in the Glick complaint. The
Company intends to vigorously defend the lawsuit.
ESSENTIAL CARE MEDICAL CENTERS
In January 1997, Dr. Franklin Saumell, et al filed a complaint in the
Circuit Court of Dade County, Florida against the Company and Essential. The
complaint alleges that the Company defaulted on payments to employees and to
independent consultants. Dr. Saumell, et al are seeking approximately $455,000
in damages. The
Company intends to vigorously defend the lawsuit.
The Company is also involved in two other lawsuits whose outcome will
not materially affect the financial condition of the Company.
CONTINUOUS PASSIVE MOTION
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 lawsuit was settled for $38,206.
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In April 1996, Corporate Capital Leasing Group, Inc. filed a suit 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 for
$4,660.
In September 1996, a lawsuit was filed in the Circuit Court of Loudoun
County of Virginia against the Company. The suit alleges the default of an
employment contract between John Dwyer and the Company and is seeking damages of
approximately $90,000.
In October 1996, a lawsuit was filed in the Fifth Judicial Court of the
County of Lyon, Minnesota by Lyon Financial Services, Inc. The suit alleges
default under several equipment leases and is asking for damages in excess of
$60,000. The Company is currently reviewing the suit and what action it will
take.
In January 1997, a lawsuit was filed in the Circuit Court for Palm Beach
County, Florida by Advanta Business Services, Corp. alleging default under an
equipment lease. Advanta is seeking approximately $31,000 including interest and
attorneys fees.
MISCELLANEOUS
In December 1995, Codise, Inc. ("Codise") filed a complaint in the
Circuit Court 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 mislead in
connection with the redemption payment for 1993 and that Codise is not entitled
to any further consideration. Codise is seeking $65,190 in damages. In September
1996, Codise and the Company settled the lawsuit for $2,700 in cash and the
exchange of general releases.
In August 1996, Shape up America filed a lawsuit in the Superior Court
of the State of California, County of Alameda-Eastern division against the
Company, et al. The suit alleges conspiracy to damage the Plaintiff by depriving
it of the benefits of the Agreements between the Plaintiff and the other
defendants, inducing the said defendants to breach their Agreements with
Plaintiff so that the Company could purchase the Talon RMS rights directly from
Greenworld. The Company is currently reviewing the suit and what action it will
take.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
is quoted through the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the symbol "MIOA." The following table shows,
for the periods indicated, the high and low closing bid prices (post-reverse) of
the Company's Common Stock as reported by NASDAQ:
1995 HIGH LOW
--------- ------ ------
First Quarter 22 1/2 17 1/2
Second Quarter 47 1/2 20
Third Quarter 57 1/2 37 1/2
Fourth Quarter 81 1/4 30
1996 HIGH LOW
--------- ------ -------
First Quarter 47 1/2 19 3/8
Second Quarter 20 5/8 7 1/2
Third Quarter 13 3/4 5 5/8
Fourth Quarter 6 4/5 25/32
As of March 7, 1997, there were approximately 167 holders of record of
the common stock, not including beneficial owners. The Company did not pay cash
dividends on its common stock in 1995 or 1996.
REGULATION S OFFERING
In 1996, the Company sold an aggregate of 41,725, as adjusted for the
October 31, 1996 1 for 20 reverse stock split, shares of Series C preferred
stock (the "Preferred Stock") and 32,303 (post-reverse) shares of common stock
pursuant to Regulation S Offerings for proceeds in net amount to the Company of
$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 31,250 (post-reverse) shares of Preferred Stock into
an aggregate of 817,879 (post-reverse) shares of common stock. Although , the
Company did not have an adequate number of shares authorized to effectuate the
conversion, it negotiated a mutually agreeable solution with the Regulation S
subscribers whereby it issued the remaining authorized shares of the Company to
the Regulation S subscribers, pro rata, and received shareholder approval at the
Company's annual shareholders meeting to increase the number of authorized
shares of common in order to issue the balance of the converted shares.
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RIGHTS OFFERING
On November 20, 1996, the Company closed an exchange offering of units
each consisting of one $15 Series D convertible preferred shares (the "Series D
Shares") and 1.5 warrants to purchase common stock (the "Warrants"). The units
were offered through Baytree Associates, Inc., acting as placement agent, solely
to holders of the Company's $10 convertible Series C preferred stock and the
consideration received by the Company was one Series C preferred share and $5.00
for each unit purchased. At the conclusion of the rights offering, 220,496
Series D shares and 330,774 Warrants were issued to investors. Each Series D
Share is convertible into shares of the Company's common stock at the lesser of
(i) 75% of the closing bid price of the common stock on the date of the closing
of the subscription (but not lower than $3.00 in the event of a stock split) or
(ii) 65% of the average closing bid price for the five trading days immediately
preceding the date of conversion. The Warrants entitle the holders to acquire
additional shares of common stock for $3.00 per share for a period of six months
following the closing and for $4.00 per share thereafter until they expire 18
months after the closing.
The offering was made only to "non-U.S. Persons" as defined in
Regulation S and the aggregate commission, expenses and legal fees related to
the offering totaled $194,677.
S-8 REGISTRATION STATEMENTS
From January 1, 1996 through February 17, 1997, the Company issued an
aggregate of 442,320 (post-reverse) common shares with a market value of
$1,059,800. These shares were issued to consultants, employees and advisors
pursuant to the Securities and Exchange Commission rules that govern S-8
registration statements on Form S-8.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following should be read in conjunction with the Financial
Statements and Notes thereto contained herein.
GENERAL
During 1996 and 1995, the Company principally derived its revenue from
its mobile cardiac catheterization division, its continuous passive motion
division, and its medical centers. Since its inception, the Company has been
providing mobile cardiac catheterization services to hospitals. In 1994, the
Company purchased companies engaged in the rental of rehabilitative medical
equipment and other home health care products, principally continuous passive
motion ("CPM") rehabilitative products. In 1995 and 1996, the Company expanded
into medical centers.
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During 1995, the Company sold the assets and operations of its CPM and
Neurological divisions. In 1996, the Company closed down seven of its nine
medical centers and intends to spin off the remaining medical centers during the
2nd quarter of 1997.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995
Revenues from operations increased 2% to $1,276,904 in 1996 compared to
$1,247,584 in 1995.
Cost of services, which includes medical supplies, technical and sales
personnel salaries and benefits and other expenses directly associated with the
Company's services increased 19%, to $669,484 in 1996 from $562,248 in 1995. As
a percentage of revenues from operations, cost of services increased to 52% in
1996 from 47% in 1995.
General and administrative expenses increased 7.7% to $3,084,025 in 1996
from $2,864,807 in 1995. This increase is primarily due to an increase in
professional expense and legal expense.
Depreciation and amortization decreased 39% to $353,785 in 1996 from
$575,640 in 1995. This decrease is due to one of the Company's Mobile Labs being
fully depreciated as of February 1996.
As a result of the foregoing factors, the Company had a loss from
continuing operations of $3,620,099 in 1996 compared to a loss from continuing
operations of $2,927,882 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
In 1996 and 1995, the Company financed its operating and investment
activities through a combination of cash flow from operations and several
Regulation S securities offerings. Net cash used in operating activities in 1996
was $2,879,070 primarily due to the Company's 1996 net loss, compared to net
cash used in operating activities of $728,732 in 1995. Net cash used by
investing activities was $2,930,648 in 1996, compared to $785,778 used by
investing activities in 1995. Net cash provided by financing activities was
$6,026,748 in 1996 compared to $1,322,593 in 1995.
At December 31, 1996, the Company had a working capital deficiency of
$1,455,837 compared to a working capital deficiency of $3,075,912 at December
31, 1995.
During the first quarter of 1996, the Company was able to raise a net of
$7,579,785 through the sale of securities governed by Regulation S.
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During 1996, the Company advanced to Westmark Group Holdings, Inc.
$2,427,568 on a short term basis. In March 1996, $700,000 of the advance was
converted to 10% convertible preferred stock of Westmark. In January 1997, the
Company signed an agreement with Westmark whereby the Company and Westmark would
restructure each other's debt and equity positions that each company currently
holds in each other. In addition to the exchange of shares, Westmark would make
a cash payment to the Company of up to $2,500,000 and the Company would receive
a note for up to $3,950,000 with a ten year amortization. This agreement is
based upon Westmark's ability to raise capital; no assurance can be placed on
this agreement being effectuated.
During the second quarter of 1996, the Company purchased, Donn Wells,
M.D. medical practice, a health care clinic in Fort Lauderdale, Florida.
Consideration for the sale included cash and 12,815 shares of the Company's
common stock.
In the fourth quarter of 1996, the Company raised a net of $907,729
through an exchange offering of units pursuant to Regulation S. Each unit
consisted of one $15 Series D convertible preferred share and 1.5 warrants to
purchase common stock.
In January 1997, the Company leased its third Mobile Lab from Comdisco.
The Mobile Lab was financed through a 36 month lease with monthly payments of
$22,000.
In March 1997, the Company entered into an asset purchase agreement
whereby it sold one of its mobile cardiac catheterization labs for $800,000,
$100,000 in cash and a promissory note in the amount of $700,000 bearing
interest at ten percent to be paid over nine months at $60,000 per month with
the balance of unpaid principal and accrued interest due and payable on December
15, 1997.
In April 1997, the Company entered into a settlement agreement with the
plaintiffs of the Tula Business, Inc. et al lawsuit. The terms of the settlement
required the Company to issue 2,063,346 unrestricted common shares, the
plaintiffs to exercise 144,384 warrants into common stock at $1.50 per share, an
aggregate of $216,576 received by the Company and the payment by the plaintiffs
and other claimants of $900,000 to the Company in settlement of its claims.
The Company may continue to receive working capital from the exercise of
warrants, private placements, long term debt and operations. If the Company's
working capital is insufficient to fund its operations, it would have to explore
additional sources of financing. No assurances, however, can be given that
future financing would be available or if available, that it could be obtained
at terms satisfactory to the Company. The Company's ability to continue
operations is dependent upon its ability to obtain profitable operations and its
ability to raise additional capital.
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ITEM 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements and the report of
independent accountants thereon appear beginning on Page F-2. See index to
consolidated financial statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On January 15, 1996, the Board of Directors of the Company voted to
dismiss its prior independent accountants, Ernst & Young, LLP. Ernst & Young's
report on the Company's financial statements during the two most recent fiscal
years contained no adverse opinion or disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles
except that Ernst & Young's report dated March 17, 1995, on the Company's
financial statements for the two fiscal years ended December 31, 1994 was
modified for uncertainties about (1) the Company's ability to continue as a
going concern, and (2) the ultimate outcome of litigation.
