As filed with the Securities and Exchange Commission on November 30, 1999
REGISTRATION NO. _________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------------------
CYBER-CARE, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 8071 65-0158479
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) NUMBER)
1903 South Congress Avenue, Suite 400
Boynton Beach, FL 33426
(561) 737-2227
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
Michael F. Morrell
Chief Executive Officer
Cyber-Care, Inc.
1903 S. Congress Avenue, Suite 400
Boynton Beach, FL 33426
(561) 737-2227
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(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Please send copies of all communications to:
Joel D. Mayersohn, Esq.
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Boulevard
Suite 1900
Fort Lauderdale, Florida 33301
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of the Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement under the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (1) PRICE (1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock -- $0.0025 par value per share ........ 5,700,000 $ 4.39 $ 25,000,000 $ 6,600
Common Stock -- $0.0025 par value per share (2) .... 995,000 $ 4.39 $ 4,368,050 $ 1,153
=================================================================================================================================
</TABLE>
(1)Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act. The maximum price per
share information is based on the two day average of the closing sale prices
of the Registrant's common stock, $0.0025 par value per share, reported on
the NASDAQ SmallCap Exchange.
(2)Issuable upon the exercise of common stock purchase warrants issued to
Selling Shareholders.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated November 30, 1999
P R O S P E C T U S
CYBER-CARE, INC.
THE RESALE OF 5,700,000 SHARES OF COMMON STOCK
The selling price for the shares of our common stock will be determined by
market factors at the time of their resale.
THE OFFERING
This prospectus relates to the resale by the selling shareholders of up to
5,700,000 shares of common stock. The selling shareholders may sell the stock
from time to time in the SmallCap market at the prevailing market price or in
negotiated transactions. Of the shares offered:
- 40,296,253 shares are presently outstanding,
- up to 5,700,000 shares are issuable to Swartz Private Equity,
LLC based on an investment agreement dated July 21, 1999, and
- up to 995,000 shares are issuable upon the exercise of
warrants issuable to Swartz under the investment agreement.
We will receive no proceeds from the sale of the shares by the selling
shareholders. However, we have received proceeds from the sale of shares
currently outstanding and may receive proceeds from the sale of shares to Swartz
and, if exercised, will receive proceeds from the sale of shares issuable upon
the exercise of warrants by Swartz and certain other selling shareholders.
Trading Symbol CYBR (Nasdaq SmallCap Market)
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 5
The Securities and Exchange Commission (SEC) and state securities regulators
have not approved these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense and should
be reported immediately to the SEC by calling 1-800-SEC-0330.
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CYBER-CARE, INC. PROSPECTUS
Please read this prospectus carefully. It describes our company, finances and
products. Federal and state securities laws require that we include in this
prospectus all the important information that you will need to make an
investment decision.
You should rely only on the information contained in this prospectus to make
your investment decision. We have not authorized anyone to provide you with
information that is different from what is contained in this prospectus.
The following table of contents has been designed to help you find important
information contained in this prospectus. We have included subheadings to aid
you in searching for particular information you might want to return to.
We encourage you to read the entire prospectus.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY .................................................. 4
RISK FACTORS ........................................................ 5
FORWARD-LOOKING STATEMENTS .......................................... 18
PLAN OF DISTRIBUTION ................................................ 18
INVESTMENT AGREEMENT ................................................ 19
SELLING SHAREHOLDERS ................................................ 21
THE COMPANY ......................................................... 22
USE OF PROCEEDS ..................................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY ............... 28
MANAGEMENT .......................................................... 36
PRINCIPAL SHAREHOLDERS .............................................. 41
CERTAIN TRANSACTIONS ................................................ 42
TRADING MARKET AND RELATED MATTERS .................................. 42
DESCRIPTION OF SECURITIES ........................................... 43
LEGAL MATTERS ....................................................... 44
EXPERTS ............................................................. 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .......................... F-1
INDEX TO FINANCIALS OF CYBERCARE, INC................................ F-43
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PROSPECTUS SUMMARY
ABOUT CYBER-CARE
We intend, through our recent acquisition of Cybercare, Inc. and its technology,
to develop, manufacture, operate and sale an Internet-based technology solution
and interactive system for use in assisting disease management. This technology
supports remote delivery of care, patient monitoring and education to the U.S.
healthcare market. We own patented routing technology, which simultaneously
delivers video, audio and data between the patient and the healthcare provider.
We are also engaged in the business of physical and pain rehabilitation,
occupational and speech therapy, pharmaceutical services, international air
ambulance transport and other services.
Our business strategy is to capture a significant share of the growing market
for remote interactive healthcare delivery and to link our technologies,
products and services through sales, licensing, strategic alliances and
third-party payor contracts.
ABOUT OUR INVESTMENT AGREEMENT
We have entered into an investment agreement with Swartz Private Equity, LLC for
Swartz to invest up to $25 million, at our option, through a series of sales of
our common stock. The dollar amount of each sale is limited by our common
stock's trading volume and a minimum period of time since the last sale. Each
sale will be to Swartz. In turn, Swartz will either sell our stock in the open
market, place our stock through negotiated transactions with other investors, or
hold our stock in their own portfolio. This prospectus covers the resale of our
stock by Swartz either in the open market or to other investors.
KEY FACTS
Shares being offered for resale
to the public.............................5,700,000
Total shares outstanding prior to
the offering..............................40,296,253 as of November 30, 1999
Total shares outstanding after the
offering..................................45,996,253
Total shares outstanding after the
offering and exercise of all
options/warrants..........................68,438,219
Price per share to the public.............Market price at time of resale
Total proceeds raised by offering.........None; however, we may receive up
to $25 million from Swartz under
the investment agreement and
additional amounts may be received
from the exercise of warrants
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RISK FACTORS
The shares of our common stock being offered for resale by the selling
shareholders are highly speculative in nature, involve a high degree of risk and
should be purchased only by persons who can afford to lose the entire sum
invested in the common shares. Before purchasing any of the shares of common
stock, you should carefully consider the following factors relating to our
business and prospects. If any of the following risk actually occurs, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our stock could decline, and you
may lose all or part of your investment.
THE HEALTHCARE INDUSTRY IS SUBJECT TO EXTENSIVE LAWS AND REGULATIONS, WHICH
COULD IMPAIR OUR ABILITY TO CONDUCT BUSINESS.
The healthcare industry in general and the medical ancillary service
business in particular is subject to extensive federal, state and local
regulation relating to licensure, conduct of operations, ownership of
facilities, environment rules, pricing and reimbursement policies. Although we
believe that our current operations comply with applicable regulations, we
believe that the healthcare industry will continue to change, requiring us to
modify our agreements and operations from time to time. While we believe that we
will be able to structure our agreements and operations in accordance with
applicable law, there can be no assurance that the subsequent adoption of laws
or interpretations of existing laws will not regulate, restrict or otherwise
adversely affect our business.
WE HAVE A HISTORY OF LOSSES AND A SUBSTANTIAL ACCUMULATED DEFICIT.
To date we have been unable to generate revenue sufficient to be
profitable on a consistent basis. Consequently, the Company has sustained
substantial losses. Net losses for the years ended December 31, 1997 and 1998
were $1,526,152 and $7,380,953, respectively. As of September 30, 1999, we had a
working capital deficit of $5,987,122, as compared to a working capital surplus
of $2,567,719 as of September 30, 1998. Accumulated deficit for the years ended
December 31, 1997 and 1998 were $21,937,441 and $29,318,394, respectively. There
can be no assurance that we will ever achieve the level of revenues needed to be
profitable in the future or, if profitability is achieved, that it will be
sustained.
OUR DEBT OBLIGATIONS CAUSE US TO INCUR SIGNIFICANT EXPENSES.
We reported net income of $235,100 in our Form 10-QSB for the quarter
ended September 30, which included beneficial conversion interest of
approximately $132,156 related to previous debt financings. Further, the
financing contemplated by this prospectus will result in our incurring
significant beneficial conversion interest. It is uncertain what effect, if any,
these expenses will have on the price of our stock.
THE FUNDS WE MAY RECEIVE FROM SWARTZ WILL NOT BE SUFFICIENT FOR THE COMPANY'S
LONG TERM CAPITAL REQUIREMENTS AND WE MAY HAVE TO RAISE ADDITIONAL FINANCING.
We believe that the funds to be raised in this offering (assuming the
successful completion of a maximum offering), together with our revenues will be
sufficient to provide us with capital sufficient to fund our short-term needs.
It is likely that we will be required to raise additional capital. There can be
no assurance that the proceeds we receive from Swartz will, in fact, be
available or if available will be sufficient in the near term or that conditions
and circumstances may not result in subsequent cash requirements by us, or that
future funds will be sufficient to sustain operations and to meet growth. In the
event of such developments, attaining financing under such conditions may not be
possible, or even if additional capital may be otherwise available, the terms on
which such capital may be available may not be commercially feasible or
advantageous to us.
WE INTEND TO ACQUIRE VARIOUS COMPANIES, WHICH WILL SUBJECT US TO ALL OF THE
RISKS ASSOCIATED WITH A GROWING COMPANY.
We may use a portion of the net proceeds from this offering and future
financings to acquire healthcare and e-commerce businesses. There can be no
assurance that suitable acquisitions will be available or that acquisitions can
be negotiated on acceptable terms, or that the operations of acquired businesses
can be integrated effectively into our
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operations. Competition for suitable acquisition candidates is expected to be
intense and many of our competitors will have greater resources than we have.
Our failure to implement our acquisition strategy could have a material adverse
effect on our financial performance and, moreover, the attendant risks of
expansion could also have a material adverse effect on our business.
One of our recent acquisitions, Cybercare, Inc., is in the research and
development stage, had losses in prior years, will continue to have losses in
1999 and will require a significant amount of capital to bring its products and
services to market. There can be no assurance that this company will be
profitable in the future or that it can be successfully integrated into our
operations. Our growth strategy will result in significant additional demands on
our infrastructure, and will place a significant strain on our management,
administrative, operational, financial and technical resources, and increased
demands on our systems and controls. A significant portion of the net proceeds
received from this offering, if available, will be used for completing the
development of the technology of Cybercare and manufacturing and marketing the
product. Additional capital may be needed and there can be no assurance that we
will be able to obtain sufficient resources to support Cybercare and future
acquisitions and growth. The inability to continue to upgrade the operating and
financial control systems, the emergence of unexpected expansion difficulties or
failure to manage our proposed expansion properly could have a material adverse
effect on our business, financial condition and results of operations. The laws
and regulations applicable to financial arrangements in the healthcare industry
are complex and may be subject to varying interpretations.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY, WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our ability to compete effectively in the medical e-commerce industry will
depend on our success in developing and marketing our products and services
and/or acquiring other suitable medical e-commerce businesses and protecting
their proprietary technology, both in the United States and abroad. The patent
positions of medical technology companies generally involve complex legal and
factual questions. We currently have an exclusive license for one patent issued
and one pending with regard to our e-commerce technology. We intend to file for
additional patents under our license agreement on products for which we feel the
cost of obtaining a patent is economically reasonable in relation to the
expected protection obtained and has economic benefit. There can be no
assurances that any patent that we apply for will be issued, or that any patents
issued will not be challenged, invalidated, or circumvented, or that the rights
granted thereunder will provide any competitive advantage. We may incur
substantial costs in defending any patent or license infringement suits or in
asserting any patent or license rights, including those granted by third
parties, the expenditure of which we might not be able to afford.
Although we have and will continue to enter into confidentiality and
invention agreements with our employees and consultants, there can be no
assurance that such agreements will be honored or that we will be able to
adequately protect our rights to our non-patented trade secrets and know-how.
Moreover, there can be no assurance that other individuals or entities will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets and know-how. In
addition, we may be required to obtain licenses to patents or other proprietary
rights from third parties. There can be no assurance that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If we do not obtain required licenses, we could encounter
delays in product development or find that the development, manufacture, or sale
of products requiring such licenses could be foreclosed. Additionally, we may,
from time to time, support or otherwise collaborate in research conducted by
universities and governmental research organizations. There can be no assurance
that we will have or be able to acquire exclusive rights to the inventions or
technical information derived from such collaborations or that disputes will not
arise with respect to rights in derivative or related research programs
conducted by us or such collaborators.
WE MAY NOT BE ABLE TO PROTECT OUR TRADENAMES AND DOMAIN NAMES AGAINST ALL
INFRINGERS, WHICH COULD DECREASE THE VALUE OF OUR BRAND NAME AND PROPRIETARY
RIGHTS.
We currently hold the Internet domain name "cyber-care.net" as well as
various other related names and we use "CyberCare" as a tradename. Domain names
generally are regulated by Internet regulatory bodies and are subject to change
and may be superseded, in some cases, by the laws, rules and regulations
governing the registration of tradenames and trademarks with the United States
Patent and Trademark Office and certain other common law rights. In the event,
the domain registrars are changed, new ones are created or we are deemed to be
infringing upon another's tradename or
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trademark, we could be unable to prevent third parties from acquiring or using,
as the case may be, our domain name, tradenames or trademarks which could
adversely affect our brand name and other proprietary rights.
WE CANNOT GUARANTEE YOU THAT OUR PRODUCTS WILL BE FULLY DEVELOPED OR ACCEPTED BY
THE MARKETS.
Due to the early-stage development of our e-commerce products and
services, no assurance can be given that these products or services can be
developed into commercial products, manufactured on a large scale or be
economical to market. Nor can there be any assurance that these products or
services will achieve or sustain market acceptance. There is, therefore,
substantial risk that our product and service development and commercialization
efforts will not prove to be successful.
There can be no assurance that physicians, medical providers or the
medical community in general will accept and utilize our products and services.
The extent that, and rate of which, these products achieve market acceptance and
penetration will depend on many variables including, but not limited to, a
timely penetration of the market, the establishment and demonstration in the
medical community of the clinical safety, efficacy and cost-effectiveness of
these products and services, the advantage of these products over existing
technology, third-party reimbursements practices and our manufacturing, quality
control, marketing and sales efforts. There can be no assurance that the medical
community and third-party payors will accept our technology or services. Similar
risks will confront any other products and services we develop in the future.
Failure of our products and services to gain market acceptance would have a
material adverse effect on our business, financial condition, and results of
operations.
OUR LIMITED MARKETING AND SALES RESOURCES COULD PREVENT US FROM EFFECTIVELY
MARKETING OUR PRODUCTS AND SERVICES.
We have limited internal marketing and sales resources and personnel. In
order to market any products and services we may develop, we will have to
develop a marketing and sales force with technical expertise and distribution
capability (or outsource such duties to independent contractors). There can be
no assurance that we will be able to establish sales and distribution
capabilities or that we will be successful in gaining market acceptance for any
products or services we may develop. There can be no assurance that we will be
able to recruit and retain skilled sales, marketing, service or support
personnel, that agreements with distributors will be available on terms
commercially reasonable to us, or at all, or that our marketing and sales
efforts will be successful. Failure to successfully establish a marketing and
sales organization, whether directly or through third parties, would have a
material adverse effect on our business, financial condition, cash flows, and
results of operations. To the extent that we arrange with third parties to
market our products or services, the success of such products and services may
depend on the efforts of such third parties. There can be no assurance that any
of our proposed marketing schedules or plans can or will be met. No material
e-commerce product sales have been made to date.
THE NATURE OF OUR BUSINESS EXPOSES US TO PROFESSIONAL AND PRODUCT LIABILITY
CLAIMS, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR OPERATIONS.
Our business and e-commerce technology exposes us to potential
professional and product liability risks, which are inherent in such businesses
and products. There can be no assurance that we will not be subjected to future
claims and potential liability. While we plan to maintain insurance against
professional and product liability and defense costs, there can be no assurance
that claims against us arising with respect to our products or services will be
successfully defended or that the insurance to be carried by us will be
sufficient to cover liabilities arising from such claims. A successful claim
against us in excess of our insurance coverage could have a material adverse
effect on us. Furthermore, there can be no assurance that we will be able to
continue to obtain or maintain liability insurance on acceptable terms.
THE LOSS OF CERTAIN MEMBERS OF OUR MANAGEMENT TEAM COULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS.
We will be dependent to a significant extent on the continued efforts and
abilities of our Chairman, Michael Morrell, and other key employees.
Notwithstanding our ownership of a one million dollar key-man life insurance
policy on each of Mr. Morrell and our President, Mr. Paul C. Pershes, if we were
to lose the services of either individual or other key employees before a
qualified replacement could be obtained, our business could be materially
adversely affected.
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THE HEALTHCARE INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY BE ABLE TO EFFECTIVELY
COMPETE.
The healthcare industry in general and the market for medical services and
equipment in particular, are highly competitive. We compete with companies that
are larger in size and have access to considerably greater financial resources
than we have. We compete by providing more personalized care to the patients
they serve, as well as providing patient transportation and pharmaceutical
delivery.
The primary competitors for products produced by our subsidiary,
Cybercare, are small, privately held companies and none has established a major
market position as of this time. Key differentiators between Cybercare and its
competitors lie primarily in the network architecture Cybercare has built to
serve this market. Unlike our known competitors, Cybercare is unique in the
automatic collection, transmission, and logging of vital signs measurements to a
central database where the information can be viewed by a caregiver on a
real-time basis or whenever necessary. Known competitive systems require the
manual entry of information. We have a patented TCP/IP protocols for the
transmission of medical data in a two-way interactive voice and video session
between patients and caregivers.
In our sleep lab business segment, there are no clear market leaders or
major competition. Most of the independents are either labs in hospitals or
physicians interested in sleep that have started labs as an adjunct to their
local practice.
Our air ambulance business has numerous smaller competitors with
short-range aircraft, but has limited competitors with aircraft capability of
performing international and, in particular, trans-Atlantic flights. Medjet in
Alabama, Kalitta in Detroit and Sky Service in Toronto are the biggest
competitors in the international market.
In our rehabilitation business, there are numerous competitors larger in
size than we are and which have access to considerably greater financial
resources than we have.
Our pharmaceutical business competes directly in the sale and delivery of
prescription drugs to individuals living in adult living facilities. There are
numerous competitors larger in size which have access to considerably greater
financial resources. We rely primarily on reputation and service to market our
services. Our inability to compete with our competitors could have a material
adverse effect on our business.
YOU WILL EXPERIENCE DILUTION OF THE VALUE OF YOUR INVESTMENT IN US.
The shares and the warrant shares are dilutive to the current outstanding
and issued shares of common stock and the consummation of the offering may have
an adverse effect on the public trading price of our common stock.
Our Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights, and preferences as may be
determined from time to time by our Board of Directors. Accordingly, our Board
of Directors is empowered, without stockholder approval, to designate and issue
additional series of preferred stock with dividend, liquidation, conversion,
voting or other rights, including the right to issue convertible securities with
no limitations on conversion, which could adversely affect the voting power or
other rights of the holders of our common stock, substantially dilute the common
shareholder's interest and depress the price of our common stock. In addition,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control. Moreover, the
substantial amount of outstanding debentures and number of warrants, and their
terms of conversion, may discourage or prevent us from being acquired.
WE HAVE NEVER PAID DIVIDENDS AND WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE
FUTURE.
We have never paid dividends on our common stock and we do not presently
intend to pay any dividends in the foreseeable future. We anticipate that any
funds available for payment of dividends will be re-invested to assist us in
furthering our business strategy.
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YOU WILL NOT HAVE THE ABILITY TO DIRECT HOW WE WILL USE THE FUNDS YOU INVEST IN
US.
The net proceeds from this offering will be used for the purposes
described under "Use of Proceeds." We reserve the right to use the funds
obtained from this offering for other purposes not presently contemplated which
we deem to be in our best interests and our stockholders in order to address
changed circumstances and opportunities. These additional uses may include, with
limitation, the use of funds for acquisitions and payment of debt. As a result
of the foregoing, our success will be substantially dependent upon the
discretion and judgment of management with respect to the application and
allocation of the net proceeds of the offering. Investors for the shares offered
hereby will be entrusting their funds to our management, upon whose judgment and
discretion the investors must depend, with only limited information concerning
management's specific intentions.
OUR CURRENT SHAREHOLDERS MAY SELL SHARES OF OUR COMMON STOCK, WHICH MAY HAVE A
DEPRESSIVE EFFECT ON THE MARKET AND DECREASE THE MARKET VALUE OF YOUR
INVESTMENT.
There are currently approximately 12,000,000 shares of our common stock
outstanding which are "restricted securities" as that term is defined by Rule
144 under the Securities Act. Such shares will be eligible for public sale only
if registered under the Securities Act or if sold in accordance with Rule 144.