During the last two fiscal years, and the subsequent period to January
15, 1996, there were no disagreements between the Company and Ernst & Young on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Ernst & Young would have caused it to make a reference to
the subject matter of the disagreements in connection with its reports.
None of the "reportable events" described in Item 304(a)(1)(v) of
Regulation S-K occurred with respect to the Company within the last two fiscal
years except as follows:
In connection with their planning of the 1994 audit of the Company,
Ernst & Young evaluated the internal control structure of KVM Rehabilitation,
Inc. (KVM), a subsidiary acquired by the Company in 1994, in order to determine
the nature, timing and extent of their audit procedures. In connection with
their review, Ernst & Young issued a letter to the Company which identified
certain weaknesses, primarily involving a lack of segregation of duties, within
KVM.
Ernst & Young provided the Company with a letter addressed to the
Commission stating it agreed with the statements above. A copy of that letter,
dated January 25, 1996 was filed as Exhibit 1 to the Form 8-K/A dated January
24, 1996.
In February 1996, the Company engaged the services of McGladrey and
Pullen, LLP ("McGladrey"). The Company authorized Ernst & Young to respond to
any and all inquires of the successor accountant.
On June 10, 1996, McGladrey resigned as the Company's independent
auditors and advised the Company that it lacked the internal controls necessary
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for the development of reliable financial statements and that McGladrey was no
longer willing to rely on management's representations.
McGladrey based this statement on the fact that there was a material
weakness in the internal control structure of the Company relating to the
documentation of agreements and decisions made by the Board of Directors and
that written documentation that had been furnished to it during the course of
the audit had been subsequently modified and that some events had occurred that
had not been documented at all. Due to the modifications and new information
provided by management, McGladrey was required to reevaluate the accounting for
a significant transaction which could have materially impacted the fairness and
reliability of the financial statements. This also required them to extend their
subsequent event audit procedures to the new audit date and required updated
responses to legal confirmation.
Despite the Company's best efforts to furnish additional information
that would allow McGladrey to resolve the inconsistencies and complete the
audit, McGladrey was not able to reconcile the evidential matter obtained during
the course of its audit with management's representations concerning certain
events and transactions and the manner in which those events and transactions
had been reflected in the Company's financial statements.
The Company does not agree with McGladrey's findings or the reason for
its resignation.
During the 1995 audit, there were no disagreements between the Company
and McGladrey on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of McGladrey, would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports.
Since McGladrey was retained in February 1996 and never completed an
audit for the Company, it did not issue any reports on financial statements for
either of the past two years and therefore no report contained an adverse
opinion or disclaimer of opinion, or was modified as to uncertainty, audit
scope, or accounting principles.
The Company has received from McGladrey a letter addressed to the
Securities and Exchange Commission ("SEC") stating that it agrees with the
statements made by the Company in response to Item 304 (a) of Regulation S-K.
The Company filed this letter as an exhibit to Form 8-K/A dated June 18, 1996.
On June 13, 1996, the Company engaged the services of Grant-Schwartz
Associates, CPA's. The Company has authorized McGladrey to respond to any and
all inquires of the successor accountant.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of April 10, 1997:
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Michael F. Morrell 55 Chairman of the Board, Chief
Executive Officer, Acting
President and Director
Paul C. Pershes 53 Director
Theodore J. Orlando 60 Director
Linda Moore 45 Senior Vice President and
Secretary
Dawn M. Drella 29 Chief Financial Officer
Mr. Morrell, who is married to Ms. Moore (married, April 1997), has
served as a director of the Company and as chairman of the board and chief
executive officer since August 1996. From March 1994 through November 1995, Mr.
Morrell served as president and as a director of Westmark Group Holdings, Inc.
("Westmark"). From March 1990 to March 1994, Mr. Morrell served as president of
Nexus Leasing Corp. and Nexus Realty which he founded in March 1990. From 1966
to 1984 Mr. Morrell served in various capacities at Reliance Group Holdings
(NYSE) and its wholly owned subsidiary Leasco. Mr. Morrell served on the joint
Board of Directors and as Vice President of Reliance and President of Leasco.
Mr. Pershes has served as a director of the Company since August 1996.
Mr. Pershes has been a director and officer of Weinberg, Pershes and Company,
P.A. since August 1995. From January 1993 to August 1995, Mr. Pershes was a
director of Pershes and Company, P.A. and its predecessor companies. From
December 1990 to December 1992, Mr. Pershes served as president of Temco Service
Industries, Inc.
Mr. Orlando has served as a director since March 1997. In 1994, Mr.
Orlando founded Barkus Capital Resources, Ltd., an entity engaged in real estate
and stock investments in which he is president. From 1980 to 1994, Mr. Orlando
acted as chairman and chief executive officer of TJ Systems Corporation, a
computer leasing entity. Mr. Orlando took TJ Systems public in 1994
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Ms. Moore, who is married to Mr. Morrell, has served as the senior vice
president and secretary of the Company since January 1997. She has served as
senior v.p./assistant secretary of Westmark Group Holding, Inc. from March 1994
through December 1995. Prior to her affiliation with Westmark, Ms. Moore founded
Moore Financial Services, Inc. to provide financial public relations for public
companies and private firms trying to go public. From 1986 to 1990, Moore
Financial, based in New Jersey, participated in four successful initial public
offerings while representing some 12 additional clients on a consulting basis.
Ms. Drella has been chief financial officer for the Company since April
1995 and was chief financial officer for Westmark from February 1996 to June
1996. She was the controller of the Company from June 1993 until April 1995. Ms.
Drella served as a staff accountant at Jones & Hall, PA from 1992 to 1993. From
1991 through 1992, Ms. Drella served as controller of RCC Associates, Inc., a
general contracting firm that specialized in high end retail stores. Ms. Drella
is a certified public accountant.
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board. The Company's directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified.
OTHERS
The following individuals play a significant role in the Company's
operations:
DR. RAZZAK TAI, MD, FACCP, ACCP, MRCP, MEDICAL DIRECTOR
Dr. Tai is Board Certified in Internal Medicine and Cardiovascular
Diseases. Dr. Tai attended the Cardiovascular program at Montefiore Hospital,
Bronx, New York, from July 1967 - June 1969; Cardiology Residency at Hamilton
Hospital Mc Master University, Ontario, Canada, July 1965 - June 1966;
Birmingham Group, United Kingdom, January 1964 - December 1964; General
Medicine, St. Charles Hospital, Toledo, Ohio, July 1966 - June 1967; Surgical
Internship, Nelson Hospital, July 1959 - January 1960; Dr. Tai practices all
aspects of Invasive and Diagnostic Cardiology, Angiography, Nuclear and Internal
Medicine. He is the author of two books: Heart Doctor's Heart Book, 1974; EKG
Interpretation Made Easy, 1975. Dr. Tai is presently on staff and in good
standing with Florida Hospital, Columbia Regional Hospital and Orlando Regional
Medical Center.
MR. ROBERT SEGARRA, RCPT, RCDMS, FAMA
Mr. Segarra is currently a consultant and has been involved with the
Company since January 1990. He attended the Cardiovascular and Cardiopulmonary
Program at San Diego Regional Medical Center and Brook Army Medical Center, 1980
- - 1982. Mr. Segarra is Board Registered in all aspects of non-
26
<PAGE>
invasive and invasive cardiology. Mr. Segarra has received formal training in
MRI, nuclear medicine, ultrasound, pulmonary testing, and electrophysiology.
From October 1987 to February 1990, Mr. Segarra served as Director of Cardiology
Services at North Broward Medical Center. Mr. Segarra was Director of Cardiac
Catheterization Laboratory and Supervisor of Special Procedures-Radiology at St.
Lukes Lutheran Hospital in San Antonio, Texas from January 1987 to October 1987.
Since November 1989, Mr. Segarra has also served as Assistant Dean for Invasive
Cardiology at Barna College in Fort Lauderdale, Florida. Additionally, Mr.
Segarra assisted in Cardiovascular Research on Right Ventricular Volume
Calculations at the University of Texas Health Science Center and performed
Research Hemodynamics at Brook Army Medical Center, Mr. Segarra acted as
President of the American Society of Cardiovascular Professionals. Since June
1989, Mr. Segarra has been a faculty member and a part of the Cardiac
Catheterization Lab Task Force at Broward Community College in Fort Lauderdale,
Florida.
HARRY KOBRIN
Harry Kobrin was the president and chief operating officer of the
Company from August 1996 until his death in November 1996.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10
percent of the Company's Common Stock, to file with the SEC the initial reports
of ownership and reports of changes in ownership and reports of changes in
ownership of common stock, officers, directors and greater than 10 percent
shareholders are required by SEC regulation to furnish the company with copies
of all Section 16(a) forms they file.
To the best of the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company, all Section 16(a) filing
requirements applicable to its officers and directors were complied with during
the year ended December 31, 1996. The Company has reason to believe that certain
investors referred to in Item 5 owned at one point, and may currently own more
than 5 and 10% of the Company's outstanding common stock, but the Company has
not received any filings indicating such.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and other executive officers for
services rendered to the Company during 1996. No other person, who, during 1996
served as an executive officer of the Company, had a total annual salary and
bonus in excess of $100,000.
27
<PAGE>
<TABLE>
<CAPTION>
OTHER
SALARY ANNUAL OPTIONS LTIP PAYOUTS
NAME & PRINCIPAL POSITION(1)(2) YEAR ($) BONUS($) COMPENSATION SARs(#) ($)
- ------------------------------- ---- --- -------- ------------ -------- ---
<S> <C> <C> <C> <C> <C> <C>
Michael F. Morrell (1) 1996 $74,999 0 0 0 0
Norman J. Birmingham (2) 1996 $49,230 0 0 0 0
1995 $21,461 0 0 0 0
- -------------------------
</TABLE>
1. Mr. Morrell was chief executive officer from August 1996 to the present.
2. Mr. Birmingham resigned from the Company as president and chief executive
officer in August 1996.
OPTION GRANTS DURING 1996 AND AGGREGATED FISCAL YEAR-END OPTION VALUE
PERCENT OF TOTAL
OPTIONS/SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE
- --------------------------------------------------------------------------------
MICHAEL MORRELL 25,000 $1.50 8/27/98
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/SARS AT IN-THE MONEY
FY-END (#) OPTIONS/SARS
AT FY-END($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------
--- ---
LONG-TERM INCENTIVE PLANS
The Company does not have any long-term incentive plans.
1996 STOCK OPTION PLAN FOR OFFICERS AND DIRECTORS
In September 1996, the shareholders of the Company ratified the 1996
Stock Option Plan for officers and directors. Under the plan, 3,000,000 shares
of the Company's common stock may be issued. The plan is administered by the
Company's compensation committee which has the authority to determine to whom
awards shall be granted. This plan supersedes the 1992 director stock option
plan.
28
<PAGE>
EMPLOYEE STOCK OPTION PLAN
In May 1992, the Company adopted a Stock Option Plan (the "Plan") under
which 200,000 shares of common stock are reserved for issuance upon exercise of
options. The plan is designed to serve as an incentive for retaining qualified
and competent employees. The Company's Board of Directors or a Committee thereof
(the "Committee") administers and interprets the Plan and is authorized to grant
options thereunder to all eligible employees of the Company, including officers
and directors.
The Plan provides for the granting of both incentive Stock Options and
non-qualified stock options. Options are granted under the Plan on such terms
and at such a price as determined by the Committee, except that the per share
exercise price of incentive stock options cannot be less than the fair market
value of the Common Stock on the date of grant and the per share price of
non-qualified stock options will not be less than 85% of the fair market value
on the date of grant. Options granted under the Plan are not transferable other
than by will or interstate distribution and no option can be exercised until six
months after the date of grant or after the expiration of 10 years from the date
of grant. To date 125,000 options have been granted under the Plan.
EMPLOYMENT AGREEMENTS
In January 1997, the Company signed an employment agreement with Michael
Morrell. The term of agreement is for four years, with compensation equal to an
annual salary of $150,000, the granting of 775,000-925,000 stock options to be
vested over a four year period and the payment of normal business expenses.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Company maintains a $3,000,000 Director and Officer and Company
Reimbursement Insurance Policy ("the Policy") with a retention of $500,000. The
Policy will pay the judgments, damages, settlement and defense costs ("loss") of
each director or officer of the Company and reimburse the Company for any loss
due to any alleged breach of duty, neglect, erroneous misstatement, misleading
statement, omissions or act by the Directors or Officers of the Company except
losses arising out of or in connection with, among other things (i) gaining
personal profit or advantage; (ii) criminal or deliberate fraudulent acts; (iii)
self dealing; (iv) violations of Section 16 (b) of the Securities Exchange Act
of 1934 and amendments thereto or similar state laws; (vi) certain corporate
takeover transaction; (vii) failure to maintain insurance; (viii) pending or
prior litigation or actions derived from the same facts as the pending or prior
litigation (ix) violations of the Environmental Protection Act or similar laws
and, (x) violations of the Employee Retirement Income Security Act of 1974 or
amendments thereto or any similar state or common law.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as of March 26,1997 as to each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock of the Company and as to the beneficial ownership of the Company's
Common Stock by each director of the Company and by all directors and executive
officers of the Company as a group:
SHARES OF PERCENTAGE
NAME AND BUSINESS ADDRESS COMMON STOCK OF CLASS
- ------------------------- ------------ --------
Michael F. Morrell
1903 S. Congress Ave., Suite 400
Boynton Beach, FL 33426 25,000(1) *
Paul C. Pershes
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 12,500(2) *
Theodore J. Orlando
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 *
Linda Moore
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 2,000(3) *
Dawn M. Drella 1,000(4) *
1903 S. Congress Ave. Suite 400
Boynton Beach, Florida 33426
Ultralex Overseas Corp. 196,058 10%
50th Street, Towerbank Bldg.
1st Floor
P.O. 8799
Panama 5, Panama
All Directors and Executive
Officers as a Group 40,500(1)(2)(3)(4) *
- -------------------------
* less than 1%
(1) Includes options to purchase 25,000 shares of common stock at $1.50 per
share.
(2) Includes options to purchase 12,500 shares of common stock at $1.50 per
share.
(3) Includes options to purchase 40,000 shares of common stock at $1.50 per
share.
(4) Includes options to purchase 500 shares of common stock at $65.00 per share
and 500 shares at $20.00 per share.
30
<PAGE>
On January 13, 1997, 3 Regulation S shareholders filed a Schedule 13D
with the Securities and Exchange Commission for an aggregate of 2,303,253 common
shares. The Company's position is that these shareholders are grossly
overstating their post-conversion beneficial ownership. The error appears to be
the result of the misapplication on the parts of four investors of the
conversion formula applicable to the conversion of preferred stock to common
stock. The investors have received the correct number of common shares from the
Company's transfer agent.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
WEINBERG, PERSHES & COMPANY
During 1995 and 1996, the Company engaged Weinberg, Pershes & Company
("Weinberg"), an accounting services firm, for consulting services. Paul
Pershes, a director of the Company, is a director and shareholder of Weinberg.
In December 1996, Weinberg received 28,000 ($35,000) shares of common stock from
the Company pursuant to a consulting contract dated October 1, 1996.
COMPENSATION OF DIRECTORS
During October 1995, the Company registered on Form S-8 shares of the
Company's common stock issued to the following directors and former directors
for services rendered as advisors and consultants: Edwin F. Russo - 3,750
(post-reverse) shares, Frank Dolney - 3,750 (post-reverse) shares, Budget
Services (Mr. Birmingham is the sole shareholder of Budget Services) - 1,250
(post-reverse) shares, and Medical Industries Consulting, Inc. (Jean Johnstone
is a majority shareholder), 3,750 shares. These shares were valued at $159,375,
$159,375, $53,125 and $159,375. Mr. Birmingham was not an officer or director at
the time that the Budget Services shares were issued. These shares were issued
for services rendered to Technomed. Subsequent to year end, Mr. Dolney returned
his shares to the Company.
WESTMARK GROUP HOLDINGS, INC.
In November 1995, the Company signed a Share Exchange Agreement with
Westmark, a publicly traded company (NASDAQ-WGHI), pursuant to which the Company
received a 49% interest or 1,298,388 shares of Westmark common stock in exchange
for $1,210,000 in cash and cash equivalents, a note payable in the amount of
$315,000 and 10,000 (post-reverse) shares of the Company's Series B preferred
stock, with a stated value of $10. The Share Exchange Agreement provides that
the Company's 49% interest will be maintained and that Westmark is obligated to
issue additional shares to maintain such ownership position.
The then officers of Westmark, Mr. Morrell and Ms. Moore resigned as
officers and Mr. Morrell resigned as a director. The Company issued Mr. Morrell
a promissory note in the principal amount of $415,000, bearing interest at a
rate of 12% per annum, to repay a $415,000 advance previously made to Westmark.
Mr. Morrell has the right to convert all or a portion of this loan into shares
of the Company's
31
<PAGE>
common stock at a rate equal to 50% of the closing bid price on the day
preceding such conversion. The Company granted certain registration rights in
connection therewith. Ms. Moore was issued a Promissory Note by the Company in
the principal amount of $60,000, bearing interest at a rate of 12% per annum, to
repay a $60,000 advance previously made to Westmark. Mr. Morrell and Ms. Moore
presently act as the chief executive officer and senior vice president of the
Company.
In the first and second quarters of 1996, the Company advanced to
Westmark additional financing of $2,427,568 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 it's option, convert to equity. As of
the date of this report, $700,000 has been converted to 10% convertible
preferred stock of Westmark.
In addition, during 1996 Norman J. Birmingham, the Company's former
president, by contract, devoted 50% of his time to the Company, served as
Westmark's president and operated Budget Services, Inc. Dawn M. Drella, the
Company's chief financial officer also devoted time and served as Westmark's
chief financial officer until June 1996 when she resigned.
ESCROW AGREEMENT
On September 1, 1992, all the shareholders of the Company entered into
an escrow agreement whereby an aggregate of 47,500 (post-reverse) common shares
("Escrow Shares") were placed in escrow. The escrow shares would have been
released to the shareholders if the Company's pre-tax earnings exceeded certain
levels or if the bid price of the Company's common stock exceeded certain
levels.
Since the Company's 1994, 1995 and 1996 pre-tax earnings and the
Company's common stock bid prices did not reach the criteria levels necessary
for return to the escrow holders, 47,500 (post-reverse) are to be returned to
the Company as treasury stock.
CHANGE IN CONTROL OF REGISTRANT
In May 1995, Edwin F. Russo, Edwin F. Russo II, Bradley T. Ray (the son
of Jean Johnstone, the former chairman of the Company) and Frank Dolney (the
"Acquiring Persons") acquired an aggregate of 49,928 (post-reverse) shares of
common stock from Marilyn Zinns. The Acquiring Persons reported the transaction
on Form 13D. The 13D also indicated that they acquired from Ms. Zinns the right
to receive, on a pro-rata basis, up to 36,135 (post-reverse) of the Escrowed
Shares, if and when such shares were released under the terms of the Escrow
Agreement and the immediate right to vote 45,173 (post-reverse) of the Zinn's
escrowed shares. (See Escrow Agreement above) Mr. Edwin F. Russo was then
elected to the Company's Board of Directors. Mr. Dolney and Mrs. Johnstone were
later elected to its Board of Directors in July 1995.
32
<PAGE>
In May 1996, the Acquiring Persons amended the Form 13D deleting the
previously asserted right to acquire the 36,135 (post-reverse) additional shares
and stating that the proxy had been determined to be invalid.
TECHNOMED ACQUISITION
In August 1995, the Company completed a Share Exchange Agreement with
Technomed, Inc. shareholders to acquire 100% ownership (7,422,500 shares of
common stock) of Technomed, Inc. for 136,950 (post-reverse) unregistered shares
of the Company's common stock.
Three of the Company's directors at the time of the transaction, Edwin
F. Russo, Jean Johnstone and Frank Dolney directly or indirectly had an interest
in Technomed. Mr. Russo held shares (.6%), Ms. Johnstone, personally and through
Medical Industries Consulting, Inc. and family members held 1,950,000 shares
(26%) and Frank Dolney's wife D. Ann Jassen held 750,000 shares (10.1%) of
Technomed common stock. The transaction was approved by a majority of
unaffiliated directors of the Company.
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 20,000 (post-reverse) 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 the Company agreed to 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 could not be facilitated in
120 days, the Company agreed to repurchase the shares at the price set forth
above by 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 June 7, 1997. In addition, the Company purchased 1,050 (post-reverse) shares
from Ms. Johnstone at the purchase price of $.87 for a total purchase price of
$18,270. The shares have not been returned to the Company.
The Company also granted Ms. Johnstone a five-year option to purchase
10,000 shares of the Company's common stock at $20.00 per share. The parties
executed mutual general releases and Ms. Johnstone resigned as Chairman of the
Board and 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/A/R Mediquest , $352,546.