Under Rule 144, a person who has held restricted securities for a period of one
year may sell a limited number of shares to the public in ordinary brokerage
transactions. Sales under Rule 144 may have a depressive effect on the market
price of our common stock due to the potential increased number of publicly held
securities. The timing and amount of sales of common stock that are currently
restricted securities could have a depressive effect on the future market price
of our common stock.
THERE IS ONLY A VOLATILE LIMITED MARKET FOR OUR COMMON STOCK.
Recent history relating to the market prices of public companies indicates
that, from time to time, there may be significant volatility in the market price
of our securities because of factors unrelated, as well as related, to our
operating performance. Factors such as announcements of new services to be
provided by us or our competitors, government regulatory action, and market
conditions for healthcare company stocks in general could have a significant
impact on the future market price of our common stock.
IF WE ARE UNABLE TO MAINTAIN OUR NASDAQ LISTING STATUS, WE MAY BECOME SUBJECT TO
RULES THAT WILL LIMIT YOUR ABILITY TO SELL THE SHARES OF OUR COMMON STOCK YOU
OWN.
Our common stock is presently included for trading on the NASDAQ SmallCap
Market System. If we are unable to meet, on a continual basis, the NASDAQ
requirements for continued listings, our common stock will be de-listed from
NASDAQ. If we fail to meet these requirements then in order to return to NASDAQ
we must qualify for the initial listing requirements which are substantially
more onerous than continued listing requirements. If our common stock is
de-listed from NASDAQ, our common stock will most likely trade on the NASD OTC
Bulletin Board. As a result, our common stock will be covered by a Commission
rule that imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction prior
to the sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell our securities and may also adversely affect the ability
of shareholders to sell their shares in the secondary market.
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COMPUTER PROBLEMS ASSOCIATED WITH THE YEAR 2000 COULD HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS.
We are aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. Many existing computer
programs use only two digits to identify a year in the date field. The issue is
whether such code exists in mission-critical applications and if that code will
produce accurate information with relation to date-sensitive calculations after
the turn of the century. While we believe that our computer systems are, for the
most part, Year 2000 compliant, there can be no assurance that we will be
completely successful in our efforts to address the Year 2000 issues. In
addition, we have determined that the computer systems in our three mobile cath
labs are not Year 2000 compliant. Accordingly, we are in the process of
addressing this issue and may incur substantial costs in order to bring these
systems into compliance. It is estimated that the cost to upgrade or replace
systems will be approximately $100,000 per lab.
We are also dependent on third parties such as customers, patients,
suppliers, service and equipment providers, payors (including Medicare) and
other business partners. If these parties fail to adequately address Year 2000
issues, we could experience a negative impact on our business operations or
financial statements. For example, the failure of certain of our principal
payors such as Medicare to have Year 2000 compliant internal systems could
impact reimbursements to us and therefore severely impact our cash flow. Because
of the many uncertainties associated with the Year 2000 compliance issues, and
because our assessments are necessarily based on information from third-party
vendors, payors and suppliers, there can be no assurance that our assessment is
correct as to either the materiality or the effect of such compliance, including
compliance by third-party payors.
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WE ARE SUBJECT TO A SIGNIFICANT NUMBER OF HEALTHCARE INDUSTRY REGULATIONS AND
RELATED REGULATIONS, WHICH, IF WE FAIL TO COMPLY WITH THEM, COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATIONS.
We are subject to substantial potential liability resulting from a variety
of possible causes, including breach of numerous healthcare laws, malpractice
and product liability. While we currently are not a party to any regulatory
action or material litigation, if any actions or lawsuits in the future are
brought against us, such actions or lawsuits may have a materially adverse
effect on us even if such lawsuits are without merit. Our attempt to minimize
our potential liability through adherence to compliance procedures, effective
case supervision and personnel recruitment procedures. We also carry a variety
of insurance policies including policies insuring against certain negligent
acts. There can be no assurance, however, that such insurance policies will
adequately cover our losses resulting from liability, or that we will continue
to qualify for, or be able to afford or obtain, insurance in the future. We
currently maintain general and professional liability insurance for our
operations in the single limit amount and aggregate annual limit amount of
$10,000,000. There is no assurance that any potential claims will or will not
exceed this limit.
Our air ambulance transport business is subject to significant federal and
international government regulations relating to airline safety, capital
requirements, licensing, maintenance, scheduling, and similar aspects of our
operations. Due to the nature of aircraft operations, applicable regulations and
our policy, we incur substantial expenses associated with the maintenance of our
aircraft fleet. Although we believe that our 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 our business.
Our physical rehabilitation and sleep therapy business are subject to
extensive federal and state regulations related to fee limitations, quality
control requirements and accounting and cost tracking requirements. These
operations are subject to periodic review and inspection of facilities, patient
records and billing policies which, if the applicable regulatory agency finds
deficiencies, may result in reduction or stoppage of reimbursements and/or fines
and penalties. Additionally, these operations are subject to severe restrictions
relative to referrals from and compensation to physicians as provided by the
Federal Stark rules and Florida Self-Referral rules. Violations of any of these
rules can result in penalties and fines and some cases criminal sanctions. See
discussion relative to Federal Anti-Kickback Laws and Florida and Federal
Self-Referral Laws.
Our pharmacy business is also subject to extensive federal and state
regulations, many of which are specific to pharmacies and the sale of
over-the-counter drugs. Regulations in this area often require subjective
interpretation, and we cannot be certain that our attempts to comply with these
regulations will be deemed sufficient by the appropriate regulatory agencies.
Violations of any of these regulations could result in various civil and
criminal penalties, including suspension or revocation of our licenses or
registrations, seizure of our inventory, or monetary fines, which could
adversely affect our operations.
We are also subject to laws and regulations regarding homeopathic drugs,
and we may face enforcement actions, lawsuits or claims asserting that we have
not complied with these laws and regulations. As we expand our product and
service offerings, more of our products and services will likely be subject to
regulation by the FDA, which regulates drug advertising and promotion. Complying
with FDA regulations is time consuming, burdensome and expensive, and could
delay our introduction of new products and services.
The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. Regulations have been proposed to implement these
requirements, and we are designing our applications to comply with the proposed
regulations. However, until these regulations become final, possible changes in
these regulations could cause us to use additional resources and lead to delays
as we revise our operations.
Management of our Internet business believes that Cybercare's products
will be subject to regulation by the Food and Drug Administration. We expect to
file for 510-K approval by the Food and Drug Administration later in 1999. Since
we use vital signs measuring devices which are already approved by the FDA, we
believe that obtaining this approval for our products will be accomplished in
90-120 days from the time application is made. Complying with FDA regulations is
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time consuming, burdensome and expensive, and we could be delayed or prevented
from our introducing of our Internet products and services which would have a
material adverse affect on our business.
WE RECENTLY ACQUIRED CYBERCARE AND ARE SUBJECT TO SUBSTANTIAL RISK RELATING TO
THE INTEGRATION OF CYBERCARE'S BUSINESS AND OPERATIONS WITH OURS.
The continuing successful operation of the businesses acquired in the
Cybercare acquisition is largely dependent upon the retention of the key
management personnel of Cybercare. Because the business acquired represents a
diversification of our business functionally and geographically, the loss of any
of the key management personnel from Cybercare could have an adverse effect on
one or both of the businesses and upon the realization of the benefits
anticipated from the Cybercare acquisition.
In determining that the Cybercare acquisition is in our best interests,
the Board of Directors has assumed the continuation of the business of
Cybercare, and that such business can be assimilated into our operations with
relative ease. Under the terms of the employment agreement with Mr. Haines, he
will continue his management of the acquired operations in a largely autonomous
manner and with minimal direct oversight by our Board of Directors and executive
officers. The employment agreement is intended to provide consistent management
of the acquired operations; however, the difficulties of assimilation may be
increased by the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. The process of combining the acquired
businesses may cause an interruption of, or a loss of momentum in, our business,
which could have an adverse effect on the revenues and operating results of the
combined companies. There is no assurance that we will be able to retain all key
management and other operating personnel or that we will realize any of the
other anticipated benefits of the Cybercare acquisition.
THE SHARES OF OUR COMMON STOCK WE ISSUED IN THE CYBERCARE ACQUISITION COULD
SIGNIFICANTLY DILUTE THE VALUE OF YOUR INVESTMENT IN US.
We issued an aggregate of 7,400,000 shares of common stock as
consideration for the Cybercare acquisition which represented approximately 19%
of the number of shares of common stock outstanding as of September 1, 1999. The
Cybercare acquisition has the effect of substantially reducing the existing
percentage voting interest prior to the Cybercare acquisition. The substantial
ownership of common stock by the Cybercare stockholders, as a group, provides
them with the ability to exercise substantial influence in the election of
directors and other matters submitted for approval by our stockholders. Further,
the ownership of common stock by the Cybercare stockholder who became a director
together with our present officers and directors and their affiliates will then
represent approximately 32% of our outstanding shares. Such concentrations of
ownership of the common stock may make it difficult or impossible for our other
stockholders to successfully advocate or oppose matters which may be submitted
for stockholder action. Such ownership may also have the effect of delaying,
deterring or preventing a change in control of the company without the consent
of such major stockholders. In addition, sales of common stock by such major
stockholders could result in a change in control of the company.
On a pro forma basis, the Cybercare acquisition had a dilutive effect on
our book value per share as of September 30, 1999 and will reduce earnings per
share. The extent of dilution or enhancement to our Stockholders with respect to
future book value and earnings per share will depend on the actual results
achieved following the Cybercare acquisition as compared with the results that
could have been achieved on a stand-alone basis over the same period in the
absence of the Cybercare acquisition. There is no assurance as to such future
results, and, accordingly, as to whether the Cybercare acquisition will
ultimately be dilutive or accretive to our future book value per share or
earnings per share.
The shares issued in the Cybercare acquisition are considered 'restricted
securities' under applicable securities laws, thereby limiting the resale of
such shares into the public market. All of such shares will, however, become
eligible for sale in the public market in accordance with SEC Rule 144 one year
following the closing with certain volume and manner of sale limitations
continuing for only one year thereafter (except as to shares held by persons
deemed to be affiliates). In addition, we have agreed to file a registration
statement to register the shares with the SEC by February 10, 2000.
Approximately four million three hundred seventy one thousand shares are also
restricted by the lock-up provisions of the exchange agreement; it is not
anticipated that a majority of such shares would be offered for sale until 2001.
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WE DEPEND ON REIMBURSEMENT FROM THIRD PARTIES FOR A SUBSTANTIAL PORTION OF OUR
REVENUE.
A substantial amount of our services are purchased by patients, managed
care organizations and medical facilities which provide healthcare services to
their patients. Such organizations, facilities or patients typically bill or
seek reimbursement from various third-party payors such as Medicare, Medicaid,
other governmental programs and private insurance carriers for the charges
associated with the provided healthcare services. We believe that our market
success will largely depend upon obtaining favorable contracts and receiving
timely reimbursement for our products and services from such programs and
carriers.
IF WE DO NOT RECEIVE, AND CONTINUE TO RECEIVE, REFERRALS FROM PHYSICIANS AND
OTHER MEDICAL PROVIDERS, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.
A significant portion of our business depends upon, among other things,
the efforts and success of the physicians, medical providers and others who
refer patients and provide services to our businesses and the strength of our
relationships with such physicians and other individuals and entities. Our
business, financial condition and results of operations could be adversely
affected by the failure of these physicians, medical providers and others to
refer patients, maintain the quality of medical care or otherwise adhere to
required professional guidelines.
Our rehabilitation, sleep and pain businesses are dependent upon revenues
received as a result of referrals made by physicians. We market each of the
services in various methods, including customer and physician referrals,
reputation in the community and third parties. We rely upon community
reputation, customer referral, physician and other medical resource referrals.
In addition, we have in place a three-tier service system that enters local
communities and utilizes a screening program and an in-home lab program. We also
rely upon independent brokers, personal contacts and healthcare provider
referrals to approach new customers. We also staff exhibit booths at major
industry-specific conventions to attract hospital groups, insurance companies,
assistance companies and managed care organizations. We rely heavily on
referrals to perform high-tech procedures. Most of the marketing for our mobile
labs is based on our reputation in the medical community. There can be no
guarantee that any physician will choose to refer patients to us. In addition,
physicians affiliated with us may not, under certain circumstances, refer
patients. In the event that, for any reason, physicians do not use the ancillary
medical service businesses operated by us, such loss of patients could have a
material adverse effect on our business, financial condition and results of
operation. Furthermore, it is possible that third-party payors may refuse to
approve referrals to ancillary medical care facilities owned by us, but rather
require that such referrals be made to other facilities. Such a requirement
could have a material adverse effect on our business, financial condition and
results of the operations. Further, our physical rehabilitation companies derive
a significant portion of their revenue from Medicare patients. Recent
adjustments to Medicare's allowances with respect to rehabilitation services
have significantly limited the amount of revenues that we may derive from
services rendered to Medicare patients. There is no assurance that future
changes to Medicare's reimbursement policy will not have a significant adverse
effect on revenues derived from these sources.
WE MAY BE SUBJECT TO SUBSTANTIAL PENALTIES WHICH COULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS IF WE FAIL TO COMPLY WITH THE FEDERAL ANTI-KICKBACK LAWS
WHICH ARE VERY BROAD AND DIFFICULT TO INTERPRET.
Federal law, 42 USC ss.1320a-7b (the "Anti-Kickback Law"), prohibits
anyone from knowingly and willfully offering, paying, soliciting or receiving
any remuneration in return for the referral of patients or other business that
is paid for in whole or in part by a federal healthcare program including the
Medicare and Medicaid programs, or in return for inducing a person to recommend
purchasing, leasing or ordering items or services that are paid for, in whole or
in part, by a federal healthcare program. The Anti-Kickback Law is very broad in
scope and its provisions are not well defined by existing case law or
regulation. Violations of the Anti-Kickback Law may result in substantial civil,
criminal and/or administrative penalties under Federal and/or state law for
individuals or entities. A violation of the Anti-Kickback Law is a felony
punishable by a fine of up to $25,000 or imprisonment for up to five years, or
both. A violation may also result in civil monetary penalties of up to $10,000
for each violation, plus three times the amount claimed, and exclusion from
participation in the federal healthcare programs, including Medicare and
Medicaid, as well as serve as the basis for a claim under the United States
False Claims Act. Exclusion from participation in the federal healthcare
programs, as well as the
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other sanctions available under federal and state law, if applied to us, would
result in significant loss of reimbursement and would have a material adverse
effect on us.
The United States Department of Health and Human Services Office of the
Inspector General ("OIG"), the federal agency with primary responsibility for
enforcing the Anti-Kickback Law, has issued regulations that define
relationships that are immune from prosecution under the Anti-Kickback Law (the
"Safe Harbor" regulations). Each Safe Harbor includes a series of standards, all
of which must be satisfied for a business or compensation arrangement to benefit
from the protection offered by a specific Safe Harbor.
Two of the Safe Harbors address investment interests held by parties who
are in a position to refer patients or other business (1) in entities whose
securities are publicly traded that have more than $50,000,000 in undepreciated
net tangible assets, and (2) in those entities in which (a) no more than 40% of
the value of the investment interests of each class of investors may be held by
investors in a position to make referrals; (b) the terms of an investment
interest offered to a passive investor in a position to make referrals must be
no different than those offered to other passive investors; (c) the terms of an
investment interest offer to an investor in a position to make referrals or
generate business must not be based on the volume or value generated from the
investor to the entity; (d) there is no requirement that a passive investor make
referrals or generate business for the entity as a condition to remaining as an
investor; (e) the entity's services or items must not be marketed to passive
investors differently than non-investors; (f) no more than 40% of the entity's
gross revenue may come from referrals or business generated by investors; (g)
the entity must not loan or guarantee funds to an investor in a position to make
referrals if used to obtain the investment interest; and (h) the amount of
return to the investor must be directly proportional to the amount of capital
investment. We believe an investment interest in us will currently satisfy the
standards of this second Safe Harbor.
Other Safe Harbors address the structuring of employment and personal
services agreements. The employment safe harbor protects amounts paid by an
employer to an employee who has a bona fide employment relationship with such
employer, for the employment in the provision of items or services covered by a
federal healthcare program. In order to be protected under the personal services
safe harbor, independent contractor relationships, like our medical director
agreements, must satisfy certain standards. These standards include the
requirement that the aggregate compensation over the term of the arrangement
must be consistent with the fair market value of the services being rendered and
not determined in a manner that takes into account the volume or value of
patient referrals or other business between the parties that is paid for, in
whole or in part, by a federal healthcare program. We believe that we currently
meet the requirements of both of these Safe Harbors.
Notwithstanding our belief that it currently satisfies the investment
interest, employee and personal services Safe Harbors to the Anti-Kickback Law,
no assurance can be given that a federal agency charged with enforcement and/or
interpreting the Anti-Kickback Law, or a private party, will not successfully
assert a contrary position, or that future federal statutes, regulations,
administrative interpretations and/or judicial decisions would cause an
investor's referral to be prohibited, or result in the imposition of penalties
on us or investors. Even the assertion of a violation could have a material
adverse effect upon the financial condition and results of our operation.
Further, in addition to complying with the Anti-Kickback Law, physician
investors must also comply with both federal and Florida laws governing
physician self-referrals discussed below.
The OIG has adopted a procedure whereby it will provide guidance (an
"Advisory Opinion") as to whether a party's participation in a particular
business or compensation arrangement would be viewed as violating the
Anti-Kickback Law. An Advisory Opinion is available to the participants in a
business or compensation arrangement who are willing to disclose certain
information to the OIG. An Advisory Opinion may be relied on only by the
requesting party and is binding on the OIG only with respect to that
transaction; provided, if the OIG later determines the requestor failed to
disclose material information, the OIG will no longer be bound. A prospective
investor should be aware that we do not intend to seek an Advisory Opinion
regarding our compliance with the Anti-Kickback Law from the OIG.
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WE MAY ALSO BE SUBJECT TO PENALTIES WHICH COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS IF WE FAIL TO COMPLY WITH THE FLORIDA AND FEDERAL SELF-REFERRAL LAWS.
Florida's prohibition on self-referrals prohibits healthcare providers
from referring patients, regardless of payment source (not just Medicare and
Medicaid beneficiaries), for the provision of certain designated health services
("Florida Designated Health Services") to an entity in which the healthcare
provider is an investor or has an investment interest. Under the Self-Referral
Act, Florida Designated Health Services are defined as clinical laboratory,
physical therapy, comprehensive rehabilitative, diagnostic-imaging and radiation
therapy services. We plan to purchase and currently operate facilities that
provide some or all of these Florida Designated Health Services. All healthcare
products and services not considered Florida Designated Health Services are
classified as "other health services." 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 (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 net equity at the end of its most recent fiscal quarter in excess of
$50,000,000; or (2) the physician's investment interest is in an entity whereby
(a) 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; (b)
the terms under which an investment interest is offered must be the same for
referring investors and non-referring investors; (c) the terms under which an
investment interest is offered may not be related to the investor's volume of
referrals to the entity; and (d) 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 exception must also (1) not lend, 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, and (2) distribute
profits and losses to investors in a manner that is directly proportional to
their capital investment.
The Self-Referral Act excludes from the definition of "referral" certain
services provided by specific healthcare providers such as referrals by a
cardiologist for cardiac catheterization services. We believe that physician
investors that are cardiologists may refer patients to it for cardiac
catheterization services because of this provision. There are, however, no
assurances that the definition of what constitutes a referral will remain in
place.
The definition of referral also excludes services by a healthcare provider
who is a sole provider or member of a group practice that are provided solely
for the referring healthcare provider's or group practice's own patients.
Physician investors cannot refer to us for Florida Designated Health Services
based upon this exception under the Self-Referral Act because we do not provide
Florida Designated Health Services solely for the referring physician's or his
or her group practice's own patients. So long as physician investors do not
refer to us for Florida Designated Health Services, we believe we will be in
compliance with the Self-Referral Act. Although we will have mechanisms in place
to monitor referrals from physician investors, it is the responsibility of the
physician investors to comply with the Self-Referral Act and there can be no
assurances that physician investors will comply with such law. Violations
thereof could adversely affect us, as well as result in regulatory action
against us.
The Self-Referral Act also imposes certain disclosure obligations on us
and physician investors that are 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, even for services that are not Florida Designated Health Services,
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 physician investors refer patients. Appropriate
disclosures will be required for physician investors. It is the responsibility
of any referring physician investor to comply with such statutes, regulations
and professional standards. However, this law may discourage certain physician
investors from making referrals to us or encourage patients to choose
alternative healthcare providers. In addition, the violation thereof could
adversely affect us, as well as result in regulatory action against us.