33
<PAGE>
BRADLEY 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
15,000 (post-reverse) 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,
the Company agreed to 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 could not be facilitated in 120 days, the
Company agreed to 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
June 7, 1997.
In addition, the Company also granted one-year options to purchase
30,000 (post-reverse) and 10,000 (post-reverse) shares of the Company's common
stock at $6.80 per share and $8.00 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. This note
was partial consideration for the Greenworld sale.
The parties also executed mutual general releases.
CONSULTING AGREEMENT
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,
this consulting contract was paid in full through the issuance of 22,500
(post-reverse) common shares registered under Form S-8.
34
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBITS DESCRIPTION
-------- -----------
3.1 Amended and Restated Articles of Incorporation*
3.2 Amended and Restated Bylaws*
4.1 Form of Common Stock Certificate*
4.2 Form of Warrant Certificate*
4.3 Form of Underwriter's Warrant*
4.4 Form of Warrant Agreement*
10.1 Form of Indemnification Agreement between the Registrant*
and each of its directors and certain executive officers*
10.2 Form of agreement between the Company and its client*
hospitals*
10.3 Master Lease Agreement, dated October 16, 1991, between the
Registrant and Comdisco Medical Leasing Group, Inc.*
10.4 Agreement between the Registrant and Northwest Broward
Invasive Cardiology Associates*
10.5 Promissory Note, dated December 9, 1992, executed by Joseph
S. Zinns, M.D. and Marilyn Zinns in favor of Northern Trust Bank
of Florida, N.A. (the "Bank"), Guaranty, dated December 9, 1992,
executed by and between the Registrant and the Bank. **
10.6 Financial Consulting Agreement *
10.7 Escrow Agreement, effective as of September 1, 1992, by and among
the Company, Joseph S. Zinns, M.D., Marilyn Zinns, Milton
Barbarosh and Broad and Cassel*
10.8 Technomed, Inc. Share Exchange Agreement***
10.9 Westmark Group Holdings, Inc. Agreement****
10.10 Greenworld Technologies, Inc. Agreement****
10.11 Employment Agreement -Harry Kobrin****
10.12 Employment Agreement - Dawn M. Drella****
10.13 Essential Care Share Exchange Agreement****
10.14 Amendment to Essential Care Share Exchange Agreement****
10.15 Employment Agreement-Michael Morrell*****
22 Subsidiaries of Heart Labs of America, Inc.****
23 Consent of Independent Auditors
- --------------------
* Incorporated by reference from the Exhibit with the same reference number
in the Company's Registration Statement.
** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1992.
*** Previously filed as an exhibit to the Company's Form 8-K dated August 23,
1995.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
***** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.
(b) Report on Form 8-K
The Company filed Form 8-K, (Event of December 5, 1996), reporting (Item
9. Sales of Equity Securities pursuant to Regulation S.) the offering of units
of its Series D Convertible Preferred.
35
<PAGE>
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 INDUSTRIES OF AMERICA, INC.
/s/ PAUL C. PERSHES
Paul C. Pershes
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.
MARCH 23, 1998 /s/ PAUL C. PERSHES
Paul C. Pershes
President & Director
MARCH 23, 1998 /s/ ARTHUR KOBRIN
Arthur Kobrin
Chief Financial Officer
36
<PAGE>
Medical Industries of America, Inc.
Index to Consolidated Financial Statements
Page
----
Report of Independent Certified Public Accountants ........................ F-2
Consolidated Balance Sheet ................................................ F-3
Consolidated Statements of Operations ..................................... F-5
Consolidated Statements of Shareholders' Equity ........................... F-6
Consolidated Statements of Cash Flows ..................................... F-7
Notes to Consolidated Financial Statements ................................ F-9
F-1
<PAGE>
GRANT-SCHWARTZ ASSOCIATES, CPA'S
40 Southeast 5th Street
Suite 500
Boca Raton, FL 33432
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Medical Industries of America, Inc.
We have audited the accompanying consolidated balance sheets of Medical
Industries of America, Inc., formerly known as Heart Labs of America, Inc., and
its subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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
misstatement. An audit also includes assessing the accounting principles used
and significant estimates by management,, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Medical
Industries of America, Inc. and Subsidiaries as of December 31, 1996 and 1995
and the results of its consolidated operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
recurring losses from operations which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 23 to the financial statements, the Companys accrued
expenses previously reported as $726,529 should have been $1,961,029. The
discovery of these errors was made subsequent to the issuance of the financial
statements. The financial statements have been restated to reflect these
corrections.
/s/ Grant-Schwartz Associates, CPA's
Boca Raton, Florida
March 10, 1997, except for Note 23, as to which the date is March 23, 1998
F-2
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
FORMERLY KNOWN AS HEART LABS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
ASSETS
1996 1995
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ........................ $ 241,461 $ 24,431
Accounts receivable - trade, net of
allowance for doubtful accounts
1996 $20,520; 1995 $50,000 ...................... 237,385 456,361
Accounts receivable - other ...................... 85,851 246,152
Current maturities of notes receivable ........... 1,811,140 145,676
Inventories of medical supplies .................. 14,871 15,030
Refundable income taxes .......................... -0- 20,000
Prepaid expenses and other current assets ........ 113,179 56,437
----------- -----------
Total current assets ......................... 2,503,887 964,087
----------- -----------
PROPERTY AND EQUIPMENT
Mobile cardiac catheterization laboratories and
medical equipment ............................. 2,911,952 2,805,124
Computer software ................................ -0- 824,719
Building and building improvement ................ 412,117 556,399
Furniture and office equipment ................... 319,141 325,971
Less: accumulated depreciation and amortization .. (2,871,414) (2,561,937)
----------- -----------
Net property and equipment ................... 771,796 1,950,276
----------- -----------
OTHER ASSETS
Investment in Westmark Group Holdings, Inc. ...... 2,233,200 2,290,743
Notes receivable, less current maturities ........ 106,535 70,305
Goodwill, net of accumulated amortization
1995 $15,712; ................................... -0- 926,990
Other assets ..................................... 128,240 134,715
Total other assets ........................... 2,467,975 3,422,753
----------- -----------
TOTAL ASSETS ............................ $ 5,743,658 $ 6,337,116
=========== ===========
See Notes to Consolidated Financial Statements
F-3
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
FORMERLY KNOWN AS HEART LABS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable - primarily to related parties ....... $ 837,791 $ 1,834,986
Current maturities of long-term debt ............... 251,120 337,092
Current maturities of capital lease obligations .... 466,581 617,103
Accounts payable ................................... 443,203 825,090
Accrued expenses ................................... 1,961,029 425,728
------------ ------------
Total current liabilities ..................... $ 3,959,724 $ 4,039,999
------------ ------------
Long-term debt, less current maturities ............ 146,556 349,511
------------ ------------
Capital lease obligation, less current maturities .. -0- 247,418
------------ ------------
Minority interest .................................. 3,129 31,880
------------ ------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred shares, authorized 5,000,000 shares:
issued and outstanding:
Series A convertible shares, 22,276 issued ......... -0- -0-
Series B convertible shares, 10,000 issued
$10 stated value, less 4,900 shares minority
interest .................................... 1,020,000 1,020,000
Series C convertible shares, 4,725 issued ..... 945,000 -0-
Series D convertible shares, 220,496 issued ... 3,425,480 -0-
Common shares, no par value, authorized 8,000,000:
issued and outstanding 1996, 1,208,688 shares;
1995, 456,845 shares, including 47,500 escrow
shares ........................................... 17,312,719 12,518,733
Less treasury shares (38,750 shares at stated value) (657,661) -0-
Accumulated (deficit) .............................. (20,411,289) (11,870,425)
------------ ------------
Total shareholders' equity ...................... 1,634,249 1,668,308
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $ 5,743,658 $ 6,337,116
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
FORMERLY KNOWN AS HEART LABS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31,
1996 1995
----------- ----------
REVENUE
Revenue from operations .......................... $ 1,276,904 $ 1,247,584
Interest income .................................. 9,329 3,915
Other revenue .................................... 25,910 -0-
----------- -----------
Total revenue ................................ 1,312,143 1,251,499
----------- -----------
COST AND EXPENSES
Cost of services ................................. 669,484 562,248
General and administrative expenses .............. 3,084,025 2,864,807
Depreciation ..................................... 353,785 575,640
Other ............................................ 17,893 809
Interest expense ................................. 140,674 114,014
Equity in net loss of investee ................... 666,381 61,863
----------- -----------
Total cost and expenses ...................... 4,932,242 4,179,381
----------- -----------
Loss from continuing operations .................... (3,620,099) (2,927,882)
Loss from discontinued operations .................. (1,624,352) (4,010,736)
Loss from disposal of discontinued operations ...... (3,296,413) (1,904,725)
----------- -----------
Net loss ..................................... (8,540,864) (8,843,343)
----------- -----------
Per share of common stock:
Loss from continuing operations ................. (4.38) (13.82)
Loss from discontinued operations ............... (1.96) (18.93)
Loss from disposal of discontinued operations ... (3.99) (9.00)
----------- -----------
Net loss ........................................ (10.33) (41.75)
=========== ===========
Weighted average common shares outstanding,
excluding contingently issuable shares ............ 826,127 211,866
=========== ===========
See Notes to Consolidated Financial Statements
F-5
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT (DEFICIT) TOTAL
----------- ---------- ------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ................... -0- -0- 109,735 4,463,959 (3,027,082) 1,436,877
Acquisitions of Technomed, Inc. ............ -0- -0- 136,950 4,313,930 -- 4,313,930
Shares issued in connection with
investment in Westmark Group Holdings ...... 5,100 1,020,000 -0- -0- -0- 1,020,000
Inc. - Net of minority interest
Shares issued for services ............... -0- -0- 65,934 1,416,132 -- 1,416,132
Shares issued upon the exercise of options -0- -0- 10,250 280,000 -- 280,000
Shares of common stock ................... -0- -0- 45,093 806,800 -- 806,800
Dividends on preferred stock ............. -0- -0- -0- -0- (44,958) (44,958)
Conversion of Technomed, Inc. Preferred
stock into common stock of Heart Labs . -0- -0- 41,383 1,282,870 -- 1,282,870
Net (loss) ............................... -0- -0- -0- -0- (8,843,343) (8,843,343)
-------- --------- ------ ----------- ---------- ---------
Balance, December 31, 1995 ................. 5,100 $ 1,020,000 409,345 $ 12,518,733 $(11,870,425) $ 1,668,308
Sales - as per regulation "S" ............ -- -- 502,638 4,912,100 -- 4,912,100
Sale of common stock ..................... -- -- 3,000 67,500 -- 67,500
Shares issued for services ............... -- -- 38,428 715,122 -- 715,122
Shares issued for acquisitions ........... -- -- 12,815 175,000 -- 175,000
Sales - as per regulation "S" ............ -- -- 122,512 664,900 -- 664,900
Shares for services ...................... -- -- 76,200 65,250 -- 65,250
Repurchase of common stock .............. -- -- (38,750) (657,661) -- (657,661)
Less: capital raise costs ................ -- -- -- (1,805,886) -- (1,805,886)
Net (loss) ............................... -- -- -- -- (8,540,864) (8,540,864)
Issued - Series C - Net of conversion
to common .............................. 4,725 945,000 -0- -0- -0- 945,000
Issued - Series D - Net of conversion
to common ............................... 220,496 3,425,480 -0- -0- -0- 3,425,480
-------- --------- ------ ----------- ---------- ---------
Balance, December 31, 1996 ................. 230,321 $ 5,390,480 1,126,188 $ 16,655,058 (20,411,289) $ 1,634,249
======== ========= ========= ============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
FORMERLY KNOWN AS HEART LABS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations .................... $(3,620,099) $(2,927,882)
Net loss from discontinued operations .................. (4,920,765) (5,915,461)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ........................ 822,126 927,061
Equity loss on investments ........................... 666,381 61,863
Minority interest .................................... (28,751) (1,277)
Write-off of patent .................................. -0- 249,001
Write-off of goodwill ................................ 1,146,042 4,043,197
Loss (gain) on disposition of property and equipment . 887,458 795,034
Common stock issued for services rendered ............ 620,997 1,416,132
Provision for bad debts .............................. -0- 542,525
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable ................................. 379,277 (267,670)
Inventories of medical supplies ..................... 159 51,180
Prepaid expenses and other current assets ........... (56,742) 18,666
Refundable income taxes ............................. 20,000 57,118
Other assets ........................................ 6,475 (13,190)
Accounts payable .................................... (336,929) 32,210
Accrued expenses .................................... 1,535,301 202,761
----------- -----------
Net cash used in operating activities ............. (2,879,070) (728,732)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements for property and equipment ............... (302,235) -0-
Proceeds from sale of property and equipment ........... 45,031 50,000
Issuance of notes receivable ........................... (2,537,569) -0-
Payments received on notes receivable .................. (135,875) -0-
Purchase of investment in Westmark ..................... -0- (835,778)
----------- -----------
Net cash used in investing activities ............ (2,930,648) (785,778)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on long-term debt and capital lease
obligations ........................................... (2,240,346) (589,902)
Proceeds from notes payable ............................ 58,000 870,653
Payment of preferred dividends ......................... -0- (44,958)
Capital raise costs .................................... (1,805,886) -0-
Proceeds from issuance of preferred stock .............. 9,447,480 -0-
Proceeds from issuance of common stock ................. 567,500 1,086,800
----------- -----------
Net cash provided by (used in) financing activities 6,026,748 1,322,593
Increase (decrease) in cash ....................... 217,030 (191,917)
Cash and cash equivalents:
Beginning .............................................. 24,431 216,348
----------- -----------
Ending ................................................. $ 241,461 $ 24,431
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest ............................. $ 119,174 $ 154,689
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
FORMERLY KNOWN AS HEART LABS OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Supplemental disclosure of non-cash investing and financing activities:
On October 24, 1995, the Company exchanged 41,383 common shares of the Company
valued at $1,282,870 to acquire assets totaling $834,678 and certain liabilities
totaling $494,510 of Essential Care Medical Centers and Prime Dental Centers.
The excess of the purchase price over the fair value of net assets acquired has
been recorded as goodwill.
On August 23, 1995, the Company exchanged 136,950 common shares of the Company
valued at $4,313,930 to acquire assets totaling $961,716 and liabilities of
$609,669 of Technomed. The excess of the purchase price over the fair value of
net assets acquired has been recorded as goodwill.
In December 1995, the Company acquired a 49% interest in the common stock of
Westmark Holdings, Inc. for $1,525,000 in cash and note payable and 10,000
shares of Class B convertible preferred stock with a stated value of $10.00 per
share.
Non-cash aspects of the acquisition of
Donn Wells, M.D. medical center
Fair value of assets acquired .................................. 48,118
Fair value of common stock
issued at acquisition .......................................... 175,000
Assets acquired and related obligations incurred
in connection with capital lease obligations ................... 21,247
Preferred stock conversions .................................... 7,400,000
F-8
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
FORMERLY KNOWN AS HEART LABS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Medical Industries of America, Inc. (formally known as Heart Labs of America,
Inc.("Medical Industries" or the "Company"), incorporated in the State of
Florida on September 29, 1989 and commenced operations on February 27, 1990. The
Company's primary business is providing mobile cardiac catheterization services
to hospitals on a shared-user basis and medical group practices. During 1994 and
for the first seven months of 1995, the Company provided neurological testing
services through its wholly-owned subsidiary, Cortex Diagnostic Services, Inc.
("Cortex") and the rental of Continuous Passive Motion ("CPM") units through its
wholly-owned subsidiaries, HLA Acquisition Corp. d/b/a KVM Rehabilitation, Inc.
("KVM"), U.S. Bio Innovations, Inc. ("BIO") and Managed Home Recovery, Inc.
("MHR"). During the third quarter of 1995, the Company sold its CPM and
neurological testing operations (See Note 8).
In August 1995, the Company acquired Technomed, Inc., a company which provides
management and hospital information systems through its wholly-owned
subsidiaries, CJ Holdings, Inc. ("CJH") and Sysdacomp, Inc. ("Sysdacomp"). In
October 1995, the Company acquired Essential Care Medical Centers, Inc.
("Essential") and Prime Dental Centers, Inc. ("Prime"). Essential and Prime
specialize in managed care. In 1996, the Company opened and/or acquired seven
additional medical centers. By the end of 1996, seven of the nine medical
centers were closed down by the Company. As of December 31, 1996, the company
was in the process of selling CJH Holdings, Inc. and Sysdacomp to the former
owners of Sysdacomp.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Medical
Industries, CJH, Sysdacomp, Essential, Prime, Cortex, BIO, KVM, MHR and
Northwest Broward Invasive Cardiology Associates, a 95%-owned partnership. All
intercompany accounts and transactions have been eliminated in consolidation.
The Company has shown CJH, Sysdacomp, Essential and CPM divisions as various
discontinued operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in highly liquid debt instruments
with a maturity of three months or less.
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 disclosure 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.
INVENTORIES OF MEDICAL SUPPLIES
Inventories of medical supplies are stated at the lower of cost, determined on
the first-in, first-out method, or market.
INVESTMENT IN WESTMARK GROUP HOLDINGS, INC.
The Company is accounting for its investment in Westmark Group Holdings, Inc.
("Westmark"), a 49%-owned affiliate, by the equity method of accounting under
which the Company's share of the net income (loss) of Westmark is recognized as
F-9
<PAGE>
income (loss) in the Company's statement of operations and added (subtracted) to
the investment account, and dividends received from Westmark are treated as a
reduction of the investment account. The Company expects to realize its net
investment in Westmark and therefore the Company feels its investment is written
down to the estimated net realizable value (see Notes 6 & 19).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Amortization
of property held for lease is included in depreciation and amortization expense
and is provided using the straight-line method over the shorter of the lease
term or estimated useful lives of the assets. Mobile cardiac catheterization
laboratories and medical equipment at December 31, 1996 and 1995 consisted of
the following:
1996 1995
---------- ----------
Property and equipment owned ......................... $1,571,258 $1,464,430
Property and equipment held under capital leases ..... 1,340,694 1,340,694
---------- ----------
$2,911,952 $2,805,124
========== ==========
GOODWILL
Goodwill was recorded at cost and was amortized using the straight-line method
over ten years.
The Company periodically evaluates the recovery of the carrying amount of
intangibles by determining if any impairment indicators are present. These
indicators include management's plans for the division, income derived from
business acquired and other factors. If this review indicates that intangibles
will not be recoverable, as principally determined based on the estimated
undiscounted cash flows of the entity over the remaining amortization period,
the Company's carrying value of the intangibles is reduced by the estimated
shortfall of cash flows.
During 1996, the board of directors reviewed the operations and the financial
condition of the Essential Care Medical Centers and voted to close down seven of
the nine medical centers in 1996 with the remaining two medical centers to be
sold or disposed of within the first two quarters of 1997. As a result of this
decision, management has written off goodwill related to these medical centers
in the amount of $1,146,042.
Additionally during 1995, unamortized goodwill of $4,043,197 has been charged to
expense as a result of the operating losses from Technomed.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry forward and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
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 and after
giving effect to the 1 for 20 Reverse Stock Split that was effective November 1,
1996. Contingently issuable shares (47,500 common shares associated with the
Escrow Agreement - see Note 3) are considered common stock equivalents and have
been excluded from the primary loss share computation since the conditions for
F-10
<PAGE>
their issuance have not been met. The effect of contingently issuable shares on
fully diluted loss per common share is antidilutive. Directors and Officer stock
options underlying 250,000 common shares, Employee Stock Options underlying
20,000 common shares and other stock options (not issued under either the
director or employee plans) underlying 7,500 common shares have been excluded
from the primary (loss) earnings per share computation since the conditions for
common stock issuance have not been met and their effect on primary and fully
diluted loss per common share are made on the same basis.
REVENUE
The Company has agreements with hospitals for the hospitals' use of mobile
cardiac catheterization units and staff, and receives revenue based upon
contracted prices. Terms of the agreements vary and range from periods of
approximately four months to five years.
Cortex, BIO, KVM and MHR reported net patient service revenue at the estimated
net realizable amounts from the third-party and others for services rendered.
Changes in the estimated reimbursement are reported in operations in the year of
settlement.
Essential and Prime have contracts with Health Maintenance Organizations ("HMO")
and also receive revenue from fee for service patients.
Sysdacomp and CJH have agreements with hospitals to purchase and support the
software that they sell to the hospitals.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 financial statements to
conform with the 1996 presentation.
REVERSE STOCK SPLIT
On November 1, 1996, the Company effectuated a 1 for 20 reverse stock split. All
references to the number of common shares and per common share amounts have been
restated to reflect the reverse split.