The Federal statute relating to self-referrals, 42 USC ss.1395 nn (the
"Stark Law"), restricts the ability of a physician to refer patients for the
furnishing of certain designated health services ("Designated Health Services")
to healthcare entities when the physician (or immediate family member) has a
financial relationship, directly or indirectly, with the entity receiving the
referral. Moreover, the entity may not present or cause to be presented a claim
or bill for the Designated Health Services, either to the Medicare or Medicaid
programs or any other individual or third-party payor. The
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financial relationship may be either an investment interest (either equity or
debt) or a compensation arrangement. Designated Health Services for purposes of
the Stark Law include: (1) clinical laboratory services, (2) physical therapy
services, (3) occupational therapy services, (4) radiology services, including
magnetic resonance imaging, computerized axial tomography scans, and ultrasound
services, (5) radiation therapy services and supplies, (6) durable medical
equipment and supplies, (7) parenteral and enteral nutrients, equipment, and
supplies, (8) prosthetics, orthotics, and prosthetic devices and supplies, (9)
home health services, (10) outpatient prescription drugs, and (11) inpatient and
outpatient hospital services.
There are exceptions to the Stark Law that apply (1) to both ownership or
investment interests and compensation arrangements, (2) only to ownership or
investment interests, or (3) only to compensation arrangements. Our current
structure will not meet any of the exceptions to permit a physician investor's
referral for Designated Health Services. Therefore, physician investors cannot
refer to us for Designated Health Services. Although we will have mechanisms in
place to monitor referrals from physician investors, it is the responsibility of
physician investors to comply with the Stark Law and no assurance can be given
that physician investors will comply with such law.
Two of the exceptions that protect only compensation arrangements are for
employees and personal services and their requirements are similar to the Safe
Harbor requirements discussed above. However, unlike the Safe Harbors to the
Anti-Kickback Law, the exceptions to the Stark Law must be complied with fully.
We believe we currently meet the requirements of both of these exceptions.
Notwithstanding our belief that we currently are in compliance with the
Stark Laws, no assurance can be given that a federal agency charged with
enforcement and/or interpreting the Stark Law, or a private party, might not
successfully assert a contrary position, or that future federal statutes,
regulations, administrative interpretations and/or judicial decisions would
cause an investor's referral to be prohibited, or result in the imposition of
penalties on us or investors. Even the assertion of a violation could have a
material adverse effect upon our financial condition and results of the
operation.
Violations of the Florida and Federal self-referral laws may result in
substantial civil penalties and administrative sanctions for individuals or
entities, including exclusion from participation in the Medicare and Medicaid
programs, as well as the suspension or revocation of a physician's license to
practice medicine and surgery in Florida. Such sanctions, if applied to us or
any of our physician investors, would result in significant loss of
reimbursement and could have a material adverse effect on us.
An Advisory Opinion procedure similar to that discussed above and the
Declaratory Statement procedure also are available for parties seeking guidance
as to whether a specific transaction violates the Stark Law or the Self-Referral
Act, as the case may be. Potential investors should be aware that we do not
intend to seek the guidance available under either of these procedures.
FAILURE TO PROPERLY SUBMIT CLAIMS FOR REIMBURSEMENT COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION. We are subject to numerous state and federal laws that
govern the submission of claims for reimbursement to third-party payors,
including state and federal healthcare programs (e.g., Medicare and Medicaid).
These laws generally prohibit an individual or entity from presenting a claim
(or causing a claim to be presented) for payment by Medicare, Medicaid or any
other third-party payor that is false or fraudulent. The penalties available for
violations of these statutes include substantial civil and criminal fines,
imprisonment, exclusion from the federal healthcare programs and licensure
revocation.
One of the most prominent of these laws is the Federal False Claims Act,
which may be enforced by the federal government directly, or by a qui tam
plaintiff on the government's behalf. Under the False Claims Act, both the
government and the private plaintiff, if successful, are permitted to recover
substantial monetary penalties, as well as an amount equal to three times actual
damages. The State of Florida has a similar statute that governs claims made to
it. In recent cases, some qui tam plaintiffs have taken the position that
violations of the Anti-Kickback Law and the Stark Law should also be prosecuted
as violations of the Federal False Claims Act. We believe that we have
procedures in place to ensure the accurate completion of claim forms and
requests for payment.
NEW LEGISLATIVE DEVELOPMENTS COULD RESULT IN FINANCIAL HARDSHIP. In
addition, proposed legislation regarding healthcare reform has been introduced
before many state legislatures. Any such reforms at the federal or state level
could significantly alter patient-provider relationships. State and federal
agency rule-making addressing these issues is also
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expected. No predictions can be made as to whether future healthcare reform
legislation, similar legislation or rule-making will be enacted or, if enacted,
its effect on us. Any federal or state legislation prohibiting investment
interests in, or contracting with, us by physicians or healthcare providers for
which there is no statutory exception or safe harbor would have a material
adverse effect on our business, financial condition and results of operations.
WE MAY BE UNDER MANAGED CARE CONTRACTS. There can be no assurance that we
will be able to obtain managed care contracts. Our future inability to obtain
managed care contracts in our markets could have a material adverse effect on
our business, financial condition or results of operations. In addition, federal
and state legislative proposals have been introduced that could substantially
increase the number of Medicare and Medicaid recipients enrolled in HMOs and
other managed care plans. We will derive a substantial portion of our revenue
from Medicare and Medicaid. If such proposals are adopted, we may be unable to
obtain contracts from HMOs and other managed care plans serving Medicare and
Medicaid enrollees. Failure to obtain such contracts could have a material
adverse effect on our business, financial condition and results of operations.
HEALTHCARE LICENSING REQUIREMENTS MAY BE HIGHLY BURDENSOME. Although our
mobile cardiac catheterization services generally are not subject to healthcare
licensing requirements (we contract directly with hospitals), we must adhere to
the same standards as the hospitals we contract with, including standards for
sanitation, safety and personnel qualifications. We are also required to
register our X-ray equipment and pay annual registration fees to state radiation
control agencies. We believe that our cardiac catheterization operations are in
compliance with applicable registration and hospital license requirements.
We have recently suspended operations of our mobile cardiac
catheterization business as a result of our catheterization labs failing to meet
the guidelines for the licensing of catheterization labs as promulgated by the
Agency for Health Care Administration ("AHCA"). We anticipate that our labs,
which are presently undergoing improvements and changes, will again be
operational by the end of 1999 and that the cost of such improvements and
changes will not exceed $100,000 per lab. Once the improvements and changes are
completed, the labs will be subject to AHCA's inspection before the labs may be
operated. In addition, each provider site must be inspected by AHCA to ascertain
whether or not such site meets the AHCA guidelines. All of our customers may not
satisfy AHCA's requirements thereby allowing us to generate revenues. Such loss
of revenues over an extended period of time will have a significant adverse
impact on our earnings.
REGULATORY LIMITATION ON FEE-SPLITTING AND THE CORPORATE PRACTICE OF
MEDICINE COULD AFFECT OUR OPERATIONS. The laws of many states prohibit
physicians from splitting fees with non-physicians (or other physicians) and
prohibit non-physician entities from practicing medicine. These laws vary from
state to state and are enforced by the courts and by regulatory authorities with
broad discretion. Our business operations have not been the subject of judicial
or regulatory interpretation; thus, there can be no assurance that review of our
business by courts or regulatory authorities will not result in determinations
that could adversely affect our operations or that the healthcare regulatory
environment will not change so as to restrict our existing operations or their
expansion. In addition, the regulatory framework of certain jurisdictions may
limit our expansion into such jurisdictions if we are unable to modify our
operational structure to conform with such regulatory framework.
A determination in any state that we are engaged in the corporate practice
of medicine or any unlawful fee-splitting arrangement could render any
management agreement between us and a practice located in such state
unenforceable or subject to modification, which could have a material adverse
effect on us. Regulatory authorities or other parties may assert that we are or
a practice is engaged in the corporate practice of medicine in such states or
that the management fees paid to us by the managed practices constitute unlawful
fee-splitting or the corporate practice of medicine. If such a claim were
asserted successfully, we could be subject to civil and criminal penalties,
managed physicians could have restrictions imposed upon their licenses to
practice medicine, and we or the managed practices could be required to
restructure their contractual arrangements. Such results or the inability of us
or the managed practices to restructure our relationships to comply with such
prohibitions could have a material adverse effect on our financial condition and
results of operations.
CHANGES IN PAYMENT FOR MEDICAL SERVICES COULD HARM OUR BUSINESS. We
believe that trends in cost containment in the healthcare industry will continue
to result in a reduction in per-patient revenue for our practices. The
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federal government has implemented, through the Medicare program, the RBRVS
payment methodology for physician services. The RBRVS is a fee schedule that,
except for certain geographical and other adjustments, pays similarly situated
physicians the same amount for the same services. The RBRVS is adjusted each
year and is subject to increases or decreases at the discretion of Congress. To
date, the implementation of RBRVS has reduced payment rates for certain
procedures historically performed by our physicians. There can be no assurance
that any reduced operating margins could be recouped by us through cost
reductions, increased volume, introduction of additional procedures or
otherwise. Rates paid by non-governmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician, ambulatory
surgery center and hospital charges, and are generally higher than Medicare
payment rates. A change in the makeup of the patient mix of our practices as
well as the medical practices under our management that results in a decrease in
patients covered by private insurance or a shift by private payors to RBRVS or
similar payment structures could adversely affect our business, financial
condition or results of operations.
CERTIFICATE OF NEED. Some states, including Florida, require a
"certificate of need" prior to the acquisition of medical equipment or provision
of cardiac catheterization services by hospitals. In Florida, a certificate of
need is required for cardiac catheterization services only if the hospital
wishes to provide such services to in-patients. Typically, obtaining a
certificate of need approval is a costly and lengthy process, and may involve
adversarial proceedings brought by competing facilities. The hospital or
healthcare provider, rather than the Company, must apply for and obtain the
certificate of need, where required. As a result, we are unable to control or
accurately predict whether and how many potential customers will obtain
certificate of needs. Our ability to provide cardiac catheterization services to
hospitals and healthcare providers is dependent upon those entities obtaining a
certificates of need for such services.
PATIENT BROKERING ACT. Florida also has a criminal prohibition regarding
the offering, soliciting, or receiving of remuneration, directly or indirectly,
in cash or in kind, in exchange for the referral of patients (the "Patient
Brokering Act"). One of the exceptions to this prohibition is for business and
compensation arrangements that do not violate the Anti-Kickback Law.
Accordingly, so long as we are in compliance with the Anti-Kickback Law, then we
will be in compliance with the Patient Brokering Act.
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking" statements within the meaning
of Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995,
and we desire to take advantage of the "safe harbor" provisions in those laws.
Therefore, we are including this statement for the express purpose of availing
ourselves of the protections of these safe harbor provisions with respect to all
of the forward-looking statements we make. The forward-looking statements in
this prospectus reflect our current views with respect to possible future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties, including specifically the absence of
significant revenues, financial resources, a history of losses, a possibility
that technology cannot be completed or that its completion might be delayed,
significant competition, the uncertainty of patent and proprietary rights,
uncertainty as to royalty payments and indemnification risks, trading risks of
low-priced stocks and those other risks and uncertainties discussed herein that
could cause our actual results to differ materially from our historical results
or those we anticipate. In this prospectus, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify certain
forward-looking statements. You are cautioned to consider the specific risk
factors described in "Risk Factors" and elsewhere in this prospectus and not to
place undue reliance on the forward-looking statements contained in this
prospectus, which speak only as of the date of this prospectus. We undertake no
obligation to publicly revise these forward-looking statements to reflect the
effect of events or circumstances that may arise after the date of this
prospectus. All written and oral forward-looking statements made subsequent to
the date of this prospectus and attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this section.
PLAN OF DISTRIBUTION
Each selling shareholder is free to offer and sell his or her common
shares at such times, in such manner and at such prices as he or she may
determine. The types of transactions in which the common shares are sold may
include transactions in the SmallCap market (including block transactions),
negotiated transactions, the settlement of short sales of common shares, or a
combination of such methods of sale. The sales will be at market prices
prevailing at the time of sale or at negotiated prices. Such transactions may or
may not involve brokers or dealers. The selling shareholders have advised
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us that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities. The selling shareholders do not have an underwriter or coordinating
broker acting in connection with the proposed sale of the common shares.
The selling shareholders may effect such transactions by selling common
stock directly to purchasers or to or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commissions from the selling shareholders. They
may also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
Swartz Private Equity, LLC and each remaining selling shareholder and
any broker-dealer that acts in connection with the sale of common shares may be,
deemed to be an "underwriter" within the meaning of Section 2(11) of the
Securities Act. Any commissions received by such broker-dealers and any profit
on the resale of the common shares sold by them while acting as principals might
be deemed to be underwriting discounts or commissions. The selling shareholders
may agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the common shares against certain liabilities.
Because Swartz is an "underwriter," and the remaining selling shareholders
may be deemed to be "underwriters," within the meaning of Section 2(11) of the
Securities Act, the selling shareholders will be subject to prospectus delivery
requirements.
We have informed the selling shareholders that the anti-manipulation rules
of the SEC, including Regulation M promulgated under the Securities and Exchange
Act, may apply to their sales in the market and have provided the selling
shareholders with a copy of such rules and regulations.
Selling shareholders also may resell all or a portion of the common shares
in open market transactions in reliance upon Rule 144 under the Securities and
Exchange Act, provided they meet the criteria and conform to the requirements of
such Rule.
INVESTMENT AGREEMENT
OVERVIEW. On July 21, 1999, we entered into an investment agreement with
Swartz Private Equity, LLC. The investment agreement entitles us to issue and
sell, at our option, our common stock for up to an aggregate of $25 million from
time to time during a three-year period through July 21, 2002.
This is also referred to as a put right.
PUT RIGHTS. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which may be issued as a consequence of the invocation of that put right.
Additionally, we must give at least ten but not more than twenty business days'
advance notice to Swartz of the date on which we intend to exercise a particular
put right and we must indicate the number of shares of common stock we intend to
sell to Swartz. At our option, we may also designate a maximum dollar amount of
common stock (not to exceed $5 million) which we will sell to Swartz during the
put and/or a minimum purchase price per common share, if applicable, at which
Swartz may purchase shares during the put. The designated minimum purchase price
per common share shall be no greater than 85% of the closing bid price of our
common stock on the advanced put notice date. The number of common shares sold
to Swartz in a given put may not exceed the lesser of:
- 17.5% of the aggregate daily reported trading volume (excluding
certain block trades) during a period which begins on the business
day immediately following the day we invoked the put right and ends
on and includes the day which is ten business days after the date we
invoked the put right (excluding certain days where the common
shares trade below a Company specified minimum price),
- the intended put amount,
- the number of our shares which when multiplied by the put share
price equals $5 million,
- 9.9% of our common stock outstanding upon completion of the put.
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For each common share, Swartz will pay us the lesser of:
- the market price for the applicable pricing period, minus $.10, or
- 91% of the market price for the applicable pricing period.
Market price is defined as the lowest inter-day trade price for the common
stock during the applicable pricing period, one of which is the ten business
days following the date notice of the put was provided to Swartz and the other
of which is the ten business days following the first pricing period. However,
the purchase price may not be less than the designated minimum per share price,
if any, that we indicated in our notice.
WARRANTS. We have delivered to Swartz warrants to purchase 425,000 shares
of our common stock at anytime for five years at an exercise price of $1.9334.
Within five business days after the end of the second pricing period for each
put, we are required to issue and deliver to Swartz a warrant to purchase a
number of shares of common stock equal to 10% of the common shares issued to
Swartz in the applicable put. Each warrant will be exercisable at a price which
will initially equal 115% of the average closing bid price for five days
immediately preceding the put date. The warrants will have semi-annual reset
provisions. Each warrant will be immediately exercisable and have a term
beginning on the date of issuance and ending five years thereafter.
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS. Swartz is not
required to acquire and pay for any common shares with respect to any
particular put for which:
- we have announced or implemented a stock split or combination
of our common stock;
- we have paid a common stock dividend;
- we have made a distribution of our common stock or of all or any
portion of our assets between the put notice date and the date the
particular put closes; or
- we have consummated a major transaction (including a transaction,
which constitutes a change of control) between the advance put
notice date and the date the particular put closes.
SHORT SALES. Swartz and its affiliates are prohibited from engaging in
short sales of our common stock, except after they have received a put notice,
they may sell a number of shares in long sales or short sales, up to the number
of shares specified in the put notice and so long as such short sale is not at a
price below the greater of:
- our designated minimum put share price, plus $.10, or
- our designated minimum put share price, divided by $.91.
CANCELLATION OF PUTS. We must cancel a particular put between the date
of the advance put notice and the last day of the pricing period if:
- we discover an undisclosed material fact relevant to Swartz's
investment decision;
- the registration statement registering resales of the common
shares becomes ineffective; or
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- shares are delisted from the then primary exchange.
However, we will be required to issue common shares equal to the lesser
of:
- 17.5% of the daily reported trading volume during the pricing
period up to the applicable put cancellation date;
- the number of shares of common stock put to Swartz which when
multiplied by the applicable put share price equals the designated
maximum dollar amount for the put; or
- 9.9% of the total amount of our common stock that would be
outstanding upon completion of the put.
NON-USAGE FEE. On the last business day of each six-month period, if we
have not put $1,000,000 of our stock to Swartz, we will be required to pay
Swartz a non-usage fee equal to the difference between $100,000 and 10% of the
aggregate put amounts to Swartz during such six month period. This non-usage fee
shall be suspended, at our request, for up to nine months if we are undertaking
a secondary offering of our stock.
TERMINATION OF INVESTMENT AGREEMENT. We may also terminate our right to
initiate further puts or terminate the investment agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the investment
agreement or any related agreement.
RESTRICTIVE COVENANTS. During the term of the investment agreement, we
are prohibited from transferring, selling, or otherwise disposing of:
- any of our material assets in excess of $3 million (on any one
occasion) to any of our subsidiaries except for cash and for
business purposes, or
- of our material assets to any officer, director or owner of 20%
or more of our common stock.
RIGHT OF FIRST REFUSAL. During the term of the investment agreement and
for 90 days after its termination, we are prohibited from issuing or selling any
capital stock or securities convertible into our capital stock for cash in
private capital raising transactions, without obtaining the prior written
approval of Swartz which Swartz has agreed to not unreasonably withhold. In
addition, Swartz has the option for 10 days after receiving notice to purchase
such securities on the same terms and conditions. This right of first refusal
shall not apply to acquisitions, option plans or primary offerings of our common
stock.
SWARTZ'S RIGHT OF INDEMNIFICATION. We are obligated to indemnify Swartz
(including affiliates, their stockholders, officers, directors, employees and
agents) from all liability and losses resulting from any misrepresentations or
breaches we made in connection with the investment agreement, our registration
rights agreement, other related agreements, or the registration statement.
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
selling shareholders as of November 30, 1999. Except as set forth below, none of
the selling shareholders currently is an affiliate of ours, and none of them has
had a material relationship with us during the past three years. None of the
selling shareholders is or was affiliated with registered broker-dealers. An
asterisk indicates if their common stock ownership is less than one percent.
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<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP OF
COMMON STOCK AS MAXIMUM NUMBER OF AMOUNT AND PERCENTAGE OF
OF NOVEMBER 30, SHARES OF COMMON STOCK COMMON STOCK AFTER THE
NAME 1999 OFFERED FOR SALE SALE
- ----------------------------- --------------- ----------------------- -------------------------
NUMBER %
------------ -----------
<S> <C> <C> <C> <C>
Swartz Private Equity, L.L.C. -- 5,700,000 5,700,000 12.6
</TABLE>
THE COMPANY
GENERAL. Cyber-Care, Inc. was incorporated in September 1989 in the State
of Florida. Our name was changed in August 1999 as a result of the acquisition
of Cybercare, Inc. and our entry into the medical e-commerce business. Our
principal executive offices are located at 1903 S. Congress Ave., Suite 400,
Boynton Beach, Florida 33426 and our telephone number is (561) 737-2227.
Our active subsidiaries include: Cybercare, Inc, Pharmacy Care
Specialists, Inc., Your Good Health Network, Inc., Air Response North, Inc. and
our two other air ambulance subsidiaries, Tallahassee Sleep Disorders, Inc., and
Heart Labs of America, Inc.
We are in the business of developing, owning and operating integrated
medical delivery services by providing diversified medical technologies and
operating physical, occupational and speech therapy, sleep apnea, diagnostic and
treatment services, pharmaceutical services and international air ambulance
transport services. We also own and are developing an Internet-based solution
and interactive system that provides products and services to support remote
delivery of care, patient monitoring and education to the U.S. healthcare
market.
BUSINESS OPERATIONS
E-COMMERCE BUSINESS. In August 1999, we acquired CyberCare, Inc.
(Cybercare), a privately held Georgia corporation, which is developing an
Internet-based solution and interactive system that provides products and
services to support remote delivery of care, patient monitoring and education to
the U.S. healthcare market. Cybercare's executive offices are located in
Atlanta, Georgia as a wholly owned subsidiary of the Company.
OVERVIEW OF CYBERCARE. Cybercare is a development-stage Internet-based
solution and interactive company that intends to develop, manufacture, operate
and sale Internet-based technology and interactive system for use in assisting
in disease management. This technology support's services to support remote
delivery of care, patient monitoring and education to the U. S. healthcare
market. Cybercare's initial product system has been targeted specifically for
the high-cost, chronically ill patient population. Management believes that
preventive services for this patient population is an untapped $4 billion market
segment in the United States alone. We believe that our expertise in providing
services to payors and managed care companies combined with CyberCare's Internet
connectivity technology will allow us to link patients directly to healthcare
professionals.
DESCRIPTION OF CYBERCARE. In January of 1996, the Willow Group was formed
by John Haines for the purpose of developing and marketing telemedicine
solutions and technologies. In September of 1997, the Willow Group acquired
rights to technologies which had been developed by the Georgia Institute of
Technology and the Medical College of Georgia for monitoring chronically ill
patients in their homes. The Willow Group was then incorporated as Cybercare,
Inc. in October of 1997 in the State of Georgia.
As our wholly owned subsidiary, Cybercare will continue to develop, refine
produce and market of its key technologies for monitoring chronically ill
patients in their homes. Cybercare expects to achieve operational efficiencies
through the synergy with the Company and the Company's existing relationships
with insurance companies and other payors.
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MATERIAL AGREEMENTS. The technologies which Cybercare uses in its business
are licensed to Cybercare pursuant to an exclusive license agreement with
Georgia Tech Research Corporation and the Medical College of Georgia. This
license agreement gives Cybercare exclusive worldwide rights to the intellectual
property developed by the universities for tele-homecare and also gives rights
to tele-homecare technologies that may be developed by the universities in the
future. This license agreement further provides for certain royalty payments to
the universities and establishes a granting of stock as compensation for the
license agreement. In addition, this license agreement provides for ongoing
research and development support by the universities for Cybercare' activities.
Cybercare also has a joint marketing agreement with Nortel Networks, Inc.,
which provides for Nortel sales personnel to bring sales leads to Cybercare and
to work jointly to close Cybercare business with Nortel prospects. Cybercare has
a distribution agreement in place with Healthlink Group, LLC, which provides for
Cybercare equipment and services to be marketed by Healthlink Group for use in
assisted living facilities in designated markets and subject to Healthlink Group
attaining certain performance objectives. Cybercare also has a letter agreement
in place with the Mayo Clinic of Jacksonville, Florida for provision of
Cybercare services in support of tele-medicine projects in Florida.
DESCRIPTION OF MATERIAL PRODUCTS. Cybercare's initial product is the care
management system, which has two major components: the patient module and the
caregiver module. The patient module consists of a multimedia personal computer
with video conferencing capability in a very simple touch-screen user interface.
The patient module also includes interface drivers and medical devices which are
used by the patient to automatically collect vital diagnostic information,
including weight, temperature, blood pressure, ECG, heart and lung sounds
(electronic stethoscope), blood oxygen level, pulse rate, blood sugar levels,
etc. Vital sign information collected by the patient module is automatically
recorded in an electronic patient record maintained by the system within the
network. The caregiver module is also a personal computer-based application with
specialized software to permit a doctor or nurse to monitor a patient's vital
signs information and communicate directly with those patients. Both modules
function together so that measurement devices may be controlled from either end
and results are automatically collected, charted, and maintained for permanent
records. Tentatively scheduled for delivery in late 1999, the patient module is
being repackaged into a small, portable unit called the personal care management
system which a nurse can hand carry into a patient's home for connection to
standard telephone lines or other network interfaces. In addition, Cybercare
plans to provide network services to link these patients together into a common
environment, where resources can be made available 24 hours a day seven days a
week whenever the patient needs assistance.
STATUS OF PATENTS AND/OR COPYRIGHTS. One patent has been granted and one
application is pending to protect the technology licenses granted Cybercare, and
several additional claims are being prepared for patent applications in the
future. Cybercare has exclusive rights to those patents under its license
agreements with the Georgia Tech Research Corporation and the Medical College of
Georgia Research Institute. Based on recent communications between the Company's
attorneys and the U.S. Patent Office, the Company believes that it is likely,
although no assurance can be given, that the patent office will approve the
majority of the claims which have been filed for Cybercare's key technologies,
and that patents will be subsequently awarded.
CYBERCARE. Currently, Cybercare has four full-time and two part-time
employees. Services for functions such as accounting, competitive analysis,
marketing, software development, mechanical engineering, electrical engineering,
and industrial design are contracted for, as needed, with outside organizations.
OUR OTHER PRIMARY BUSINESSES.
AIR AMBULANCE TRANSPORT. We are taking advantage of what our management
believes is the growing air ambulance industry through our subsidiaries, Air
Response North, Inc., Global Air Rescue, Inc. and Global Air Charter, Inc.
Through these subsidiaries, we offer national and international fixed-wing air
ambulance transport services to ill, injured or otherwise incapacitated persons
requiring relocation and possible emergency medical care during flight.
Circumstances requiring our transport services include the relocation of
patients requiring specialized medical procedures such as organ transplants,
cancer treatment, specialized cardiac surgery, burn care, stroke care and
advanced brain and spinal cord surgery, as well as transportation to hospitals
and medical facilities recognized nationally for excellence in their respective
fields.
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Based in Denver, Colorado, our air ambulance transport companies maintain
an aircraft fleet which includes 15 owned and two leased aircraft. Air Response
has the competitive advantage generated by the long-range capabilities of its
Model 36 Learjets offering worldwide, intercontinental response capabilities. It
also has the added advantage of an in-house maintenance team, providing
expedient flight readiness equipped with state-of-the-art medical equipment
including the lifeport stretcher system, oxygen, suction pumps, compressed air
and a 1500 watt AC inverter.
PHYSICAL, OCCUPATIONAL AND SPEECH THERAPY CENTERS. We acquired Your Good
Health Network, Inc. effective October 16, 1998. Your Good Health was founded in
April 1997 by four individuals, three of whom founded and managed a similar
company which went public and was subsequently acquired by a much larger NYSE
company. The business objective of Your Good Health is to provide physical,
occupational, speech therapy and pain rehabilitation services. Your Good Health
intends to develop business operations within specific geographic locations
which can create synergies and operating efficiencies and satisfy the cost
containment requirements of significant payor sources.
Your Good Health currently owns and operates 49 rehabilitation and therapy
clinics and two physician sites in Boynton Beach and North Palm Beach, Florida.
Your Good Health currently has a total of approximately 100 people, including
nine employees in its corporate office providing management and administrative
services through a staff leasing company. Each physical therapy clinic typically
has three staff, including two fully licensed therapists and an administrative
secretary/rehabilitation aide. Physician offices typically have a staff of four,
including a medical assistant, nurse, technician and clerical aide.
Your Good Health services include: specialty programs like pain
management, coupled with traditional services such as primary care, orthopedic
and neurological physician services and comprehensive rehabilitation. These
services allow Your Good Health to be a unique healthcare provider. The
physicians' component is focused on specialized clinical programs that
complement the company's rehabilitation services. Your Good Health strategy is
to provide services which are less reliant upon governmental reimbursement and
to diversify its payor sources to more of a fee-for-service basis. Your Good
Health is focused to be minimally reliant upon managed care payors.
PHARMACEUTICAL SERVICES. We acquired Pharmacy Care Specialists, Inc. in
April 1998. Pharmacy Care Specialists is a closed network pharmacy employing
approximately 50 individuals with its principal place of business in Lakeland,
Florida. Pharmacy Care Specialists provides unit-dosed medications to over 2,500
residents in assisted-living facilities across Florida. Pharmacy Care
Specialists delivers medications to the facilities, provides training workshops
and does third-party billing. The future of the pharmacy industry is in a
transitional phase. We believe the area with potential for growth is in the
adult living facility, mail order and Internet pharmacy services. The insurance
industry has, in recent years, expanded its involvement with mail order
pharmacies. In essence, many insurance companies are requiring their
policyholders to order, by mail, their medications from an approved, contracted
pharmacy. This allows them to control expenses by stipulating the amount each
medication will be sold for, thus allowing them to increase their profit margin.
Realizing this, Pharmacy Care Specialists has targeted its marketing efforts to
accelerate the adult living facility and mail order business. As the population
ages and expands and many of these older individuals relocate to Florida, the
market for pharmaceuticals to assisted-living facilities and nursing homes
increases as does the direct-mail pharmacy market.
OUR OTHER BUSINESSES.
SLEEP CENTERS. Through our indirect wholly owned subsidiary, Tallahassee
Sleep Disorders, Inc., we offer sleep and disordered breathing diagnostic
programs to physicians and hospitals. We use the latest diagnostic equipment
along with the proprietary DataSmart screening program, involving screening,
home testing and testing in a complex lab. The majority of patients suffering
from sleep disorders have obstructive sleep apnea and snoring. It is estimated
that 40 million people suffer from sleep apnea and that 95% of these cases go
undiagnosed and untreated. In the past several years, sleep center studies have
been increasing by approximately 25% per year as technology and testing programs
are improved. Most of the studies to date have been performed by hospitals and
smaller, independent companies.
CARDIOLOGY ANCILLARY SERVICES. We currently operate three mobile cardiac
catheterization laboratories which perform outpatient cardiology procedures and
diagnostic tests through our wholly owned subsidiary Heart Labs of America, Inc.
Heart Labs typically contracts with smaller, non-urban hospitals which may not
have in-house cardiac catheterization
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capabilities, or larger hospitals which use the mobile labs for when they exceed
their existing capacity. Heart Labs is accredited by the Joint Commission on
Accreditation of Healthcare Organizations.
PROFESSIONAL LIABILITY INSURANCE. We currently maintain general and
professional liability insurance for our operations in the single limit amount
and aggregate annual limit amount of $5,000,000. There is no assurance that any
potential claims will or will not exceed this limit. While our 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 our
nurses and technologists, and interpret the results of the examinations. We
require the users of the mobile labs to carry medical malpractice insurance to
cover the physicians using our mobile labs.
COMPETITION. The healthcare industry in general and the market for
medical ancillary services are highly competitive.
We compete with companies that are larger in size and have access to
considerably greater financial resources than we do. We compete by providing
more personalized care to the patients they serve, as well as providing patient
transportation and pharmaceutical delivery.
The primary competitors for products produced by Cybercare are small,
privately held companies and none has established a major market position as of
this time. Key differentiators between Cybercare and its competitors lie
primarily in the network architecture Cybercare has built to serve this market.
Unlike our known competitors, Cybercare is unique in the automatic collection,
transmission, and logging of vital signs measurements to a central database
where the information can be viewed by a caregiver on a real-time basis or
whenever necessary. Known competitive systems require the manual entry of
information. We believe Cybercare is unique in using TCP/IP protocols for the
transmission of medical data in a two-way interactive voice and video session
between patients and caregivers.
In our pain and physical rehabilitation business, there are thousands of
treatment centers, clinics and facilities some of which are larger in size than
we are and which have access to considerably greater financial resources than we
do.
In our sleep lab business, there are no clear market leaders or major
competition. Most of the independents are either labs in hospitals or physicians
interested in sleep that have started labs as an adjunct to their local
practice.
The air ambulance business segment has numerous smaller competitors with
short-range aircraft, but has limited competitors with aircraft capability of
performing international and, in particular, trans-Atlantic flights. Medjet in
Alabama, Kalitta in Detroit, and Sky Service in Toronto are the biggest
competitors in the international market.
Our pharmacy business competes directly in the sale and delivery of
prescription drugs to individuals living in adult living facilities. There are
numerous competitors larger in size than we are which have Internet capabilities
and access to considerably greater financial resources. We rely on reputation
and service to market our services.
MARKETING. We market each of the services in various methods, including
cross marketing, customer and physician referrals, reputation in the community
and third parties.
Studies now show that 1% of the U.S. population is responsible for 30% of
all healthcare costs and that 1/3 to 1/2 of those costs are preventable through
monitoring and intervention. Cybercare has created an Internet-based healthcare
delivery system for these high-cost chronically ill patients which would
dramatically improve patient health while significantly reducing per-patient
costs. Cybercare's customers are expected to be payors (insurance companies and
health management organizations) who currently spend upwards of $70,000 per year
for the care of each of these patients. Cybercare believes these prospects are
highly motivated to reduce costs and will be strong candidates to purchase
Cybercare equipment and services in the future. Cybercare intends to reach these
prospects through two separate channels. The first channel is an indirect
channel where Cybercare hopes to form partnerships with other companies who have
relationships with customers Cybercare has targeted. The second channel will use
Cybercare's direct sales force to contact the largest of these prospects.
Cybercare believes that state Medicaid organizations, the military, Veterans'
Administration, and major health management organizations will be among the
prospects for its direct sales force.
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Our pain and physical therapy business relies upon community reputation,
customer referral, physician and other medical resource referrals.
The sleep centers rely upon physician referrals for its customer base. In
addition, we have in place a three-tier service system that enters local
communities and utilizes a screening program and an in-home lab program.
Our air ambulance transport business relies upon print media, independent
brokers, personal contacts and physician referrals to attract new customers. We
also staff exhibit booths at major industry-specific conventions to attract
hospital groups, insurance companies, assistance companies and managed care
organizations.
Heart Labs relies heavily on referrals to perform high-tech procedures.
Most of the marketing for its mobile labs is based on our reputation in the
medical community.
EMPLOYEES. As of November 30, 1999, we employed approximately 360 persons,
of which approximately 300 are full time. Our ability to provide our services is
dependent upon our recruiting, hiring and retaining qualified technical
personnel. To date, we have been able to recruit and retain sufficient qualified
personnel. None of our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
DESCRIPTION OF PROPERTIES. We lease approximately 6,000 sq. ft. of office
space in Boynton Beach, Florida for our corporate offices at an average monthly
net rental of $6,111 over the term of the lease. The lease expires in April
2003.
Our physical therapy business leases approximately 41,000 sq. ft. of space
for its 25 rehabilitation centers and two physician offices located throughout
South Florida for a total monthly net rental of approximately $50,000. The
leases expire periodically through August 31, 2003.
Our sleep apnea business leases approximately 2,600 sq. ft. of space
for its sleep disorder center in Tallahassee, Florida for a total net monthly
rental of $3,007. The lease expires March 31, 2001.
Our air ambulance transport business leases office and hangar space in
Clearwater, Florida at an average monthly net rental of $4,350 on a
month-to-month basis and leases approximately 37,000 sq. ft. of office and
hangar space in Denver, Colorado; Schenectady, New York; and Paducah, Kentucky
for a total current net monthly rental of $16,218. The leases expire through
June 30, 2002.
Our Internet technology business presently operates in leased space at the
Advanced Technology Development Center which is located on the campus of the
Georgia Institute of Technology in Atlanta, Georgia. The engineers at Georgia
Tech who provide services for Cybercare are located at the Georgia Center for
Advanced Telecommunications Technology where Cybercare also maintains a
demonstration facility. We anticipate entering into a new lease for
approximately 9,600 square feet of office space in another facility in Atlanta,
Georgia. It is anticipated that the lease will have a minimum term of five years
and the monthly rental will be approximately $10,000.
LEGAL PROCEEDINGS. We are not presently a party to any material
litigation outside the ordinary course of business.
AVAILABLE INFORMATION. We file reports, proxy statements and other
information with the SEC, and these reports may be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, DC 20549. You may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330. The
same information may be obtained at the following Regional Offices of the SEC:
75 Park Place, New York, New York 10007, and the Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of such
material may be obtained from the Public Reference Section of the SEC's
Washington, DC office at prescribed rates.
We mail a copy of our audited Annual Report on Form 10-KSB along with a
proxy statement to our shareholders prior to our annual meeting.
26
<PAGE>
We have filed a registration statement on Form SB-2, of which this
prospectus is a part, with the SEC. This registration statement or any part
thereof may also be inspected and copied at the public reference facilities of
the SEC.
Our filings may also be accessed through the SEC's web site
(http://www.sec.gov) or by visiting our web site at (http://www.ptsc.com) and
linking to the SEC's site.
GOVERNMENT REGULATION.
Our air ambulance transport business is subject to significant federal and
international government regulations relating to airline safety, capital
requirements, licensing, maintenance, scheduling, and similar aspects of our
operations. Due to the nature of aircraft operations, applicable regulations and
our policy, we incur substantial expenses associated with the maintenance of our
aircraft fleet. Although we believe that our 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 our business.
Our physical rehabilitation and sleep therapy business are subject to
extensive federal and state regulations related to fee limitations, quality
control requirements and accounting and cost tracking requirements. These
operations are subject to periodic review and inspection of facilities, patient
records and billing policies which, if the applicable regulatory agency finds
deficiencies, may result in reduction or stoppage of reimbursements and/or fines
and penalties. Additionally, these operations are subject to severe restrictions
relative to referrals from and compensation to physicians as provided by the
Federal Stark rules and Florida Self-Referral rules. Violations of any of these
rules can result in penalties and fines and some cases criminal sanctions. See
discussion relative to Federal Anti-Kickback Laws and Florida and Federal
Self-Referral Laws.
Our pharmacy business is also subject to extensive federal and state
regulations, many of which are specific to pharmacies and the sale of
over-the-counter drugs. Regulations in this area often require subjective
interpretation, and we cannot be certain that our attempts to comply with these
regulations will be deemed sufficient by the appropriate regulatory agencies.
Violations of any of these regulations could result in various civil and
criminal penalties, including suspension or revocation of our licenses or
registrations, seizure of our inventory, or monetary fines, which could
adversely affect our operations.
We are also subject to laws and regulations regarding homeopathic drugs,
and we may face enforcement actions, lawsuits or claims asserting that we have
not complied with these laws and regulations. As we expand our product and
service offerings, more of our products and services will likely subject to
regulation by the FDA, which regulates drug advertising and promotion. Complying
with FDA regulations is time consuming, burdensome and expensive, and could
delay our introduction of new products and services.
The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. Regulations have been proposed to implement these
requirements, and we are designing our applications to comply with the proposed
regulations. However, until these regulations become final, possible changes in
these regulations could cause us to use additional resources and lead to delays
as we revise our operations.
Management of our Internet business believes that Cybercare's products
will be subject to regulation by the Food and Drug Administration. We expect to
file for 510-K approval by the Food and Drug Administration later in 1999. Since
we use vital signs measuring devices which are already approved by the FDA, we
believe that obtaining this approval for our products will be accomplished in
90-120 days from the time application is made. Complying with FDA regulations is
time consuming, burdensome and expensive, and we could be delayed or prevented
from our introducing of our Internet products and services which would have a
material adverse affect on our business.
To our knowledge and other than what we have described in this statement
and other than occupational health and safety laws and labor laws which are
generally applicable to most companies., our products are not subject to
governmental regulation by any federal, state or local agencies that would
affect the manufacture, sale or use of our products. We cannot,
27
<PAGE>
of course, predict what sort of regulations of this type may be imposed in the
future, but we do not anticipate any unusual difficulties in complying with
governmental regulations which may be adopted in the future.
We have not incurred costs associated with environmental laws and do not
anticipate such laws will have any significant effect on our future business.
USE OF PROCEEDS
We expect to sell to Swartz Private Equity, LLC up to $25,000,000 of
common stock under the investment agreement. Additional amounts may be received
if the warrants to purchase common stock are exercised.
We intend, in the following order of priority, to use the net proceeds from this
offering as follows:
Cybercare Research and Development $10,000,000
Development of E-Commerce Products and Services 5,000,000
Acquisitions 5,000,000
Working capital and general corporate purposes 5,000,000
-----------
Total $25,000,000
The amount and timing of working capital expenditures may vary significantly
depending upon numerous factors such as:
- The progress of our final development of our e-commerce
business,
- Revenues generated from existing and anticipated services,
products and licenses,
- The development of marketing and sales resources,
- Administrative and legal expenses, and ~ Other requirements
not now known or estimable.
We believe that our available cash and existing sources of funding, together
with the proceeds of this offering and interest earned thereon, will be adequate
to maintain our current and planned operations for at least the next 24 months.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
The following should be read in conjunction with the financial statements
and corresponding notes contained in this prospectus.
OVERVIEW. Our complete management team has been in place now for less than
two years. We decided that it was in our and our shareholders' best interest to
re-evaluate our direction, and, accordingly, discontinue certain operations in
1998 and focus our attention on the subsidiaries we felt could grow with
profitable margins. These included: pharmaceutical services; physical,
occupational and speech rehabilitation services; the sleep centers; and, the air
ambulance transport services.