2. CONTINUING OPERATIONS
The Company's 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 has reported net
losses of $8,540,864 and $8,843,343 for the years ended December 31, 1996 and
1995. There was a significant negative working capital deficiency and negative
cash flows from operating activities for the years ended December 31, 1996 and
1995.
Under the current circumstances, the Company's ability to continue as a going
concern depends on the successful restructuring and obtaining profitable
operations and its ability to raise sufficient capital. 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 (see note 16).
3. ESCROW AGREEMENT
In September 1992, the Company's Pre-Initial Public Offering, the ("Escrow
Holders") IPO shareholders, entered into an Escrow Agreement whereby an
aggregate of 47,500 shares of their common stock were owned by Mrs. Marilyn
Zinns and Mr. Milton Barbarosh were being held in escrow until the date all such
shares were to be released to the Escrow Holders or transferred to the Company
in accordance with the provisions described below.
The Escrow Shares would have been released to the shareholders only if either of
the following conditions were met: (1) the Company's income before income taxes
F-11
<PAGE>
during 1994, 1995 and 1996 exceeded certain defined levels or (2) if the bid
price of the common stock exceeded $12.50 at any time prior to December 31,
1996.
Neither of the conditions for release were met in 1996, 1995 or 1994, therefore
47,500 Escrow Shares will be forfeited and contributed to the capital of the
Company subsequent to December 31, 1996.
4. BUSINESS ACQUIRED
On October 24, 1995, the Company exchanged 41,383 shares of the Company's common
stock in exchange for all of the assets and business operations of Essential
Care Medical Centers, Inc. ("Essential") and Prime Dental Care, Inc. ("Prime").
The acquisition has been accounted for using the purchase method of accounting
and the net assets and results of operations for Essential and Prime are
included in the Company's consolidated financial statements from the date of
acquisition. The excess of the purchase price over the fair market value was
$942,702.
On August 23, 1995, the Company acquired, through a share exchange agreement,
Technomed, Inc., a Florida corporation. The Company issued 136,950 shares of the
Company's common stock in exchange for 7,422,500 shares of Technomed common
stock. The acquisition has been accounted for using the purchase method of
accounting, and the net assets and results of operations of Technomed are
included in the Company's consolidated financial statements from the date of
acquisition. The excess of the purchase price over the fair market value of the
net assets acquired of approximately $4,043,197 was recognized as goodwill .
In April 1996, the Company acquired 100% of the outstanding common stock of
Greenworld Technologies, Inc. ("Greenworld") Consideration for the purchase
included (1) the funding 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 5,000 shares,
on a post reverse basis, 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 45,000 shares, on
a post reverse basis of the Company's common stock at $30.00 per share and (6)
cancel a bridge loan note in the amount of $100,000. The acquisition was
accounted for using the purchase method of accounting. In July 1996, Greenworld
was sold to GTB Company (See Note 8).
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 12,815 shares of the Company's common stock.
The following unaudited pro forma summary presents the consolidated results of
operations as if all acquisitions had occurred on January 1, 1996 and 1995,
after giving effect of certain adjustments, including amortization of goodwill
and related income tax effects. The pro forma financial information does not
purport to be indicative of the results of operations that would have occurred
had the transactions taken place at the beginning of the periods presented or of
future results of operations.
1996 1995
----------- -----------
Net revenue ............................ $ 2,641,183 $ 5,741,976
Net loss ............................... (7,773,927) (9,033,057)
Loss per common share .................. $ (9.42) $ (.98)
F-12
<PAGE>
5. NOTES RECEIVABLE
Notes receivable as of December 31, 1996 and 1995 consisted of the following:
1996 1995
---------- ----
Note receivable - related party:
Various notes from Westmark a 49% owner
subsidiary, bearing interest at 10%,
due between February 12, 1997 and
April 30, 1997 .................................... $1,727,569 --
The receivables are secured by preferred
class C preferred stock of Westmark
which is convertible to common stock
Notes receivable - in monthly installments
of $2,000 , which includes principal and
interest, bearing interest at 10%, balance
due November 15, 1997 ............................... 65,106 65,106
Note receivable - in monthly installments
of $1,083, which includes bearing interest
at 8.5%, with a maturity date of January 1, 2002 .... 110,000 --
Other ................................................ 15,000 150,875
---------- --------
1,917,675 215,981
Less: current maturities ............................ 1,811,140 145,676
---------- --------
$ 106,535 $ 70,305
========== ========
6. INVESTMENT IN WESTMARK GROUP HOLDINGS, INC.
In December 1995, the Company acquired a 49% interest in the common stock of
Westmark Group Holdings, Inc. for $1,525,000 in cash and notes payable and
10,000 shares of Class B convertible preferred stock with a stated value of $200
per share.
The carrying value of the Company's investment exceeded its share of the
underlying equity in the net assets of Westmark Group Holdings, Inc. by
$2,736,285 at December 31, 1995. This amount is being amortized over 10 years by
the straight-line method. Amortization in 1996 and 1995 was $274,530 and $9,025,
respectively and is included as an adjustment to the Company's equity in the
earnings of Westmark Group Holdings, Inc.
As of December 31, 1996, the net assets of Westmark Group Holding, Inc. included
$2,000,000 of the Class B convertible preferred stock of Medical Industries. The
investment in Westmark Group Holdings, Inc. as of December 31, 1996 has been
adjusted to eliminate Medical Industries 49% interest in these net assets. A
summary of the investment at December 31, 1996 is as follows:
Equity in net assets .......................................... $ 717,827
Unamortized excess of purchase price over
equity in net assets ........................................ 2,495,373
Elimination of interest in Medical Industries Class B
convertible preferred stock ................................. (980,000)
Investment in Westmark Group Holdings, Inc. ................... $ 2,233,200
===========
7. CUSTOMERS AND CREDIT CONCENTRATION
The Company had a contract with one hospital that accounted for approximately
55% and 59% of revenue from operations in 1996 and 1995, respectively in
February 1997. The Company subsequently replaced the contract with several other
F-13
<PAGE>
contracts. During 1996 and 1995, the Company derived its revenue primarily in
Florida, Texas, Ohio and Pennsylvania.
8. DISPOSAL OF BUSINESSES
In July 1995, the Company settled the lawsuit brought by Thera-Kinetics by
selling to Thera-Kinetics, substantially all of its CPM operations (including
KVM, BIO and Acrotronics Rehabilitation Services, Inc.). Consideration for the
sale included a note in the amount of $250,000 for the purchase of all medical
assets, except accounts receivable, and the assumption of certain equipment
leases. The note is currently in default and the Company is pursuing all
available legal remedies to enforce the collection of the note. As the leases
were not assignable, the Company has recorded a lease obligation. A loss on the
sale of $554,359 was recognized during the year ended December 31, 1995.
Additionally, during July 1995 the Company sold the assets of Cortex to
Neurological Diagnostic Centers, Inc. Consideration for the sale included, but
was not limited to, a note in the amount of $25,000. Loss on the sale of $25,938
was recognized during the year ended December 31, 1995, in addition to the
goodwill write-off of $560,000 in 1994.
In September 1995, the Company sold the business operations of MHR to Victoria
Hawley. Consideration for the sale included, but was not limited to, notes in
the approximate amount of $138,000. This figure is netted with an allowance of
approximately $57,000 due to contingencies written in the notes. Loss on the
sale of $197,529 was recognized during the year ended December 31, 1995.
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 $700,000 promissory note owed by
the Company pursuant to an Agreement signed in June 1996 to Bradley T. Ray, a
former consultant to the Company and (c) a royalty of 7% of the gross sales of
Greenworld Technologies, Inc. for a period of two years, and 5% of the gross
sales of Greenworld Technologies, Inc. for an additional three years. As of the
date of this report, GTB Company has defaulted on its payment of the promissory
note.
9. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt as of December 31, 1996 and 1995 consisted of
the following:
1996 1995
------- --------
Notes payable, related party:
Notes payable to officers and directors,
non-interest-bearing, due on demand .....................$ 21,000 $ 561,046
Notes payable to a trust administered by an
officer, non-interest-bearing, due on demand ............ -0- 19,000
Notes payable to a trust administered by an
officer, payable interest only at 12%, with
balloon payments of $50,000 due in February
1996 and $100,000 due in March 1996 ...................... -0- 150,000
Note payable to a trust administered by an officer,
principal and interest at 10%, due in April 1996 ........ 13,000 13,000
Note payable, net to Westmark Group Holdings, Inc.,
principal and interest at 10%, due in January 1996
(see Note 4) ............................................. -0- 190,853
Note payable to a stockholder, principal and interest at
10%, due in March 1996 .................................. -0- 253,750
Note payable to an affiliated company, principal and
interest at 10%, due March 1996 ......................... -0- 50,000
F-14
<PAGE>
Notes payable to a stockholder, interest payable at 10%,
with balloon payments of $90,000 plus interest due in
February 1996 and $55,903 plus interest due in March
1996 -0- 145,903
Notes payable to stockholders, interest payable at 8% with
balloon payments due in June 1997 .......................... 498,286 --
Notes payable, other:
Note payable in default at December 31, 1995, principal
and interest at 18%, due on demand, collateralized by
accounts receivable, leaseholds, chattel paper, general
intangibles and contract rights ........................ 300,000 300,000
Note payable in default at December 31, 1995, cured
subsequent to year-end, principal and interest
at 10%, due on demand .................................. -0- 73,811
Note payable, non-interest -bearing, due on demand ......... -0- 60,000
Other .................................................... 5,505 17,623
-------- ----------
$837,791 $1,834,986
======== ==========
Long-term debt, related party:
Note payable to a stockholder, payable interest
only at 12%, with balloon payments ranging
from $50,000 to $115,000 due between January
1996 and December 1997, convertible into
unregistered common stock of Westmark at a
price of 50% of the closing bid price on the
day preceding the conversion, exchangeable
into common stock of Medical Industries ............. $175,000 $415,000
Long-term debt, other:
Note payable to a bank, payable in monthly
installments of $1,420 including interest at
the bank's prime rate (8.5% as of December 31,
1995) plus 2% balance due in November 2001,
collateralized by building .......................... 91,518 92,369
Note payable, payable in monthly installments of
$636 including interest at 12%, balance due
in December 1998, collateralized by building ....... 47,007 48,895
Note payable in default at December, 1995 and 1994,
payable in monthly installments of $589 including
interest at 12.172%, balance due in July 2004 ....... 38,201 38,201
Other .................................................. 45,950 92,138
-------- --------
397,676 686,603
Less current maturities .................................. 251,120 337,092
-------- --------
$146,556 $349,511
======== ========
F-15
<PAGE>
Aggregate maturities required on long-term debt as of December 31, 1996 are as
follows:
YEAR ENDED
DECEMBER 31, AMOUNT
------------ -------
1997 251,120
1998 71,611
1999 9,573
2000 10,549
2001 54,823
--------
Thereafter $397,676
========
10. LEASES
AS LESSEE:
The Company has a capital lease for a mobile cardiac catheterization laboratory
and other medical equipment with a cost of $1,340,694 and $1,340,694 as
of December 31, 1996 and 1995, respectively. Accumulated depreciation on
these assets totaled $1,276,177 and $1,013,295 as of December 31, 1996
and 1995, respectively. In 1995, the Company also had capital leases
for medical equipment which it is subleasing to former affiliates under
direct-financing leases. In consideration of entering into the mobile cardiac
catheterization laboratory lease, the Company agreed that the monthly rentals
under the lease have priority over any withdrawals of funds, other than regular
salaries, by the stockholders of the Company. The Company's service agreements
and accounts receivable are collateral under the lease. Additionally, a pre-IPO
stockholder has pledged shares in the common stock of the Company and is a
guarantor under the lease.