During 1998 it became very clear to us that, in order for us to obtain
significant profit levels, utilization of technology and the internet was
necessary. A significant amount of administrative and duplicative costs are
incurred in each and every aspect of our healthcare activities. Management
estimates there are over 30 billion transactions annually in healthcare and only
10% are electronic. Accordingly, we identified and entered into a definitive
agreement and consummated the transaction with Cybercare, Inc. This acquisition
will significantly expand our ability to address the healthcare issues facing
society. We believe by bringing in this company we will have a significant
advantage in healthcare e-commerce increasing stockholder value, increasing
profitability and positioning us to expand our operations for future years.
28
<PAGE>
We have also changed our name to more closely reflect our refocused
business around which each of our diversified medical businesses will function
as a support mechanism. Each of the diversified medical businesses will support
the further development and implementation of digital information technology -
this technology will make each of the businesses more efficient. Digital
technology will have a profound effect on our enterprises. We are embarking upon
an entirely new, but overdue, approach to the delivery of quality healthcare in
this country. We expect to emerge as an innovator meeting the global trend
toward fully digitized, fully integrated medical services.
In addition to Cybercare, during the last twelve months we made two
strategic acquisitions. They were Your Good Health Network, Inc. and Air
Response, Inc. We believe these acquisitions will allow us to expand our growth
potential with acceptable profitability.
We made some significant strides during 1998 but incurred significant
losses. The loss from continuing operations in the amount of $4,598,412 resulted
from significant costs incurred to refocus and grow our business, repositioning
the company for the Year 2000, and losses from the mobile catheterization lab
operations.
We settled the dispute with Westmark Group Holdings, Inc. which resulted
in our acquiring over 20% of Westmark's issued and outstanding common stock.
Westmark is currently profitable and is projecting to substantially increase its
profitability in 1999. As of the date of this prospectus, the approximate market
value of our 625,284 Westmark shares is $821,000.
MATERIAL CHANGES. There have been no material changes in the Company's
business since the filing of our 10-QSB for the period ending September 30,
1999.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
------------------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue ....................................... 100% 100% 99% 99% 96%
Equity in net income of investee .............. -- -- 1 1 --
Gain on sale of investment in equity securities -- -- -- -- --
Gain on sale of subsidiary .................... -- -- -- -- 4
------ ------ ------ ------ ------
Total income .......................... 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
Operating expenses:
Cost of services ........................... 51 60 47 53 53
General and administrative ................. 235 55 57 27 28
Depreciation and amortization .............. 27 9 10 6 7
Interest expense, net ...................... 11 3 15 5 9
Equity in (net loss of) investee ........... 51 15 -- -- --
Other ...................................... 1 -- 2 -- --
------ ------ ------ ------ ------
Total operating expenses ............ 376 142 131 91 97
------ ------ ------ ------ ------
Income (loss) from continuing operations ...... 276% (42)% (31)% 9% 3%
====== ====== ====== ====== ======
</TABLE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER
30, 1999 AND 1998. Revenue increased 150% to $27.5 million for the nine months
ended September 30, 1999 from $11 million for the 1998 period, driven by
increases in all business segments except technology assisted disease management
which is further explained below. Net income increased to $858,000 for the nine
months ended September 30, 1999 in comparison to a net loss of $1.6 million for
the same period in 1998. The results were driven by internal growth, reduction
in expenses and acquisitions which were partially offset by increased interest
expense including a beneficial conversion feature of $884,000.
Air ambulance's revenue increased 233%, or $10.4 million, to $14.9 million
for the nine months ended September 30, 1999, driven by the acquisition of Air
Response, Inc. effective March 1, 1999 and internal growth. Operating income
29
<PAGE>
increased 822% or $1 million to $899,000 for the nine months ended September 30,
1999, reflecting the acquisition of Air Response, Inc. increased utilization of
aircraft and decrease in overall operating costs, as a percentage of revenue,
due to synergies.
Physical and occupation rehabilitation's revenue increased 672%, or $6.1
million, to $7 million, driven by the acquisition of Your Good Health Network,
Inc. effective October 15, 1998, and internal growth. Operating income increased
102% or $322,000, to $639,000 for the nine months ended September 30, 1999,
reflecting the acquisition of Your Good Health Network, Inc. and internal
growth.
Pharmacy revenues increased 114%, or $1.9 million, to $3.6 million for the
nine months ended September 30, 1999. The increase reflects three additional
months of activity over 1998 and substantial internal growth. Operating income
increased 252%, or $195,000, to $272,000 for the nine months ended September 30,
1999, reflecting increase in gross margins and decrease in operating costs as a
percentage of revenue.
Technology assisted disease management segment had minimal revenue for the
period. We have incurred approximately $758,000 in expenses for the period since
acquisition. We will incur similar costs including amortization of licenses
through the first quarter of 2000 at which time we anticipate generating
revenue.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998. Revenue increased 192% to
$10.8 million for the quarter ended September 30, 1999 from $3.7 million for the
1998 period driven by increases in all business segments except technology
assisted disease management which is further explained below. Net income
increased to $235,000, from a loss of $2.2 million for the 1998 period. These
results were driven by internal growth, reduction in expenses, and acquisitions
which were partially offset by increased interest including beneficial
conversion feature of $132,000.
Air ambulance's revenue increased 200%, or $4.2 million, to $5.6 million
for the nine months ended September 30, 1999, driven by the acquisition of Air
Response, Inc. and internal growth. Operating income increased by $373,000 to
$224,000 for the nine months ended September 30, 1999, reflecting the
acquisition of Air Response, Inc. increased utilization of aircraft and decrease
in overall operating costs as a percentage of revenue due to the synergies.
Physical and occupational rehabilitation's revenue increased 767% or $2.3
million to $2.6 million for the nine months ended September 30, 1999, driven by
the acquisition of Your Good Health Network, Inc. effective October 15, 1998 and
internal growth, but is offset by the sale of Valley Pain Centers, Inc.
Operating income increased by $68,000 to $9,000 reflecting the acquisition of
Your Good Health Network, Inc. and internal growth but offset by the reduction
in profits due to the sale of Valley Pain Centers, Inc.
Pharmacy revenue increased 50%, or $451,000, to $1,345,000 for the nine
months ended September 30, 1999, due to internal growth. Operating income
decreased 97%, or $56,000, to $2,000 for the nine months ended September 30,
1999, due to higher costs for pharmaceutical drugs and an increase in overhead
to accommodate the infrastructure necessary for significantly higher volume.
Our technology assisted disease management segment had minimal revenue for the
period. We have incurred approximately $791,000 in expenses for the period since
acquisition. We will incur similar costs including amortization of licenses
through the first quarter of 2000 at which time we anticipate generating
revenue.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998 AND DECEMBER 31, 1997. Total revenues for all subsidiaries
were $14,448,523 for the year ended December 31, 1998, as compared with
$2,375,309 for the year ended December 31, 1997. This 508% increase is primarily
due to the revenues generated from the companies acquired during 1998. Global
Air Charter, Inc. had revenues of $7,146,457 in 1998 which was the first
complete year of operations since acquisition. Your Good Health, Inc. had
revenues of $1,143,625 from October 16, 1998 to December 31, 1998. Pharmacy Care
Specialists, Inc. had $2,565,887 from April 1, 1998 to December 31, 1998.
Ivanhoe had revenues of $824,198 from April 1, 1998 to December 31, 1998. Valley
Pain had revenues of $993,944 from September 1, 1998 to December 31, 1998.
30
<PAGE>
Cost of services, which include salaries and benefits and other expenses
directly associated with the Company's services, increased 347% to $6,915,503 in
1998, as compared with $1,545,710 in 1997. The increase is due to the cost of
services relating to the acquisitions of the companies during 1998 and Global
which was acquired on December 31, 1997. There was increased cost of services
from Heart Labs due to increased operating costs and fixed costs and lower
revenue.
General administrative expenses increased 502% to $8,425,420 in 1998, from
$1,400,102 in 1997. This increase was due primarily to the acquisitions made
during 1998 and Global.
Depreciation and amortization increased 528% to $1,458,595 in 1998, from
$232,235 in 1997, primarily as a result of the acquired companies.
Interest expense increased 1,173% to $1,120,106 in 1998 from $87,992 in
1997 primarily due to the increase in long-term debt on the airplanes and other
debt associated with the acquired companies in 1998.
On July 31, 1998, we issued $3,000,000 of 6% convertible A debentures,
calling for semi-annual interest with a maturity date of July 29, 2001. The
holders of the 6% convertible A debentures received options to purchase 300,000
shares of our common stock at an exercise price of $2.50. The underwriter
received options to purchase 60,000 shares of the Company's common stock at an
exercise price of $2.00. The convertible A debentures were issued through J.W.
Genesis Financial Services Capital Markets and were issued to accredited
investors. The total offering price was $3,000,000 and the underwriter's
commission was $180,000.
The debentures are convertible into our common stock based on the lower of
$2.00 per share or 82.5% of the twenty-two (22) day average closing bid price of
our common stock just prior to conversion with a minimum conversion price of
$1.00.
The estimated fair market value of the beneficial conversion feature of
these debentures amounted to $1,109,163. In accordance with EITF D-60, this
amount has been amortized as additional interest expense over a five-month
period ending December 31, 1998. The estimated fair market value of the
debenture conversion feature was calculated as the difference between the fair
market value of our common stock at the date of commitment and the conversion
price multiplied by the number of shares to be issued upon conversion.
Equity in net income (loss) of investee increased to a profit of $80,685
in 1998 as compared with a loss of $373,458 in 1997 due to the profitability of
Westmark Group Holdings, Inc.
Merger costs of $117,748 in 1998 resulted from the termination of the
merger with Physician Health Corporation.
The loss on sale of subsidiary of $29,026 in 1998 was the result of the
sale of Care America, Inc. The loss from discontinued operations of $1,441,799
and loss from disposal of discontinued operations of $1,510,308 resulted from
the sale of Care America, Inc., PRN of North Carolina, Inc., and Florida
Physicians Internet Inc. during 1998.
The gain from retirement of debt in 1998 was a result of the settlement of
a note payable for less than carrying amount.
Interest income increased to $282,803 in 1998 from $182,757 in 1997 due to
interest earned on mortgage and notes receivable, and cash equivalents.
Total revenues from operations for 1998 existing in 1997 were $1,017,554,
as compared with $2,375,309 for the same operations in 1997. Cost and expenses
for these operations were $1,683,171 in 1998, as compared with $1,727,503 in
1997.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996. Revenues from the mobile cardiac
catheterization subsidiary for the year ended December 31, 1997 were $2,375,310
compared to $1,276,904 for the year ended December 31, 1996. This increase is
due to our increased utilization
31
<PAGE>
through additional contracts with hospitals, and the sale of a mobile lab. In
1997, we had six contracts with hospitals compared to four for 1996.
Cost of services, which includes medical supplies, technical and sales
personnel salaries and benefits, and other expenses directly associated with our
services, increased 130% to $1,545,710 compared to $669,484 in 1996. Heart Labs
had an increase in cost of services due to increased operating costs and an
increase in cost of personnel.
General and administrative expenses decreased 54.6% from $3,084,025 to
$1,400,102. The decrease was due to our implementing a cost reduction program.
Depreciation and amortization decreased 34% to $232,235 from $353,785 in
1996. This decrease is due to one of the Company's mobile lab leases being
renewed in July 1997 and recorded as an operating lease versus a capitalized
lease, as in previous years.
Interest expense decreased 37% to $87,992 in 1997 from $140,674 in 1996.
This decrease is due to one of the Company's mobile lab leases being renewed in
July 1997 and recorded as an operating lease versus a capitalized lease, as in
previous years.
As a result of the foregoing factors, we had net loss of $1,526,152 in
1997 compared to $8,540,864 in 1996 and a working capital deficiency of
$1,016,557 for 1997 compared to a working capital deficiency of $1,458,966 for
1996.
LIQUIDITY AND CAPITAL RESOURCES. In 1998 and 1997, we financed operating
activities through a combination of cash flow from operations, private
placements, and proceeds from litigation settlements. Cash used in operating
activities was $3,862,280 in 1998 as compared with cash provided by operating
activities of $362,339 in 1997. Cash used in investing activities was $1,120,748
in 1998 as compared with cash used in investing activities of $297,231 in 1997.
At December 31, 1998, we had a working capital deficiency of $2,496,464 as
compared with a working capital deficiency of $1,016,557 in 1997. Current
portion of long-term maturities aggregating $465,804 represents payments due on
the outstanding airplane debt. We are in the process of refinancing the
long-term debt on our airplanes.
In April of 1999, pursuant to a private placement, we completed the sale
of $2,000,000 of 12% convertible debentures plus 2,000,000 three-year detachable
warrants. The debentures were sold in increments of $10,000 amounts and up. The
debentures are convertible at any time into common stock at $.50 per share,
which was the approximate value of our common stock at the time the transaction
was priced. The warrants are exercisable immediately by the warrant holder at
$.50 per share.
On November 30, 1999, we closed our offering of $100,000 Units with
Connecticut Capital Markets, LLC, as placement agent. We raised 7,500,000 from
the sale of the Units. Each Unit consisted of a three year 10% convertible
debenture in the principal amount of $100,000 and a five year warrant to
purchase 50,000 shares of common stock. The placement agent received 15,000
warrants for each Unit sold. We are required to make our first interest payment
on September 30, 2000 and semi-annually thereafter at a rate of 10 percent with
the debentures maturing on September 30, 2002. We may pay interest in shares of
our common stock. The number of shares paid is determined by dividing the
interest payment by the average closing bid price of our stock on the twenty
days prior to the interest accrual date. The debentures and any accrued interest
may be initially convertible into our common stock at 80 percent of the closing
bid price of our stock on the date we received the investors' subscription funds
but in no event less than $1.00. If our common stock is listed on a national
market and is trading at two times the then applicable conversion price for the
22 consecutive trading days during the 30 day period prior to conversion, then
we have the right to convert all or any portion of the debentures with any
accrued interest into shares of our common stock at the applicable conversion
price. We may also redeem the debentures with any accrued interest after
providing 30 days notice to the debenture holders. If the average bid price of
our common stock during any 22 consecutive trading days during the 30 day period
prior to the redemption is less than two times the applicable conversion price,
then as a protective incentive, the holders of the debenture will be entitled
for a period of six months after such redemption to purchase additional
nonregistered shares of our common stock at the conversion price in effect on
the redemption date. The debentures are not be subordinated to any other of our
debt obligations except secured debt obligations, existing and replacement
revolving debt and non-convertible loans from
32
<PAGE>
lending institutions with over $500,000,000 in assets. We will be considered in
default of our obligations under the debentures if we file for bankruptcy
protection under the federal bankruptcy laws, enter into an agreement to sell
all, or substantially all of our assets, default under the terms of the
placement agency agreement, fail to use our reasonable best efforts to register
with the Commission our shares of common stock issuable upon the exercise or
conversion of the debentures or warrants by February 28, 2000 (or fail to
register such shares for any reason by November 30, 2000), fail to pay interest
due on the debentures for 30 days or commits any other material default. If an
event of default occurs, among other things, the interest rate on the debentures
will increase to 14% until such default is cured. If we implement a reverse
stock split of 1:5, or multiple splits which aggregate more than 1:5, prior to
the conversion of any of the debentures then the owners of the debentures and
warrants shall be protected so that any debenture or warrant that are
outstanding as of the effective date of the reverse stock split will be no
greater than 1:5. If we issue common stock, or securities convertible into our
common stock (other than pursuant to this registration statement, obligations
existing on July 1, 1999, acquisitions or mergers, and options to officers or
directors), at a lower price than the conversion price then in effect, the
debenture and warrant owners are protected by way of a price reset mechanism so
that they may convert their debentures and exercise their warrants at the lower
price. A holder of a debenture may not engage in short sales of our common
stock. As compensation for its services under this best efforts agreement, the
placement agent will received a sales commission of 8% of the aggregate purchase
price of all Units sold by the placement agent and in addition, received a fee
for its administrative and due diligence services provided in connection with
the offering equal to 3% of the purchase price paid for all the Units sold. The
discount relative to the beneficial conversion feature of the debentures and
warrants will be charged to interest expense in the Company's income statement
as additional cost of the financing. This interest expense is deductible for
income tax purposes.
We intend to continue to raise working capital from equity based private
placement, long-term debt and warrants and believe we will refinance our
long-term debt. We believe that, if our working capital is insufficient to fund
our operations, we will have to explore additional sources of financing as
discussed above. No assurances, however, can be given that future financing will
be available or, if available, could be obtained at terms satisfactory to us.
TAX LOSS CARRY-FORWARDS
At December 31, 1998, we had operating loss carry-forwards for US income
tax purposes of approximately $14,990,500 available to reduce future taxable
income, which expire 2018.
33
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per-share data)
The following table sets forth our selected consolidated financial data.
The selected consolidated financial data for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 is derived from our audited consolidated financial
statements. The selected consolidated financial data for the nine months ended
September 30, 1998 and 1999 is derived from our unaudited financial statements.
This information should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the Notes thereto included elsewhere in
the Proxy.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED NINE MONTHS
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER ENDED
31, 1994 31, 1995 31, 1996 31, 1997 31, 1998 SEPTEMBER 30,
-------- -------- -------- -------- -------- ------------------
1998 1999
-------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Income:
Revenue from operations ............... 1,722 1,251 1,312 2,558 14,731 11,025 27,521
Equity in net income of Investee ...... -- -- -- -- 81 136 90
Gain on Investment in Equity .......... -- -- -- -- -- -- 77
Gain on sale of subsidiary ............ -- -- -- -- -- -- 1,256
-------- -------- -------- -------- -------- -------- --------
Total income 1,722 1,251 1,312 2,558 14,812 11,161 28,944
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Cost of services ...................... 753 562 669 1,546 6,916 5,358 15,498
General and administrative ............ 976 2,865 3,084 1,400 8,425 3,435 7,957
Depreciation and amortization ......... 537 576 354 232 1,459 951 2,081
Interest expense, net ................. 83 114 141 88 1,120 642 1,665
Interest - beneficial conversion feature -- -- -- -- 1,109 -- 884
Equity in (net loss of) investee ...... -- 62 666 373 -- -- --
Other ................................. -- 1 18 -- 382 -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 2,349 4,180 4,932 3,639 19,411 10,386 28,085
======== ======== ======== ======== ======== ======== ========
Income (loss) from continuing
operations.............................. (627) (2,929) (3,620) (1,081) (4,599) 776 858
Merger Costs ............................. -- -- -- -- -- 118 --
Loss from discontinued operations ........ (2,994) (4,011) (1,624) (445) (1,442) (1,599) --
Loss from disposal of discontinued
operations ............................. -- (1,905) (3,296) -- (1,510) (678) --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
items and income taxes ................. (3,621) (8,845) (8,540) (1,526) (7,551) (1,619) 858
Extraordinary item - gain from
retirement of debt ..................... -- -- -- -- 170 -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes ........ (3,621) (8,845) (8,540) (1,526) (7,381) (1,619) --
Income tax expense (benefit) ............. 59 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................$ (3,562) $ (8,845) $ (8,540) $ (1,526) $ (7,381) $ (1,619) $ 858
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per share ..............$ (33.40) $ (41,75) $ (10.33) $ (.28) $ (.39) $ (.09) $ .03
-------- -------- -------- -------- -------- -------- --------
Weighted average shares outstanding ...... 107 212 826 5,476 18,874 18,399 26,058
======== ======== ======== ======== ======== ======== ========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficit................... $ (1,180) $ (3,076) $ (1,456) $ (1,017) $ (2,496) 2,568 (5,987)
Total assets ............................. 3,672 6,337 5,744 22,278 28,333 28,431 55,112
Long-term debt ........................... 105 350 147 4,468 9,552 11,011 13,992
Total Stockholders' equity ............... 1,437 1,668 1,634 12,771 10,497 12,545 26,646
</TABLE>
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field, with the result that data referring to the Year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of a company or third parties (such as customers,
financial institutions, and suppliers) and not corrected, this problem may cause
computer applications to fail or to create erroneous results and could cause a
disruption in operations and have an adverse effect on a company's business and
results of operations.
We have adopted a formal plan to evaluate our readiness for the Year 2000 and to
address any deficiencies. The plan encompasses:
- information technology (IT) systems,
- non-IT systems,
- our products, and
- systems of third parties, including distributors and key suppliers.
NON-IT SYSTEMS. By the end of October 1999, we expect to have completed an
evaluation of telephone systems, product manufacturing systems, facility heating
and cooling systems, and other non-IT systems for Year 2000 readiness and will
promptly take remedial action as necessary.
OUR PRODUCTS. We have completed a series of tests, utilizing industry
standards, of the electronics systems of our products. Our review has determined
that the products should continue to operate according to specifications after
December 31, 1999.
KEY VENDORS AND SUPPLIERS. We will initiate a survey of our key vendors
and suppliers to assess their plans for bringing any non-compliant systems into
Year 2000 compliance. This study is expected to be completed by the end of
October 1999.
Substantially all of the effort to evaluate our Year 2000 readiness has
been made using internal personnel. As a result, we have not incurred any
material expenses in connection with our evaluation of non-IT systems and do not
expect material expense in the future, although the evaluation of non-IT systems
is not yet complete. We have not incurred any material expenses to date in
connection with the evaluation of our products and the status of our vendors and
suppliers with respect to Year 2000 issues. We do not anticipate material
expenses in the future, although the evaluation of key vendors' and suppliers'
Year 2000 readiness is not yet complete.
Our Year 2000 readiness plan, as well as our consideration of contingency
plans, is ongoing and will continue to evolve as new information becomes
available. At the present time, we believe that it is difficult to identify the
cause of the most reasonably likely worst case Year 2000 scenario. We have not
yet adopted any formal contingency plans and will determine the need for such
plans as part of our ongoing assessment of vendors and suppliers, products, and
internal business systems. Due to the complexity and pervasiveness of the Year
2000 issue, and in particular the uncertainty
35
<PAGE>
regarding the Year 2000 compliance programs of third parties, no assurances can
be given that the Year 2000 problem will not have material adverse effects on
our business or our results from operations.
MANAGEMENT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our current directors and executive officers, their ages, positions held with us
and duration as such, are as follows:
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
Michael F. Morrell 57 Chairman of the Board, Chief
Executive Officer, and Director
Paul C. Pershes 56 President and Director
Linda Moore 46 Senior Vice President and
Secretary
Arthur Kobrin 38 Senior Vice President and
Chief Accounting Officer
John Haines 52 Director and Senior Vice
President
Theodore J. Orlando 59 Director
Glen Barber 49 Director
Terry Lazar 56 Director
Dana Pusateri 46 Director
Louis R. Capece, Jr. 51 Director
Michael F. Morrell, Chairman of the Board and Chief Executive Officer. Mr.
Morrell has served as our Chairman and CEO since August 1996. From November 1995
to August 1996 he was an independent consultant in the field of corporate
finance. From March 1994 to November 1995 Mr. Morrell served as President and a
director of Westmark Group Holdings, Inc. From March 1984 through March 1994 he
founded and served as President of Nexus Leasing Corp. and Nexus Realty. From
1966 to 1984 Mr. Morrell served in executive management positions with Reliance
Group Holdings (NYSE), a multi-billion dollar provider of insurance, leasing and
other services.
Paul C. Pershes, President and Director. Mr. Pershes has served as one of
our directors since August 1996 and as our President since May 1997. Prior to
joining us, Mr. Pershes was a founding shareholder of a local accounting firm
and prior thereto was a senior partner of the international accounting firm
Laventhol and Horvath for 18 years, with extensive experience in healthcare.
Between 1990 and 1992, Mr. Pershes served as President of Temco Service
Industries, Inc., a public international facilities management company.
Linda Moore, Senior Vice President and Secretary. Ms. Moore, the wife of
Mr. Morrell, has served as our Senior Vice President and Secretary since January
1996. From March 1994 through December 1995, she served as Senior Vice President
and Secretary of Westmark Group Holdings, Inc. From 1986 to 1994 she was an
executive officer of Moore Financial Services, Inc., a financial public
relations firm she founded in 1986.
Arthur Kobrin, Senior Vice President and Chief Accounting Officer. Mr.
Kobrin joined our Company in June 1997 as Senior Vice President of Financial
Operations and Chief Accounting Officer. Prior to joining us, Mr. Kobrin, a
36
<PAGE>
Certified Public Accountant, from August 1987 to June 1997, was employed by
Weinberg, Pershes & Company, P.A. From June 1983 to August 1987 he was employed
by Dorfman, Abram & Music, P.A.
John E. Haines, Senior Vice President and Director. Mr. Haines serves
as Senior Vice President in charge of our technology markets, divisions and
subsidiaries as of September 1, 1999. Mr. Haines has been a Director since
August 26, 1999. He has served as Chairman, Chief Executive Officer and
President of Cybercare since its inception in October 1997. Mr. Haines
founded C-Med Corporation, a telemedicine technology company in Atlanta,
Georgia, in January 1994, and served as its Chief Executive Officer from its
inception until March 1995, when he became Chief Executive Officer of Video
Lan Technologies, Inc. Mr. Haines remained Chief Executive Officer of Video
Lan Technologies, Inc. until December 1995, when he left to form another
telemedicine technology firm known as the Willow Group. The Willow Group was
formally incorporated in October 1997 as Cybercare, Inc.
Theodore J. Orlando, Director. Mr. Orlando has served as one of our
outside directors since March 1997. In 1994, Mr. Orlando founded and is
currently President of Barkus Capital Resources, Ltd., a real estate and
securities investment company. From 1984 to 1994 he founded and served as
Chairman and Chief Executive Officer of TJ Systems Corporation, a computer
leasing company.
Glen Barber, Director. Mr. Barber has served as one of our outside
directors since April 1997. In 1988, Mr. Barber founded, and is currently
President of, New Age Communications, Inc., a master distributor of operator
services. Since 1993, he has served as President and Director of the Museum of
Art in Tallahassee, Florida.
Terry Lazar, Director. Mr. Lazar has served as one of our outside
directors since April 1997. In 1977, Mr. Lazar founded, and is currently senior
partner of, Lazar, DeThomasis, Sanders and Company, LLP, a full-service
accounting firm specializing in healthcare and other industries. He also is a
partner and Director of Finance of the Ambulatory Surgery Center and Vice
President of Empress Travel.
Dana Pusateri, Director. Mr. Pusateri has served as one of our directors
since January 1999. He founded IntegraCare, Inc. in 1988 and served as its
Chairman, Chief Executive Officer and President. IntegraCare contracted with
skilled nursing facilities, hospitals and home health agencies to provide
physical, occupational and speech therapy services and owned outpatient clinics.
In October of 1993, IntegraCare completed its initial public offering and placed
it on the NASDAQ/NMS exchange. In August 1995, IntegraCare completed a merger
with Integrated Health Services, Inc., a Baltimore-based New York Stock Exchange
company. In December 1995, Mr. Pusateri left to pursue other consulting
opportunities. In May of 1997, Mr. Pusateri co-founded Your Good Health Network,
Inc., a wholly owned subsidiary of our Company, and currently serves as its
Chief Executive Officer.
Louis "Rusty" Capece, Jr., Director. Mr. Capece has served as President of
Air Response, Inc., a wholly owned subsidiary of our Company, since its
inception in 1986. From 1982 to 1997, he was President of Response Medical, a
ground ambulance company, which serviced a large portion of upstate New York
with emergency ambulance and invalid coach service. Mr. Capece has also owned
and operated several funeral homes and apartment complexes in upstate New York.
Our officers are appointed 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.
GENERAL CONFLICTS OF INTEREST
Conflicts of interest now exist and will continue to exist between us and
certain of our officers and directors due to the fact that certain officers and
directors have other employment or business interests to which they devote
attention. We have not established policies or procedures for the resolution of
current or potential conflicts of interest between us and our management or
management-affiliated entities. There can be no assurance that members of
management will resolve all conflicts of interest in our favor.
37
<PAGE>
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
As permitted by Florida law, our Articles of Incorporation provide that we
will indemnify our officers, directors, employees and agents. This includes
indemnification against attorneys' fees and other expenses and liabilities they
incur to defend, settle or satisfy any civil or criminal action brought against
them arising out of their association with or activities on behalf of us.
However, they will not be indemnified if they are adjudged to have acted with
gross negligence or to have engaged in willful misconduct. We may also bear the
expenses of such litigation for any such persons upon their promise to repay
such sums if it is ultimately determined that they are not entitled to
indemnification. Such expenditures could be substantial and may not be recouped,
even if we are so entitled. We have provided for indemnification for liabilities
arising under the Securities Act of 1933, as amended, as they may be permitted
to directors, officers or persons controlling us. The Securities and Exchange
Commission has informed us that such indemnification is against public policy
and may be unenforceable.
EXCLUSION OF DIRECTOR LIABILITY
In accordance with Florida law, our Articles of Incorporation exclude
personal liability on the part of our directors to us for monetary damages based
upon any violation of their fiduciary duties as directors, except as to:
- liability for any breach of the duty of loyalty,
- acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
- acts in violation of Sections 607.0831 and 607.0834
of the Florida Business Corporation Act, or
- any transaction from which a director receives an improper
personal benefit.
This exclusion of liability does not limit any right which a director may
have to be indemnified and does not affect any director's liability under
federal or applicable state securities laws.
EXECUTIVE COMPENSATION
The following table includes information with respect to each person who
served in the capacity of chief executive officer during 1997 and l998, and our
other officers whose total annual salary and bonus for the fiscal year ended
December 31, 1998 exceeded $100,000. These named executive officers receive
other personal benefits in amounts less than 10% of their total annual salary
and bonus.
SUMMARY OF COMPENSATION TABLE.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
NAME & PRINCIPAL OTHER ANNUAL LTIP
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION OPTIONS PAYOUTS ($)
- ----------------------------------- ----------- ------------- ------------- -------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Micheal F. Morrell (1)............. 1998 $160,000 600,000
1997 $173,461 1,500,000
Paul C. Pershes (2)................ 1998 $153,462 500,000
1997 $104,808 1,437,000
E. Nicholas Davis (3).............. 1998 $111,631 200,000
A. Razzak Tai (4).................. 1997 $348,354 50,000
</TABLE>
38
<PAGE>
(1) Chief Executive Officer from August 1996 to present.
(2) President from April 1997 to present.
(3) Senior Vice President of Legal Affairs from June 1998 through September 30,
1999. Resigned effective October 1, 1999.
(4) Director and Director of Medicine of Florida Physicians Internet, Inc. and
CyberCare from June 1997 and January 1997, respectively. President of
Florida Physicians Internet, Inc. from January 1997. Resigned all offices in
September 1998.
EMPLOYMENT AGREEMENTS.
In January 1997, we signed an employment agreement with Michael Morrell.
The term of the agreement is for four years and provides for annual salary of
$150,000, the granting of 1,175,000 stock options at $.50 per share which have
vested (1,000,000 of which were exercised in February 1998) and the payment of
normal business expenses. On November 1, 1997, the Board of Directors approved
an increase in salary to $200,000 per year and granted 300,000 stock options at
$1.25 a share. In February 1998, 600,000 stock options were granted at $1.25 a
share. The agreement was extended for one additional year. On September 7, 1999,
the Board of Directors granted 1,000,000 options at $1.00 per share. Effective
October 1, 1999, the Board of Directors approved an increase in salary to
$250,000 per year.
In January 1997, we signed an employment agreement with Paul C. Pershes.
The term of the agreement is for four years and provides for annual salary of
$150,000, the granting of 1,175,000 stock options at $.50 per share which have
vested (1,000,000 of which were received in February 1998) and the payment of
normal business expenses. On November 1, 1997, the Board of Directors approved
an increase in salary to $175,000 per year and granted 250,000 stock options at
$1.25 a share. In February 1998, 500,000 stock options were granted at $1.25 a
share. The agreement was extended for one additional year. On September 7, 1999,
Mr. Pershes was granted 400,000 stock options at $1.00 per share. Effective
October 1, 1999, the annual salary was increased to $200,000.
On June 16, 1997, we signed an employment agreement with Arthur Kobrin.
The term of the agreement is for four years and provides for annual salary of
$78,000, the granting of 100,000 stock options at $1.48 a share to be vested
over a three-year period, and the payment of normal business expenses. Effective
February 8, 1998 the annual salary was increased to $100,000 and he received
150,000 stock options at $1.25 a share (75,000 options were exercised in
February 1998). On September 7, 1999, Mr. Kobrin was granted 100,000 stock
options at $1.00 per share. Effective October 1, 1999, the annual salary was
increased to $125,000.
On November 6, 1996, we signed an employment agreement with Linda Moore.
The term of the agreement is for five years and provides for annual salary of
$80,000, the granting of 100,000 stock options at $.50 per share to be vested
immediately (these options were exercised in February 1998), and the payment of
normal business expenses. Effective February 8, 1998 the annual salary was
increased to $100,000 and she received 150,000 stock options at $1.25 a share
(25,000 options were exercised in February 1998). On September 7, 1999, Ms.
Moore was granted 350,000 stock options at $1.00 per share. Effective October 1,
1999, the annual salary was increased to $150,000.
Effective October 15, 1998, our subsidiary, Your Good Health Network,
Inc., signed an employment agreement with Dana Pusateri who is also one of our
directors. The term of the agreement is for four years and provides for annual
salary of $120,000, and the granting of 100,000 of our stock options at $.75 per
share vested over four years. On September 7, 1999, Mr. Pusateri was granted
500,000 stock options at $1.00 per share. Effective October 1, 1999, the annual
salary was increased to $175,000.
Effective in July 1999, Mr. Haines entered into an employment agreement
with us as Senior Vice President in charge of our technology markets, divisions
and subsidiaries and effective September 1, 1999 as president of our subsidiary,
Cybercare, Inc. The term of the employment agreement is three years. Mr. Haines
base salary is $175,000 per annum. Mr. Haines is also entitled to receive
incentive compensation as determined by the Board of Directors and options to
purchase 200,000 shares of our common stock at an exercise price of $1.75 per
share which vests ratably over the term of the employment agreement. The
employment agreement also includes a covenant not to compete during the term of
the agreement and for a two-year period thereafter in the United States. On
September 7, 1999, Mr. Haines was granted 100,000 stock options at $1.00 per
share.
39
<PAGE>
The compensation of our officers and directors is reflected in Form 10KSB
and Form 10QSB. Officers' and directors' compensation and options to acquire our
stock are subject to increase at the discretion of the compensation committee
and the Chief Executive Officer.
The following tables show, as to the named executive officers, certain
information concerning stock options:
OPTION GRANTS DURING 1998 AND AGGREGATED FISCAL YEAR-END OPTION VALUE.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXCERCISE OR
UNDERLYING EMPLOYEES BASE EXPIRATION
NAME OPTIONS IN FISCAL YEAR PRICE ($/SH) DATE
- ---- ---------- ------------------ ------------ ----------
<S> <C> <C> <C> <C>
Michael F. Morrell 600,000 27.3 1.25 2/10/08
Paul C. Pershes 500,000 22.7 1.25 2/10/08
E. Nicholas Davis III 200,000 9.1 1.25 2/10/08
</TABLE>
With respect to the options granted to Messrs. Morrell and Pershes as described
immediately above:
(1) Vesting date was revised on 10/24/97 from a three-year vest to immediate.
(2) Price is at market value at vesting date.
(3) Does not include options to purchase 600,000 shares of the Company's common
stock granted on 2/10/98 at an exercise price of $1.25 per share.
(4) Does not include options to purchase 500,000 shares of the Company's common
stock granted on 2/10/98 at an exercise price of $1.25 per share.
(5) Does not include options to purchase 50,000 shares of the Company's common
stock granted on 2/10/98 at an exercise price of $1.25 per share.
AGGREGATED OPTIONS EXERCISED IN 1998 AND 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN THE
OPTIONS AT 12/31/98 MONEY OPTIONS AT 12/31/98
----------------------------- -------------------------------
SHARES ACQUIRED
VALUE -----------------------------
NAME ON EXERCISE REALIZED EXCERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael Morrell 1,000,000 0 925,000 200,000 32,000 -0-
Paul C. Pershes 1,000,000 0 783,333 32,000 -0-
E. Nicholas Davis III 0 0 -0- 200,000 -0- -0-
</TABLE>
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
CASH COMPENSATION SECURITY GRANTS
----------------------------------------------- ------------------------------------
CONSULTING NUMBER OF
ANNUAL RETAINER MEETING FEE/OTHER NUMBER OF SECURITIES UNDERLYING
NAME FEE($) FEE($) FEE($) SHARES (#) OPTION SHARES
- ---- ---------------- --------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C> <C>
Terry Lazar - 2,000 (1) - 50,000 50,000
Glen Barber - 1,000 (1) - 50,000 50,000
Theodore J. Orlando - 2,000 (1) - 50,000 50,000
</TABLE>
(1) The Directors had fourteen meetings during 1998, of which twelve were
telephonic meetings. The Directors receive $1,000 for each meeting they
attend, up to a maximum of $5,000. The Directors are also awarded stock
options for other meetings and work performed.
40
<PAGE>
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by us to
the directors in their capacity as directors other than the granting of stock
options and $1,000 for each meeting attended in person. We expect that, during
the next twelve months, we will not pay any direct or indirect remuneration to
any directors of ours in their capacity as directors other than in the form of
stock option grants or the reimbursement of expenses of attending directors' or
committee meetings.
PRINCIPAL SHAREHOLDERS
The following table and notes thereto set forth, as of November 30, 1999,
certain information regarding beneficial ownership of our common stock by (1)
each person known by us to beneficially own more than 5% of our common stock,
(2) each of our directors and director nominees, (3) each named executive
officer, and (4) all directors and officers of ours as a group.
SHARES OF PERCENTAGE
NAME COMMON STOCK OF CLASS
- ---- ------------ ----------
Michael F. Morrell (1)(2) ................. 3,071,145 5.4%
Paul C. Pershes (1)(3) .................... 1,775,533 3.1%
Linda Moore (1)(4) ........................ 383,145 *
Arthur Kobrin (1)(5) ...................... 307,200 *
John Haines (6) ........................... 2,150,666 3.8%
Theodore J. Orlando (1)(7) ................ 250,834 *
Terry Lazar (1)(8) ........................ 340,834 *
Glen Barber (1)(9) ........................ 220,834 *
Dana Pusateri (1)(10) ..................... 961,333 1.7%
Louis R. Capece, Jr. (11) ................. 3,143,334 5.6%
All Directors and Officers as a
group (10 persons) ........................ 12,604,858 22.3%
*less than 1%
A person is deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days from November 30, 1999 upon the exercise of
options, and that person's options are assumed to have been exercised in
determining such person's percentage ownership.
(1) The business address of each of the beneficial owners is: 1903 S.
Congress Ave., Suite 400, Boynton Beach, Florida 33426.
(2) Includes 1,925,000 shares of common stock that are issuable upon exercise
of vested options. Does not include 200,000 unvested options, and 77,500
shares of common stock that are issuable upon exercise of warrants. On
February 11, 1998 Mr. Morrell exercised options to acquire 1,000,000
shares of common stock at a collective
41
<PAGE>
exercise price of $500,000, issuing us a promissory note in payment for
the shares, which note contained the following terms: (1) repayment of
principal with interest at the prime lending rate, (2) pledge of the
shares as collateral security for repayment of the loan, and (3) repayment
of the principal and interest upon the earlier to occur of the sale of the
shares or February 11, 2002.
(3) Includes 683,333 shares of common stock that are issuable upon exercise of
vested options. Does not include 366,667 unvested options, and 40,000
shares of common stock that are issuable upon exercise of warrants. On
February 11, 1998 Mr. Pershes exercised options to acquire 1,000,000
shares of common stock at a collective exercise price of $500,000, issuing
us a promissory note in payment for the shares, which note contained the
following terms: (1) repayment of principal with interest at the prime
lending rate, (2) pledge of the shares as collateral security for
repayment of the loan, and (3) repayment of the principal and interest
upon the earlier to occur of the sale of the shares or February 11, 2002.
(4) Includes 277,000 shares of common stock that are issuable upon exercise of
vested options. Does not include 200,000 unvested options, and 12,500
shares of common stock that are issuable upon exercise of warrants.
(5) Includes 200,000 shares of common stock that are issuable upon exercise of
vested options. Does not include 75,000 unvested options, and 10,000
shares of common stock that are issuable upon exercise of warrants.
(6) Includes 50,000 shares of common stock that are issuable upon exercise of
vested options. Does not include 50,000 unvested options.
(7) Includes 220,834 shares of common stock that are issuable upon exercise of
vested options. Does not include 129,166 unvested options.
(8) Includes 220,834 shares of common stock that are issuable upon exercise of
vested options. Does not include 129,166 unvested options and 60,000
shares of common stock that are issuable upon exercise of warrants.
(9) Includes 220,834 shares of common stock that are issuable upon exercise of
vested options. Does not include 129,166 unvested options.
(10) Includes 275,000 shares of common stock that are issuable upon exercise of
vested options. Does not include 325,000 unvested options.
(11) Includes 50,000 shares of common stock that are issuable upon exercise of
vested options. Does not include 50,000 shares of common stock that are
issuable upon exercise of unvested options.