Capital lease obligations in default amounted to $398,278 and $777,205 at
December 31, 1996 and 1995, respectively.
The Company leases one of its premises under an operating lease. The lease
expires in June 1999 and requires monthly payments of $3,030. The Company has
the option to renew the lease for an additional five years. The Company leases
two other premises under month-to-month operating leases.
Future minimum payments of noncancelable operating leases with terms of one year
or more consisted of the following as of December 31, 1996:
YEAR ENDING OPERATING
DECEMBER 31, LEASES
- ------------ ------
1997 36,366
1998 36,366
1999 18,183
2000 -0-
2001 -0-
-------
Total lease payments 90,915
=======
Rent expense for the years ended December 31, 1996 and 1995 totaled $215,319 and
$121,925, respectively.
11. INCOME TAXES
The Company has net operating losses totaling approximately $18,000,000 which
F-16
<PAGE>
expire between 2008 and 2011.
The Company has capital loss carry forwards of approximately $1,002,000 as of
December 31, 1996 which expire in 2000. These capital losses can only be
deducted against future capital gains of the Company.
As of the date of the report, the Company has not filed its 1995 or 1996 U.S.
federal income tax return. No tax liability is anticipated.
12. STOCK OPTION AND WARRANT PLANS
The Company has three stock option plans, the 1994 Employee Stock Option Plan
(Employee Plan), Director Stock Option Plan ("Director Plan" and the 1996
Officer and Director stock option plan). The Compensation Committee of the
Company's Board of Directors administers and interprets the plans and is
authorized to grant options thereunder to all eligible employees of the Company,
including officers and directors (whether or not employees) of the Company.
Transactions involving the stock option plans are summarized as follows:
1996
DIRECTOR &
EMPLOYEE DIRECTOR OFFICER
PLAN PLAN PLAN
---- ---- ----
Shares under option:
Outstanding, December 31, 1994 ............. 2,250 1,250 -0-
Granted .................................... 5,500 3,000 -0-
Exercised .................................. (750) (1,250) -0-
Terminated ................................. (750) (1,250) -0-
------ ------ -------
Outstanding, December 31, 1995 ............. 6,250 1,750 -0-
====== ====== =======
Granted .................................... -0- -0- 125,000
Exercised .................................. 2,250 -0- -0-
Terminated ................................. 3,000 1,500 -0-
Outstanding December 31, 1996 .............. 1,000 250 125,000
====== ====== =======
Options available to grant as of December
31, 1996 ................................. 19,000 1,750 2,875,000
====== ====== =======
1996
DIRECTOR &
EMPLOYEE DIRECTOR OFFICER
PLAN PLAN PLAN
---- ---- ----
Average option price per share:
At December 31, 1995 ............... $ 36.50 $53.40 $ -0-
At December 31, 1996 ............... 42.60 57.50 1.50
Options exercisable:
At December 31, 1995 ............... 313 63 -0-
At December 31, 1996 ............... 50 13 $62,500
Average price of options exercised:
At December 31, 1995 ............... 22.50 29 -0-
At December 31, 1996 ............... 22.50 -0- -0-
During 1995, the Company amended its Director Plan to increase the number of
shares available for grant from 1,000 shares to 3,000 shares.
During 1993, the Company granted to three directors options to purchase an
aggregate of 7,500 shares of the Company's common stock. These options were not
granted in connection with either of the two plans described above. The options
are exercisable through April 23, 1998 at an exercise price of $120.00 per
share.
F-17
<PAGE>
Shares of common stock reserved for future issuance at December 31, 1996 are as
follows:
Employee Plan ............................................... 20,000
1996 Officer and Director Plan .............................. 250,000
Other options ............................................... 7,500
Warrants .................................................... 330,744
-------
608,244
The shares of common stock reserved for future issuance above do not include any
amounts reserved for future conversion of preferred stock.
13. PROFESSIONAL LIABILITY INSURANCE
The Company maintains its professional liability insurance with an independent
commercial insurance company. Professional liability coverage is on a
claims-made basis. The Company has not experienced any historical professional
liability losses.
14. MINORITY INTEREST
The minority interest represents the 5% interest of an unrelated third party who
purchased a 5% interest of one of the Company's mobile cardiac catheterization
units for $75,000.
15. RELATED PARTY TRANSACTIONS
During October 1995, the Company issued a Registration Statement issuing an
aggregate of 12,500 shares to directors of the Company and certain corporations
owned by certain directors.
JEAN JOHNSTONE
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 20,000 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 the
Company agreed to issue Johnstone a convertible debenture in an amount equal to
the shortfall. The Company agreed to register the shares underlying the
debenture. If a third party purchase could not be facilitated in 120 days, the
Company agreed to repurchase the shares at the price set forth above by 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 June 7, 1997. In
addition, the Company purchased 1,050 shares from Ms. Johnstone at the purchase
price of $17.40 for a total purchase price of $18,270. In September 1997, the
Company issued shares of its restricted common stock in exchange for the senior
promissory note plus interest accrued as discussed above. See footnote 23.
In 1996, the Company also granted Ms. Johnstone a five-year option to purchase
10,000 shares of the Company's common stock at $20.00 per share. The parties
executed mutual general releases and Ms. Johnstone resigned as Chairman of the
Board and 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) AR Mediquest accrued salary, $33,603; and (iii)
repayment of her loan to C.J. Holding/AR/Mediquest, $342,546.
BRADLEY 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
F-18
<PAGE>
things, the Company would facilitate, through a third party the purchase of
15,000 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 agreed to 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 could not be facilitated in 120 days, the
Company agreed to 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
June 7, 1997. In September 1997, the Company issued shares of its restricted
common stock in exchange for the senior promissory note plus accrued interest
discussed above. See footnote 23.
In addition, in 1996 the Company also granted one-year options to purchase
30,000 and 10,000 shares of the Company's common stock at $6.80 per share and
$8.00 per share, respectively. The Company agreed to register the share
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. This
promissory note was canceled as partial consideration for the Greenworld sale.
In 1996, the parties also executed mutual general releases.
CONSULTING AGREEMENTS
During 1995 and 1996, the Company engaged an accounting and consulting firm of
which a director of the Company is a director and shareholder of this firm. In
December 1996, the firm received $35,000 in the form of common stock for these
services.
16. LITIGATION AND CONTINGENCIES
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. Bio
Innovations, 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. As of the date of this
report year end, TK had not assumed any of the leases and was in default on its
promissory note. The Company currently is seeking all remedies available to
enforce the provisions of the settlement agreement.
In December 1995, the Company was named as defendant in a lawsuit which contends
that HLOA Diagnostic, Inc., the former name of the Company's neurological
testing subsidiary, Cortex Diagnostic Services, Inc. failed to redeem stock
purchased by the plaintiff as partial consideration for the purchase of certain
assets. The Company contends that the price of the redemption was excessive .
The Company settled the lawsuit in September 1996
In February 1996, the Company was named as defendant in a lawsuit which alleges
default under an equipment lease. The case is presently in the discovery stage.
In August 1996, a lawsuit was filed in the Circuit Court of Broward County,
Florida by G-4, Inc. against the Company seeking approximately $36,000 for past
computer related services. The case is in the discovery stage.
In January 1997, Dr. Franklin Saumell, et al filed a complaint in the Circuit
Court of Dade County, Florida against the Company and Essential. The complaint
alleges that the Company defaulted on payments to employees and to independent
F-19
<PAGE>
consultants. Dr. Saumell, et al are seeking approximately $455,000 in damages.
The Company intends to vigorously defend the lawsuit.
In January 1997, a demand for arbitration was filed with American Arbitration
Association of Orlando, Florida by Pyramid Holdings, Inc. The plaintiff alleged
a breach of a consulting agreement in that the Company failed to compensate the
plaintiff pursuant to the terms of a 1995 agreement. In October 1997, the
Company settled this case by paying the plaintiff up to $290,000 in cash and
70,000 unrestricted shares of the Companys common stock.
In February 1997, a lawsuit was filed in the United States District Court,
Southern District of New York, by Tula Business, Inc. et al. The suit alleges
the Company failed to accurately convert preferred shares of stock issued
pursuant to a transaction exempt from the registration requirements of the SEC
pursuant to Regulation S promulgated under the Securities Act of 1933 as amended
("Regulation S") into shares of common stock. Similar charges were made by four
other shareholders of preferred stock who threatened to file a lawsuit similar
to the one brought by Tula Business, Inc. et al. The plaintiffs are seeking the
issuance of additional shares. Effective April 7, 1997, the Company entered into
a settlement agreement and mutual releases with the plaintiffs of the Tula
Business, Inc. et al lawsuit and four other shareholders of preferred stock. The
terms of the settlement required the Company to issue 2,063,346 unrestricted
common shares, the exercise of 144,384 warrants into common stock at $1.50 per
share(an aggregate of $216,576 received by the Company) and the payment by the
Tula Business, Inc. et al plaintiffs and certain of the four other claimants of
$900,000 to the Company in settlement of its claims.
On March 4, 1997, a lawsuit was filed against the Company in the Supreme Court
of New York by Glick Enterprises. The suit alleges the Company failed to
accurately convert shares of preferred stock issued pursuant to a transaction
exempt from the registration requirements of the SEC pursuant to Regulation S
promulgated under the Securities Act of 1933 as amended (Regulation S) into
shares of common stock. The plaintiffs are seeking the issuance of additional
shares. On April 2, 1997, the Companys attorneys made a motion to dismiss three
of the four causes of action in the Glick complaint. The Company intends to
vigorously defend the lawsuit.