CERTAIN TRANSACTIONS
There were no transactions, or series of transactions, during fiscal 1997
or 1998, nor are there any currently proposed transactions, or series of
transactions, to which we are a party, in which the amount exceeds $60,000, and
in which to our knowledge any director, executive officer, nominee, five percent
or greater shareholder, or any member of the immediate family of any of the
foregoing persons, have or will have any direct or indirect material interest
other than as described below.
TRADING MARKET AND RELATED MATTERS
Our common stock is traded and is quoted on the Nasdaq SmallCap Market.
Prices reported represent prices between dealers, do not include markups,
markdowns or commissions, and do not necessarily represent actual transactions.
The market for our shares has been sporadic and at times very limited.
42
<PAGE>
The following table sets forth the high and low reported sales prices per
share of our common stock for the nine months ended September 30, 1999 and the
fiscal years ended December 31, 1998 and 1997.
The prices for our common stock are as reported on the Nasdaq SmallCap
Market. We have never paid dividends on our capital stock.
PER SHARE OF
COMMON STOCK
------------------------
DATE HIGH LOW
- ---- --------- ---------
1997
First Quarter .................................... $ 4 3/16 $ 1/4
Second Quarter ................................... 3 1/16 1 13/16
Third Quarter .................................... 2 9/32 1 5/8
Fourth Quarter ................................... 2 17/32 1 5/8
1998
First Quarter .................................... $ 2 1/8 $ 1 1/4
Second Quarter ................................... 2 3/16 1 3/8
Third Quarter .................................... 1 7/8 13/32
Fourth Quarter ................................... 1 9/32
1999
First Quarter .................................... $ 1 11/16 $ 5/8
Second Quarter ................................... 2 3/8 11/16
Third Quarter .................................... 2 7/8 3/4
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 200,000,000 shares of common
stock, $.0025 par value, and 20,000,000 shares of Preferred Stock. As of
November 30, 1999 there were approximately 40,000,000 shares of common stock
issued and outstanding, and no shares of Preferred Stock are currently
outstanding. The number of shares of common stock outstanding does not include
shares of common stock that could be issued in connection with the potential
acquisitions or upon conversation or exercise of stock options, debentures, and
other derivative securities.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share owned
of record on all matters voted upon by shareholders, and a majority vote is
required for all actions to be taken by shareholders. In the event of our
liquidation, dissolution or winding-up, the holders of the common stock are
entitled to share equally and ratably in our assets, if any, remaining after the
payment of all of our debts and liabilities. The common stock has no preemptive
rights, no cumulative voting rights and no redemption, sinking fund or
conversion provision. Holders of common stock are entitled to receive dividends
if, as and when declared by our Board of Directors out of funds legally
available therefor, subject to any dividend restrictions imposed by our
creditors. No dividend or other distribution (including redemptions or
repurchases of shares of capital stock) may be made if, after giving effect to
such distribution, we would not be able to pay our debts as they become due in
the normal course of business, or our total assets would be less than the
minimum of our total liabilities. If we realize net profits in the future, our
policy is likely to retain such earnings for the operation and expansion of our
business.
PREFERRED STOCK
Our Board of Directors is authorized (without any further action of the
shareholders) to issue preferred stock in one or more series and to fix the
voting rights, liquidation preferences, dividend rates, conversion rights,
redemption rights
43
<PAGE>
and terms, including sinking fund provisions, and certain other rights and
preferences. Satisfaction of any dividend preferences of outstanding preferred
stock would reduce the amount of funds available for the payment of dividends,
if any, on the common stock. Also, holders of the preferred stock would normally
be entitled to receive a preference payment in the event of our liquidation,
dissolution or winding-up before any payment is made to holders of common stock.
In addition, under certain circumstances, the issuance of preferred stock may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of our
securities, or the removal of incumbent management. The Board of Directors,
without shareholder approval, may issue preferred stock with dividend,
liquidation, redemption, voting and conversion rights which could adversely
affect the holders of common stock.
OPTIONS AND WARRANTS
As of November 30, 1999, options and warrants to purchase collectively
16,615,000 shares of common stock were outstanding.
CONVERTIBLE DEBENTURES
As of November 30, 1999, $6,650,000 principal amount of debentures
convertible into 5,256,966 shares of common stock were outstanding.
LEGAL MATTERS
Atlas Pearlman, 200 East Las Olas Boulevard, Suite 1900, Ft. Lauderdale,
Florida 33301 will pass on the validity of the common stock offered by us.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by Grant Thornton, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein and in the Registration Statement, and
are included herein in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.
44
<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-11
F-1
<PAGE>
GRANT THORNTON
GRANT THORNTON LLP ACCOUNTANTS AND
MANAGEMENT CONSULTANTS
THE U.S. MEMBER FIRM OF
GRANT THORNTON INTERNATIONAL
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Industries of America, Inc.
We have audited the accompanying consolidated balance sheet of Medical
Industries of America, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton
Fort Lauderdale, Florida
March 26, 1999
F-2
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................... $ 698,574 $ 957,446
Accounts receivable - trade, net of allowance for
contractual adjustments and doubtful accounts of
$753,804 and $473,392, in 1998 and 1997,
respectively ................................... 3,409,025 1,517,599
Current maturities of mortgage and notes receivable 79,119 611,677
Inventories of medical supplies .................... 125,525 53,071
Medical equipment held for sale .................... 92,540 --
Prepaid expenses and other current assets .......... 549,896 405,465
------------ ------------
Total current assets .......................... 4,954,679 3,545,258
------------ ------------
PROPERTY AND EQUIPMENT
Mobile cardiac catheterization laboratories and
medical equipment ................................ 1,709,153 517,003
Aircraft and related equipment ..................... 9,297,415 8,310,838
Transportation equipment ........................... 126,587 76,172
Building and building improvement .................. 258,642 432,156
Furniture and office equipment ..................... 734,324 415,039
------------ ------------
12,126,121 9,751,208
Less: accumulated depreciation and amortization ... (1,657,701) (464,184)
------------ ------------
Net property and equipment .................... 10,468,420 9,287,024
------------ ------------
OTHER ASSETS
Investment in equity securities .................... 2,863,840 2,579,742
Mortgage and notes receivable, less current
maturities ..................................... 97,580 1,820,377
Goodwill, net of accumulated amortization $241,279
and $75,362, respectively ...................... 8,338,972 3,776,197
Other assets ....................................... 1,609,219 1,269,515
------------ ------------
Total other assets ............................ 12,909,611 9,445,831
------------ ------------
TOTAL ASSETS ............................. $ 28,332,710 $ 22,278,113
============ ============
</TABLE>
The Accompanying Notes Are An Integral Part of the
Consolidated Financial Statements
F-3
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Line of credit .......................................... $ 1,789,827 $ --
Current maturities of notes payable and long-term debt .. 1,827,835 2,483,791
Current maturities of capital lease obligations ......... 163,595 58,051
Current maturities of convertible subordinated debentures 125,000 --
Accounts payable ........................................ 2,117,079 873,773
Accrued expenses ........................................ 1,009,564 1,146,200
Net liabilities of discontinued operations .............. 418,243 --
------------ ------------
Total current liabilities ....................... 7,451,143 4,561,815
Notes payable and long-term debt, less current
maturities ............................................ 6,184,737 4,248,037
Convertible subordinated debentures ..................... 3,367,500 400,000
Capital lease obligations, less current maturities ...... 681,335 12,781
Payable to officers ..................................... 151,169 284,096
------------ ------------
Total liabilities ............................... 17,835,884 9,506,729
------------ ------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred shares, authorized 20,000,000 shares:
issued and outstanding:
Series B convertible shares, 27,250 and 200,000
issued, $10 stated value .............................. 215,913 1,740,000
Preferred stock to be issued ............................ -- 959,500
Common shares, .0025 par value, authorized 100,000,000:
issued and outstanding 21,252,924 and 14,565,712
shares, respectively .................................. 53,131 36,413
Additional paid-in capital .............................. 37,871,126 30,297,862
Net proceeds from settlement of litigations ............. 1,675,050 1,675,050
Accumulated deficit ..................................... (29,318,394) (21,937,441)
------------ ------------
Total shareholders' equity ...................... 10,496,826 12,771,384
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . $ 28,332,710 $ 22,278,113
============ ============
</TABLE>
The Accompanying Notes Are An Integral Part of the
Consolidated Financial Statements
F-4
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1998 1997
------------ ------------
REVENUE
Revenue from operations ...................... $ 14,448,523 $ 2,375,309
Interest income .............................. 282,803 182,757
------------ ------------
Total revenue .......................... 14,731,326 2,558,066
------------ ------------
COST AND EXPENSES
Cost of services ............................. 6,915,503 1,545,710
General and administrative expenses .......... 8,425,420 1,400,102
Depreciation and amortization ................ 1,458,595 232,235
Interest expense ............................. 1,120,106 87,992
Interest - beneficial conversion feature ..... 1,109,163 --
Equity in net (income) loss of investee ...... (80,685) 373,458
Merger costs ................................. 117,748 --
Loss on sale of subsidiary ................... 29,026 --
Loss on sale of building ..................... 234,862 --
------------ ------------
Total cost and expenses ................ 19,329,738 3,639,497
------------ ------------
Loss from continuing operations ................ (4,598,412) (1,081,431)
Loss from discontinued operations .............. (1,441,799) (444,721)
Loss from disposal of discontinued operations .. (1,510,308) -0-
------------ ------------
Net loss before extraordinary items ............ $ (7,550,519) $ (1,526,152)
Extraordinary item - gain from retirement
of debt ...................................... 169,566 --
------------ ------------
Net loss ....................................... $ (7,380,953) $ (1,526,152)
============ ============
Loss per common share - Basic:
Continuing operations ........................ $ (.24) $ (.20)
Discontinued operations ...................... (.16) (.08)
Extraordinary items .......................... .01 --
------------ ------------
Net loss ..................................... $ (.39) $ (.28)
============ ============
The Accompanying Notes Are An Integral Part of the
Consolidated Financial Statements
F-5
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997
(as re-stated) 425,221 $ 5,390,480 1,126,188 $ 2,815
Conversion of preferred stock (225,221) (4,370,480) 7,065,530 17,664
Shares issued for services -- -- 638,100 1,595
Shares issued in settlement of
lawsuit -- -- 560,336 1,400
Sale of common stock -- -- 412,000 1,030
Shares issued from exercise of
warrants -- -- 144,384 361
Shares issued in exchange in
subordinated debentures -- -- 409,889 1,025
Shares issued for businesses
acquired 1,289,000 959,500 4,209,285 10,523
Adjustment for equity
investment 3,600 720,000 -- --
Net proceeds from settlement
of litigations -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1997 1,492,600 $ 2,699,500 14,565,712 $ 36,413
Common stock issued for
business acquired 5,871,208 14,678
Common shares returned (75,500) (188)
Exercise of stock options 2,100,000 5,250
Notes receivable from officers (2,100,000) (5,250)
Interest - beneficial conversion
feature
Settlement of lawsuits 466,504 1,166
Reversal of acquisition
agreements (1,289,000) (959,500) 425,000 1,062
Adjustment for equity
investment (5,659) (56,587)
Return of preferred shares (176,350) (1,467,500)
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance - December 31, 1998 21,591 $ 215,913 21,252,924 $ 53,131
============ ============ ============ ============
<CAPTION>
ADDITIONAL ACCUMULATED
PAID-IN CAPITAL OTHER DEFICIT TOTAL
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997
(as re-stated) $ 16,652,243 -- $(20,411,289) $ 1,634,249
Conversion of preferred stock 4,352,816 -- -- --
Shares issued for services 1,215,076 -- -- 1,216,671
Shares issued in settlement of
lawsuit 462,806 -- -- 464,206
Sale of common stock 567,740 -- -- 568,770
Shares issued from exercise of
warrants 216,217 -- -- 216,578
Shares issued in exchange in
subordinated debentures 490,060 -- -- 491,085
Shares issued for businesses
acquired 6,340,904 -- -- 7,310,927
Adjustment for equity
investment -- -- -- 720,000
Net proceeds from settlement
of litigations -- $ 1,675,050 -- 1,675,050
Net loss -- -- (1,526,152) (1,526,152)
--------------- ------------ ------------ ------------
Balance, December 31, 1997 $ 30,297,862 $ 1,675,050 $(21,937,441) $ 12,771,384
Common stock issued for
business acquired 5,710,608 5,725,286
Common shares returned 188 --
Exercise of stock options 1,044,750 1,050,000
Notes receivable from officers (1,044,750) (1,050,000)
Interest - beneficial conversion
feature 1,109,163 1,109,163
Settlement of lawsuits 522,493 523,659
Reversal of acquisition
agreements 230,812 (727,626)
Adjustment for equity
investment (56,587)
Return of preferred shares (1,467,500)
Net loss -- -- (7,380,953) (7,380,953)
--------------- ------------ ------------ ------------
Balance - December 31, 1998 $ 37,871,126 $ 1,675,050 $(29,318,394) $ 10,496,826
=============== ============ ============ ============
</TABLE>
The Accompanying Notes Are An Integral Part
of the Consolidated Financial Statements
F-6
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(4,598,412) $(1,081,431)
Net loss from discontinued operations (2,952,107) (444,721)
Gain from retirement of debt 169,565 --
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Liabilities on discontinued operations 418,243 (574,966)
Depreciation and amortization 1,458,595 338,306
Equity loss on investments (80,685) 373,458
Interest - beneficial conversion feature 1,109,163 --
Bad debts 172,500
Write-off of Goodwill 2,354,476 --
Forgiveness of debt (30,000) --
Loss on disposition of property and equipment 234,862 --
Common stock issued for services rendered -- 1,216,671
Common stock issued in settlement of litigation -- 464,206
Net proceeds from settlement of litigation -- 1,675,050
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (690,837) (500,671)
Assets held for sale (92,540) --
Inventories of medical supplies (15,908) (12,753)
Prepaid expenses and other current assets (69,213) (242,311)
Other assets (586,422) 192,693
Accounts payable 34,306 (79,791)
Accrued expenses (697,866) (961,401)
----------- -----------
Net cash provided by (used in)
operating activities (3,862,280) 362,339
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements for property and equipment (1,315,011) (221,179)
Issuance of notes receivable (484,625) (741,057)
Payments received on mortgage and notes receivable 820,920 265,005
Proceeds from debentures -- 400,000
Cash received upon acquisition 81,737 --
Purchase of goodwill (223,769) --
----------- -----------
Net cash used in investing activities (1,120,748) (297,231)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on long-term debt and notes payable (1,198,278) (229,268)
Proceeds from long-term debt and notes payable 2,999,479 205,230
Proceeds from issuance of debentures 3,367,500 --
Proceeds from issuance of common stock -- 892,108
Payments on debentures (275,000) --
Repayment on capitalized leases (169,542) (217,193)
----------- -----------
Net cash provided by financing activities 4,724,159 650,877
----------- -----------
(Decrease) Increase in cash (258,869) 715,985
Cash and cash equivalents:
Beginning 957,446 241,461
----------- -----------
Ending $ 698,577 $ 957,446
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 1,006,568 $ 65,880
=========== ===========
The Accompanying Notes Are An Integral Part
of the Consolidated Financial Statements
F-7
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Supplemental disclosure on non-cash investing and financial activities:
In August 1997, the Company issued 409,889 shares of the Company's common stock
for payment of subordinated debentures totaling $491,085.
Effective January 9, 1997, the Company acquired 100% of the outstanding stock of
Florida Physicians Internet, Inc. in exchange for preferred shares in amount
equal to $832,000, cash payments of $1,415,000 over a three year period and the
issuance of stock options. The Company assumed $34,000 in liabilities. In 1998,
the purchase price was adjusted in the amount of $313,000. The acquisition has
been accounted for using the purchase method of accounting and the net assets
and revenue and expenses are included in the Company's consolidated financial
statements from the date of the acquisition. The excess of the purchase price
over the fair market value of the net assets acquired of approximately
$1,651,000 was recognized as Goodwill.
Effective October 31, 1997, the Company acquired 100% of the outstanding stock
of PRN in exchange for 500,000 shares of the Company's common stock. The Company
received $56,000 in cash and assumed $107,000 in liabilities. The acquisition
has been accounted for using the purchase method of accounting and the net
assets, revenue and expenses 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
$854,000 was recognized as Goodwill.
Effective October 31, 1997, the Company acquired 100% of the outstanding stock
of Care America in exchange for preferred shares convertible into 100,000 shares
of the Company's common stock. The Company received $15,000 in cash and assumed
$32,000 in liabilities. The acquisition has been accounted for using the
purchase method of accounting and the net assets and revenue and expenses of
Care America 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 $53,000 was recognized
as Goodwill. In addition, the former stockholders have the right to earn 200,000
shares of the Company's common stock for each $1,000,000 or portion thereof of
pretax profit over a three year period.
Effective December 31, 1997, the Company acquired 100% of the outstanding stock
of Global Air Charter, Inc. in exchange for 1,432,000 shares of the Company's
common stock. The Company received $38,533 in cash and assumed $734,373 in
liabilities. The acquisition has been accounted for using the purchase method of
accounting and the net assets of Global Air Charter, Inc. 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 $1,263,000 was recognized as Goodwill.
Effective December 31, 1997, the Company acquired 100% of the outstanding stock
of Global Air Rescue, Inc. in exchange for 2,174,285 shares of the Company's
common stock. The Company received $921 in cash and assumed $5,138,782 in
liabilities. The acquisition has been accounted for using the purchase method of
accounting and the net assets of Global Air Rescue, Inc. are included in the
Company's consolidated financial statements from the date of acquisition. The
fair value of the net assets acquired equaled the purchase price, therefore no
Goodwill was recorded.
Effective December 31, 1997, the Company acquired 51% of the outstanding stock
of Clearwater Jet Center, Inc. in exchange for 3,000 shares of the Company's
common stock. The Company received $2,611 in cash and assumed $354 in
liabilities. The acquisition has been accounted for using the purchase method of
accounting and the net assets of Clearwater Jet Center, Inc. are included in the
Company's consolidated financial statements from the date of this acquisition.
The excess of the purchase price over the fair market value of the net assets
acquired of approximately $26,000 was recognized as Goodwill.
In 1997, the Company's Series C and D preferred stock were converted into
7,065,530 shares of the Company's common stock.
F-8
<PAGE>
In April 1998, the Company issued 6,504 shares of restricted common stock valued
at $10,000 in settlement of a lawsuit.
Effective April 1, 1998, the Company acquired 100% of the outstanding stock of
Pharmacy Care Specialists, Inc, in exchange for 680,000 shares of the Company's
common stock at $1.56 per share and a Note in the amount of $90,000. The Company
received $26,157 in cash and assumed $280,000 in liabilities. The acquisition
has been accounted for using the purchase method of accounting and the net
assets of PCS are included in the Company's 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 $1,036,593 was recognized as Goodwill.
Effective April 1, 1998, the Company acquired 81% of the outstanding stock of
Ivanhoe Medical Systems, Inc, in exchange for 607,500 shares of the Company's
common stock at $1.56 per share. Effective September 1, 1998, the Company
acquired the remaining 19% of the outstanding stock of Ivanhoe Medical Systems,
Inc. in exchange for $660,000 in cash and notes. The Company received $14,037 in
cash and assumed $325,163 in liabilities. The acquisition has been accounted for
using the purchase method of accounting and the net assets of Ivanhoe are
included in the Company's 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 $1,969,170 was recognized as Goodwill.
Effective September 1, 1998, the Company acquired 100% of the outstanding stock
of Valley Pain Centers, Inc, in exchange for 1,320,000 shares of the Company's
common stock at $1.00 per share, or $1,320,000. The Company received $6,772 in
cash and assumed $914,943 in liabilities. The acquisition has been accounted for
using the purchase method of accounting and the net assets of Valley are
included in the Company's 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 $1,529,327 was recognized as Goodwill.
Effective October 15, 1998, the Company acquired 100% of the outstanding stock
of Your Good Health Network, Inc. in exchange for 3,333,233 shares of the
Company's common stock at $.75 per share, or $2,500,000. The Company received
$52,280 in cash and assumed $1,393,335 in liabilities. The acquisition has been
accounted for using the purchase method of accounting and the net assets of YGHN
are included in the Company's 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 $2,830,646 was recognized as Goodwill.
In December 1998, the Company issued 460,000 shares of restricted common stock
in settlement of conversion of previously held preferred stock in the Company
and a note payable of $29,000.
The note receivable due from Westmark was partially repaid by returning to the
Company 172,750 shares of Series B convertible preferred valued at $1,727,500.
As part of the settlement with Dr. A. Razzak Tai, the Company received back part
of the shares originally issued as part of the acquisition of FPII.