17. COMMITMENTS
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
employees. These agreements specify, among other things, salary and/or
commissions, car allowance, stock incentives and expense reimbursement. The
contracts range in length from one year to three years. Future minimum payments
committed by the Company under these contracts amounted to $290,000 and $290,000
for the years ended December 31, 1997 and 1998, respectively.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash, trade accounts receivable, notes receivable, excess of outstanding checks
over bank balance, accounts payable: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Notes payable and Long term debt: The carrying amounts approximate fair value
due to the length of the maturities and the interest rates not being
significantly different from the current market rates available to the Company.
The estimated fair values of the Company's financial instruments as of December
31, 1996 and 1995 are as follows:
F-20
<PAGE>
1996 1996 1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT AMOUNT AMOUNT AMOUNT
---------- ---------- ---------- ----------
Cash and cash equivalent ....... $ 241,461 $ 241,461 $ 24,431 $ 24,431
Trade accounts receivable ...... 237,385 237,385 456,361 456,361
Notes receivable ............... 1,917,675 1,917,675 215,981 215,981
Notes payable .................. 339,505 339,505 1,834,986 1,834,986
Accounts payable ............... 443,203 443,203 825,090 825,090
Long-term debt ................. 397,676 397,676 686,603 686,603
19. SUBSEQUENT EVENTS
In January 1997, the Company signed an agreement with Westmark Group Holdings,
Inc. whereby the Company and Westmark would restructure each other's debt and
equity positions that each company currently holds in each other. Under the
terms of the restructuring agreement, the Company will return 1.2 million common
shares and 200,000 convertible preferred shares of Westmark, valued at $700,000,
to Westmark. Conversely, Westmark will return to the Company 10,000 of its
Series B convertible preferred shares, value at $2,000,000, for retirement to
treasury, and make a cash payment of up to $2,500,000 and 400,000 common shares
of Westmark. The Company will also receive a note from Westmark for up to
$3,950,000 with a ten year amortization schedule and a balloon payment at the
end of 36 months. The note provides for a certain discount based upon the
initial cash payment received from Westmark. Westmark is currently filing a
registration statement to raise sufficient funds to repay the note. This
Agreement is based on Westmark's ability to raise Capital; no assurance can be
placed on the agreement effectuated. Loss from the equity investment in
Westmark Group Holdings, Inc. was $666,381 and $61,863 for the periods ending
December 31, 1996 and 1995, respectively.
On March 28, 1997, the Company entered into an asset purchase agreement whereby
it sold a mobile cardiac catheterization lab for $800,000, $100,000 in cash and
a promissory note in the amount of $700,000 bearing an interest rate of ten
percent to be paid over nine months at $60,000 per month with the balance of
unpaid principal and accrued interest due and payable on December 15, 1997.
In connection with the sale of the mobile cardiac catheterization lab, the
Company entered into a management agreement with the purchasers of the mobile
lab to operate and manage the mobile lab.
20. PREFERRED STOCK
In connection with the December 1995 investment in Westmark, the Company issued
10,000 shares of its Series B convertible preferred stock ("Series B Preferred
Stock") which accrues dividends at a rate of 7% per annum. The shares of Series
B Preferred Stock are convertible, at the option of the holder, for a period of
ten years from the date of issuance, exercisable by giving written notice to the
Company not less than thirty days prior to such conversion date into shares of
common stock at a price which is fixed at an average of the bid and ask price as
listed by NASDAQ for the thirty days prior to the conversion date.
The Company has the right, in its sole discretion, upon receipt of a notice of
conversion, or earlier without receipt of any notice of conversion, to redeem,
in whole or in part any shares of Series B Preferred Stock submitted for
conversion, immediately prior to conversion, or otherwise outstanding and
subject to a right of conversion. The redemption payment per share for each
redemption of the Series B Preferred Stock shall be at a stated value of $200.00
per share. If less than all of the outstanding shares of the Series B Preferred
Stock are redeemed at any time, then the shares of Series B Preferred Stock held
by such holder, subject to such adjustment as may be equitably determined by the
Company in order to avoid the redemption of fractional shares.
In February 1996, pursuant to a Regulation S agreement the Company issued a
F-21
<PAGE>
total of 41,725 shares of Company's Series C Convertible Preferred Stock with a
stated value of $200 per share. The preferred shares are convertible at the
lesser of (1) 75% of the closing bid at date of closing or (2) 65% of the 5
trading day average bid immediately preceding the date of conversion.
As of December 31, 1996, all but 4,725 shares of the Company's Series C
Convertible Preferred had been converted.
In November 1996, the Company closed a rights offering of units each consisting
of one $15 Series D Convertible Preferred Shares (the "Series D Shares") and 1.5
warrants to purchase common stock (the "warrants"). The units were offered,
through Baytree Associates, Inc. Acting as placement agent, solely to holders of
the Company's $200 per share Convertible Series C Preferred Stock and the
consideration received by the Company was one Series C Preferred Share and $5.00
for each unit purchased. At the conclusion of the rights offering, 220,496
Series D Shares and 330,774 warrants were issued to investors (See note 16).
21. TREASURY STOCK
Three thousand seven hundred and fifty shares of the Company's common stock were
returned to the Company during the 1st quarter of 1996. The Company accounted
for the Treasury Stock under the par or stated value method.
22. DISCONTINUED OPERATIONS
During the fourth quarter of 1996, the Company adopted a plan to focus the
Company's energies on its mobile cardiac catheterization labs and dispose of the
clinical care and Technomed divisions. Negotiations for the sale of Technomed
division are currently being conducted with the respective management group.
Revenues from the Technomed division accounted for $478,587 and $ 315,200 for
the years ended December 31, 1996 and 1995, respectively. Loss from the
operation of the Technomed division was $372,155 and $3,887,602 for the periods
ending December 31, 1996 and 1995, respectively.
During 1996, the Company closed down seven of its nine medical centers. It is
the Company's intent that the remaining two medical centers are to be spun off
into a separate company that will become publicly traded upon registration with
the Securities and Exchange Commission. It is expected that the transaction will
close during the second quarter of 1997. Revenues from the clinical care
division accounted for $785,616 and $153,560 for the years ended December 31,
1996 and 1995, respectively. Loss from the operation of the clinical care
division was $3,911,248 and $186,879 for the periods ending December 31, 1996
and 1995, respectively.
During 1996, the Company sold Greenworld Technologies, Inc. Revenue for 1996 was
$11,024. Loss from operations was $380,000.
During 1996, the Company sold the CPM Division. Revenue for 1996 and 1995 was
$47,850 and $2,281,742 with a loss from operations of $257,362 and $1,666,260.
During 1995, the Company sold the assets of Cortex. Revenue for 1995 was
$199,551 with a loss from operations of $174,720.
23. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to year-end the Company discovered errors relating to the oversight
and omission of facts that existed at the time the financial statements were
prepared. The following items have been reflected in the accompanying financial
statements.
Description Amount
- ----------- ------
Interest payable $ 21,500
Amount due to former employee from
default judgment entered into in 1996 90,000
Consulting fee not accrued 435,500
Property taxes 27,500
Additional losses from discontinued
operations 660,000
-----------
Increase in net loss $ 1,234,500
===========
F-22
<PAGE>
The Company failed to accrue interest payable on a loan for the period July 1996
through December 1996 due to an oversight. The additional interest amounted to
approximately $21,500.
On December 10, 1996, a former employee obtained a default judgment for
approximately $90,000 in connection with a suit in which the former employee
charges the Company that the Company failed to pay all considerations due under
his employment agreement. On October 15, 1997, the Company settled this matter
by issuing 45,000 shares of free trading common stock.
On October 1, 1996, the Company entered into a consulting contract with a
company to serve as corporate development consultant and advisor. The monthly
retainer was $10,000 for the first month and $7,500 per month thereafter. In
previously issued financial statements, this accrual was not recorded.
In 1995, the Company entered into a consulting agreement with Pyramid Holdings,
Inc. as of December 31, 1996, the Company, in error, did not accrue the amount
due Pyramid under the consulting agreement. In October 1997, the Company settled
the amount due by issuing cash and common stock of the Company.
In previous issued financial statements, the Company failed to record
approximately $27,500 due to Palm Beach County for property taxes for 1995. This
has been reflected in the accompanying statement of operations for the year
ended December 31, 1996.
The Company discontinued certain operating companies and failed to record the
cost to dispose and ultimate sale of the operations. In addition, the Company
failed to record additional amounts due under an earn out agreement from the
1995 acquisition of Essential Care Medical Centers in the amount of $510,000.
The effect of these transactions on the loss from continuing operating for the
year ended December 31, 1996 was to increase the loss by $574,500. The effect of
the additional expense related to the discontinued operations for the year ended
December 31, 1996 was to increase the loss on discontinued operations by
$660,000.
The per share effect was as follows:
1996
-----
Per share of common stock:
Loss from continuing
operations $ 1.50
Loss for discontinued
operations (4.00)
Loss from disposal of
discontinued operations 3.99
-----
Net loss per share $ 1.49
-----
Subsequent to year end, the Company agreed to purchase the stock from
shareholders as described in footnote 15 for $498,286 and issue 35,000 shares to
liquidate the debt. In the previously issued financial statements, this
transaction was not recorded and should have been recorded as notes payable and
as treasury stock. The transaction does not have any effect on net loss for the
two years ended December 31, 1996.
Exhibit "23"
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the 10 KSB/A dated March 23, 1998 of our report
dated March 10, 1997, except for Footnote 23 which is as of March 23, 1998,
related tot he financial statements of Medical Industries of America, Inc.,
formerly known as Heart Labs of America, Inc.
/s/ Grant Schwartz Associates, CPA's
Boca Raton, Florida
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 241,461
<SECURITIES> 0
<RECEIVABLES> 258,805
<ALLOWANCES> 20,520
<INVENTORY> 14,871
<CURRENT-ASSETS> 2,503,887
<PP&E> 3,643,210
<DEPRECIATION> 2,871,414
<TOTAL-ASSETS> 5,743,658
<CURRENT-LIABILITIES> 3,959,724
<BONDS> 0
0
5,390,480
<COMMON> 16,655,058
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,743,658
<SALES> 1,276,904
<TOTAL-REVENUES> 1,312,143
<CGS> 669,484
<TOTAL-COSTS> 4,932,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,674
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,620,099)
<DISCONTINUED> (4,920,765)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,540,864)
<EPS-PRIMARY> (10.33)
<EPS-DILUTED> (10.33)
</TABLE>