F-9
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Medical Industries 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 is in the business of developing integrated medical delivery
services by providing diversified medical technologies, physical and pain
rehabilitation, occupational and speech therapy, sleep apnea, diagnostic and
treatment services, pharmaceutical services, and international air ambulance
services. The Company provides these services primarily in Florida, North
Carolina, South Carolina and Virginia. The Company also provides diagnostic and
therapeutic healthcare services to the surgical and medical community through
its mobile cardiac catheterization services to hospitals in the State of
Florida.
At the Annual Meeting held in November 1998, the shareholders approved an
increase in the number of authorized common shares to 100,000,000 from
50,000,000 and to change the par value of the common stock to $.0025 from no par
value, and additionally to increase the number of authorized preferred shares
from 10,000,000 to 20,000,000.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements for 1998 include the activity of the
Company and its wholly owned subsidiaries Heart Labs of America, Inc. ("HLOA"),
Global Air Charter, Global Air Rescue, Inc. and Clearwater Jet Center, Inc.
("Global"). The consolidated financial statements include from the date of
acquisition Pharmacy Care Specialists, Inc. ("PCS"), Ivanhoe Medical Systems,
Inc. ("Ivanhoe"), Valley Pain Centers, Inc. ("Valley") and Your Good Health
Network, Inc. ("YGHN").
The consolidated financial statements for 1997 include the activity of the
Company and its wholly owned subsidiaries Heart Labs of America, Inc. ("HLOA")
and Florida Physicians Internet, Inc. ("FPII") for the full year, and PRN of
North Carolina, Inc. ("PRN"), Care America Integrated Healthcare Services, Inc.
("Care America"), Global Air Charter, Inc., Global Air Rescue, Inc. and
Clearwater Jet Center, Inc. ("Global") from the date of acquisition.
All inter-company accounts and transactions have been eliminated in
consolidation.
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 statements 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.
YEAR 2000 COSTS
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
F-10
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
INVESTMENT IN WESTMARK GROUP HOLDINGS, INC.
In 1998, the Company accounted for its investment in Westmark Group Holdings,
Inc. ("Westmark"), a 21%-owned affiliate, by the equity method of accounting
under which the Company's share of the net income (loss) of Westmark is
recognized as income (loss) in the Company's statement of operations and added
(subtracted) to the investment account. In accordance with the equity method of
accounting, the Company has restated its 1997 financial statements to be
comparative with 1998 presentation.
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 and accelerated methods over the shorter
of the lease term or estimated useful lives of the assets. Property and
equipment at December 31, 1998 and 1997 consisted of the following:
1998 1997
----------- ----------
Property and equipment owned ........................ $11,180,347 $9,751,208
Property and equipment held under capital leases .... 945,774 0
----------- ----------
$12,126,121 $9,751,208
=========== ==========
GOODWILL
Goodwill was recorded at cost and is amortized using the straight-line method
over twenty-five 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 amount the
carrying value exceeds its fair value.
During 1998, the board of directors reviewed the operations and the financial
condition of Florida Physicians Internet, Inc. and PRN of North Carolina, Inc.
and voted to close down PRN and sold FPII in September 1998. As a result of this
decision, management has written off goodwill related to these companies in the
amount of $2,354,476.
LOSS PER SHARE
The Company adopted Financial Accounting Standards No. 128 (FAS 128), "Earnings
per share" in 1997. FAS 128 requires dual presentation of basic and diluted
earnings per share on the face of the income statement as well as restatement of
prior periods presented. Basic loss per share is calculated by dividing net loss
by the weighted average common shares outstanding. In 1998 and 1997, the effect
of the common stock equivalents on diluted loss per common share was
antidilutive. Therefore, they were not considered in the calculation.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is provided for deferred
tax assets when it is more likely than not that the asset will not be realized.
REVENUE
Revenue is recognized at the time the service is rendered for the following
subsidiaries; Ivanhoe, PCS, Valley and YGHN. Medicare and Medicaid
reimbursements ("third-party") are based on allowable charges. The difference
between the Company's established billing rates and contracted or anticipated
reimbursement rates is recorded as a contractual allowance and offset against
net sales. These revenues are subject to audit and retroactive adjustment by the
respective
F-11
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
third-party fiscal intermediaries. In the opinion of management, retroactive
adjustments, if any, would not be material to the financial statements of the
Company.
HLOA 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 one
to two years.
Global recognizes revenue upon completion of the scheduled flight.
STOCK-BASED COMPENSATION
Beginning in 1996, the Company implemented the provisions of SFAS 123,
Accounting of Stock-Based Compensation, in accounting for stock-based
transactions with non-employees and, accordingly, records compensation expense
in the consolidated statements of operations for such transactions. The Company
continues to apply the provisions of APB 25 for transactions with employees, as
permitted by SFAS 123.
NEW ACCOUNTING PRONOUNCEMENT
In 1988, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 provides guidance on accounting for
start-up costs and organization costs, which must be expensed as incurred. This
Statement is effective for financial statements for fiscal years beginning after
December 15, 1998. Management does not expect this Statement to have a material
impact on the Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1997 financial statements to
conform with the 1998 presentation.
2. BUSINESS ACQUIRED
Effective January 9, 1997, the Company acquired 100% of the outstanding stock of
Florida Physicians Internet, Inc. in exchange for preferred shares in amount
equal to $832,000, cash payments of $1,415,000 over a three year period and the
issuance of stock options. In 1998, the purchase price was adjusted in the
amount of $313,000. The acquisition has been accounted for using the purchase
method of accounting and the net assets and revenue and expenses are included in
the Company's consolidated financial statements from the date of the
acquisition. The excess of the purchase price over the fair market value of the
net assets acquired of approximately $1,651,000 was recognized as Goodwill. As
of December 31, 1998, the Company sold the assets of Florida Physicians
Internet, Inc.
Effective October 31, 1997, the Company acquired 100% of the outstanding stock
of PRN in exchange for 500,000 shares of the Company's common stock. The
acquisition has been accounted for using the purchase method of accounting and
the net assets, revenue and expenses 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
$854,000 was recognized as Goodwill. As of December 31, 1998, the Company
discontinued this subsidiary.
Effective October 31, 1997, the Company acquired 100% of the outstanding stock
of Care America in exchange for preferred shares convertible into 100,000 shares
of the Company's common stock. The acquisition has been accounted for using the
purchase method of accounting and the net assets and revenue and expenses of
Care America 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 $53,000 was recognized
as Goodwill. As of August 31, 1998, the Company sold 100% of its stock in Care
America to two original shareholders.
Effective December 31, 1997, the Company acquired 100% of the outstanding stock
of Global Air Charter, Inc. in exchange for 1,432,000 shares of the Company's
common stock valued at $1.50 per share, or $2,148,000.. The acquisition has been
accounted for using the purchase method of accounting and the net assets of
Global Air Charter, Inc. 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 $1,263,000 was
recognized as Goodwill.
Effective December 31, 1997, the Company acquired 100% of the outstanding stock
of Global Air Rescue, Inc. in exchange
F-12
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
for 2,174,285 shares of the Company's common stock valued at $1.50 per share, or
$3,261,428. The acquisition has been accounted for using the purchase method of
accounting and the net assets of Global Air Rescue, Inc. are included in the
Company's consolidated financial statements from the date of acquisition. The
fair value of the net assets acquired equaled the purchase price, therefore no
Goodwill was recorded.
As part of the acquisition of Global Air Charter and Global Air Rescue, Inc.
("Global"), the Company granted stock options to two employees to acquire 49% of
the issued and outstanding stock of Global under the following terms:
(a) The option price per Option Share will be equal to eighty-five
percent (85%) of the book value per share of Global's common
stock for the five (5) business days immediately preceding the
vesting date of such Option Shares.
(b) The Option Shares shall vest at such time as Global or any of its
subsidiaries undertake an initial public offering of their
capital stock.
(c) The right to exercise Option Shares shall expire (unless
previously exercised) within one (1) year of vesting. Vested
Option Shares shall be exercisable by Employee, in whole or in
part, on or before such expiration by payment in full, in cash,
by check or any other consideration permitted by applicable law,
to MIOA of the aggregate option price for the Option Shares so
acquired.
(d) All unvested Option Shares shall be subject to immediate
forfeiture upon Termination For Cause.
(e) In the event of a Termination Without Cause, all unvested Option
Shares shall immediately vest in full.
Effective, December 31, 1997, the Company acquired 51% of the outstanding stock
of Clearwater Jet Center, Inc. in exchange for 3,000 shares of the Company's
common stock valued at $1.50 per share, or $4,500. The acquisition has been
accounted for using the purchase method of accounting and the net assets of
Clearwater Jet Center, Inc. are included in the Company's consolidated financial
statements from the date of this acquisition. The excess of the purchase price
over the fair market value of the net assets acquired of approximately $26,000
was recognized as Goodwill.
Effective April 1, 1998, the Company acquired 100% of the outstanding stock of
Pharmacy Care Specialists, Inc, in exchange for 680,000 shares of the Company's
common stock at $1.56 per share and a Note in the amount of $90,000. The
acquisition has been accounted for using the purchase method of accounting and
the net assets of PCS are included in the Company's 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 $1,036,593 was recognized as
Goodwill.
Effective April 1, 1998, the Company acquired 81% of the outstanding stock of
Ivanhoe Medical Systems, Inc, in exchange for 607,500 shares of the Company's
common stock at $1.56 per share. Effective September 1, 1998, the Company
acquired the remaining 19% of the outstanding stock of Ivanhoe Medical Systems,
Inc. in exchange for $660,000 in cash and notes. The acquisition has been
accounted for using the purchase method of accounting and the net assets of
Ivanhoe are included in the Company's 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 $1,969,170 was recognized as Goodwill.
Effective September 1, 1998, the Company acquired 100% of the outstanding stock
of Valley Pain Centers, Inc, in exchange for 1,320,000 shares of the Company's
common stock at $1.00 per share, or $1,320,000. The acquisition has been
accounted for using the purchase method of accounting and the net assets of
Valley are included in the Company's 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 $1,529,327 was recognized as Goodwill.
Effective October 15, 1998, the Company acquired 100% of the outstanding stock
of Your Good Health Network, Inc. in exchange for 3,333,233 shares of the
Company's common stock at $.75 per share, or $2,500,000. The acquisition has
been accounted for using the purchase method of accounting and the net assets of
YGHN are included in the Company's 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 $2,830,646 was recognized as Goodwill.
The following unaudited pro forma summary presents the consolidated results of
operations as if acquisitions had occurred on January 1, 1997, after giving
effect of certain adjustments, including amortization of goodwill and related
income tax
F-13
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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.
1998 1997
------------- ------------
Net revenue ..................... $ 20,547,099 $ 18,046,000
============= ============
Net (loss) ...................... $ (8,164,968) $ (935,000)
============= ============
(Loss) per common share ......... $ (.36) $ (.06)
============= ============
3. NOTES RECEIVABLE
Notes receivable as of December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Various notes from Westmark, bearing interest at 10%, due with a monthly minimum
payment of $25,000 and a balloon payment due June 30, 2000. Additional
payments are based on Westmark's excess cash flow. The receivable is
collateralized by the Company's preferred stock held by Westmark. -0- $1,839,789
Mortgage receivable - in monthly installments of $1,083, including interest at
8.5%, with a maturity date of January 1, 2002, collateralized by a building. 102,077 106,206
Notes receivable, in monthly installments of $60,000, which includes interest at
10%, balance due December 31, 1997. This note was subsequently paid. -0- 437,000
Note receivable, in monthly installments of $5,879, including interest at
10%, with a maturity date of September 2, 1999., unsecured. 74,622 -0-
Other -0- 49,059
---------- ----------
176,699 2,432,054
Less: current maturities 79,119 611,677
---------- ----------
$ 97,580 $1,820,377
========== ==========
</TABLE>
4. 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.
As of December 31, 1997, the net assets of Westmark Group Holding, Inc. included
$2,000,000 of the Class B convertible preferred stock of the Company. The
investment in Westmark Group Holdings, Inc. as of December 31, 1997 has been
adjusted to eliminate the Company's 13% interest in these net assets.
Westmark is a public company that trades on Nasdaq under the symbol (WGHI) and
is subject to the reporting requirements mandated by the Securities and Exchange
Commission.
In July 1998, the Company exercised its option and converted $700,000 of
Westmark's preferred shares for 350,000 common shares of Westmark, bringing the
total Westmark common shares held by the Company to 683,457 shares, or an
ownership of 20.6% as of December 31, 1998, and 333,333 shares, or 13%, as of
December 31, 1997. In accordance with generally accepted accounting principles,
the Company in 1998 changed its method for accounting for its investment in
Westmark from the cost method to the equity method and has restated 1997
financial statements to reflect this change. The equity method requires the
Company to include in its statement of operations its proportionate ownership
percentage of Westmark's annual profit or loss.
F-14
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The Company's investment in Westmark includes the unamortized excess of the
Company's investment over its equity in Westmark's net assets. This excess was
$2,351,711 at December 31, 1998 and is being amortized on a straight-line basis
over 25 years.
Summarized financial information derived from Westmark's financial reports to
the Securities and Exchange Commission was as follows:
1998 1997
------------ ------------
Balance Sheet:
Current assets $ 31,387,182 $ 7,888,384
Property and equipment 578,382 644,563
Investments 860,528 4,287,660
Other Assets 315,982 --
------------ ------------
Total Assets $ 33,142,074 $ 12,820,607
============ ============
Current liabilities 30,616,262 10,984,258
Long-term obligations 39,749 1,774,044
Shareholder's Equity 2,486,063 62,305
------------ ------------
Total Liabilities and
Shareholder's Equity $ 33,142,074 $ 12,820,607
============ ============
Results of Operations
Revenues 17,300,099 8,342,506
Costs and expenses 15,583,452 9,032,329
Other expense 1,240,713 381,022
Taxes (benefit) expense (710,784) 147,000
------------ ------------
Income (loss) from
Continuing operations 1,186,718 (1,217,845)
Discontinued operations -- (250,225)
------------ ------------
Net income (loss) $ 1,186,718 $ (1,468,070)
============ ============
5. CUSTOMERS AND CREDIT CONCENTRATION
The Company has no customer which individually accounted for greater than 10% of
consolidated revenue. During 1998 and 1997, the Company derived its revenue in
Florida, North Carolina, South Carolina, and Virginia.
Each entity's revenue as percentage to total revenue is as follows:
Heart Labs 6.9%
Global 48.6%
Ivanhoe 5.6%
Valley 6.7%
PCS 17.4%
YGHN 7.7%
Corporate 7.1%
F-15
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt as of December 31, 1998 and 1997 consisted of
the following:
1998 1997
---------- ----------
Notes payable to former officers and
directors, non-interest-bearing, due on demand $ 126,000
Note payable in default at December 31, 1995,
principal and interest at 18%, due
on demand, collateralized by HLOA's accounts
receivable, leaseholds, chattel paper,
general intangibles and contract rights -- 300,000
Note payable to related parties, payable in
semi-annual installments of $5,207, interest
at 10% maturing December, 2002 -- 40,000
Note payable to related party, payable
semi-annual non-interest bearing, maturing
January 2000 -- 1,101,893
Notes payable, payable in monthly installments
of $2,018 including interest at rates of 12%
and prime rate (8.5% as of December 31, 1997)
plus 2%, balance due in November 2001 and December
1998, collateralized by building. This was
satisfied in 1998 upon the sale of the building. -- 141,230
Notes payable to financial institutions,
payable in monthly installments of $76,492,
interest ranging from 9% to 11%,
collateralized by aircraft, maturing through
July 2007. This note was refinanced in 1998. -- 5,022,705
Note payable to a financing company, payable
in monthly installments of $89,997, interest
9%, collateralized by aircraft, maturing May 2003 6,329,509 --
Note payable, payable in monthly installments
of $12,352, interest at 8.5%, maturing May 2003 317,751 --
Note payable to a bank, principal and interest
of prime plus 1.5%, adjusted annually (10% at
November 30, 1998), due in monthly installments
through April 2001, collateralized by certain
equipment and guaranteed by a shareholder. 68,067 --
Note payable to a bank, principal and interest
of prime plus 1%, adjusted annually (9.25% at
December 30, 1998), due in monthly installments
through October 1999, uncollateralized and
guaranteed by a shareholder. 41,667 --
Note payable to a bank, interest only at 10%,
matured on March 15, 1999, unsecured 600,000 --
Note payable to a bank, interest at 9.25%, due
on demand, unsecured. 49,970 --
Note payable, payable in monthly installments
of $6,450, interest at 12%, maturing
12/30/99, unsecured. 72,600 --
Note payable, payable based on certain
collection criteria, maturing 7/17/2000,
unsecured. 228,470 --
F-16
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Notes payable to various banks, payable in
monthly installments of $4,400, with
interest varying between 8.75% and 14%,
maturing through March 14, 2002,
collateralized by various equipment. 184,394 --
Note payable to an individual, payable in
monthly installments of $1,800, with
interest at 8%, maturing May 1999, unsecured. 8,450 --
Other 111,694 --
---------- ----------
8,012,572 6,731,828
Less current maturities 1,827,835 2,483,791
---------- ----------
$6,184,737 $4,248,037
========== ==========
Aggregate maturities required on notes payable and long-term debt as of December
31, 1997 are as follows:
YEAR ENDING DECEMBER 31 AMOUNT
--------------------------------- ----------------
1999 $ 1,827,835
2000 668,308
2001 552,216
2002 483,144
2003 480,580
Thereafter 4,000,489
-------------
$ 8,012,572
=============
7. LEASES
The Company leases two mobile labs under operating leases which expire July 31,
2002.
The Company leases various office space under non-cancelable operating leases
which expire through April 2001.
Future minimum payments of non-cancelable operating leases consisted of the
following as of December 31, 1998:
YEAR ENDING DECEMBER 31, OPERATING LEASES
------------------------- ----------------------
1999 $1,206,702
2000 746,382
2001 579,478
2002 43,716
----------
Total lease payments $2,576,278
==========
Rent expense for the years ended December 31, 1998 and 1997 totaled $1,587,897
and $191,303, respectively.
CAPITALIZED LEASES
The Company has acquired equipment under the provisions of long-term leases. The
future minimum lease payments under the capital leases at December 31, 1998 are
as follows:
1999 $250,201
2000 242,002
2001 231,225
2002 216,384
2003 54,096
--------
TOTAL 993,908
Less: Imputed interest 148,978
--------
Total minimum lease payments 844,930
Current maturities of capital leases 163,595
--------
Long-term capital leases less
current maturities $681,335
========
F-17
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
8. INCOME TAXES
The Company's temporary differences result in federal income tax asset which is
reduced to zero by a related valuation allowance summarized as follows:
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
Deferred tax assets:
Operating loss carry-forwards $ 5,651,800 $ 4,909,200
Accounts receivable 614,700 125,300
Note receivable reserve 202,700 202,700
Prepaid insurance 25,500 25,500
Contingent liability -- 6,600
Other 6,800 --
----------- -----------
Total gross deferred tax assets 6,501,500 5,269,300
Less valuation allowance (6,471,900) (5,089,100)
----------- -----------
Net deferred tax assets $ 29,600 $ 180,200
=========== ===========
Deferred liabilities:
Fixed assets 29,600 29,600
Deferred gain on sale of assets -0- 150,600
----------- -----------
Total gross deferred tax liabilities 29,600 180,200
----------- -----------
Net deferred tax assets -0- -0-
=========== ===========
At December 31, 1998, the Company had operating loss carry-forwards for US
income tax purposes of approximately $14,990,500 available to reduce future
taxable income, which expire as follows:
YEAR OF
EXPIRATION NET OPERATING LOSS
---------- ------------------
2006 $ 6,000
2007 106,000
2008 620,000
2009 2,760,000
2010 4,185,000
2011 3,410,000
2012 1,930,000
2018 1,973,500
-----------
$14,990,500
===========
It appears that the Company may have experienced a change in control, as defined
under Section 382 of the Internal Revenue Service Code. As a result, the
utilization of a significant portion of the tax loss carry-forwards may be
limited on an annual basis and could expire unused.
9. LOSS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------
INCOME SHARES
(NUMERATOR) (DENOMINATOR) PER-SHARE AMOUNT
----------- ------------- ----------------
<S> <C> <C> <C>
BASIC EPS
Available to common stockholders $ (7,380,953) 18,873,992 $ (.39)
=============== ========== =======
</TABLE>
F-18
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
INCOME SHARES
(NUMERATOR) (DENOMINATOR) PER-SHARE AMOUNT
----------- ------------- ----------------
<S> <C> <C> <C>
BASIC EPS
Available to common stockholders $ (1,526,152) 5,476,495 $ (.28)
=============== ========= ========
</TABLE>
The warrants and stock options outstanding during 1998 and 1997 were
antidilutive therefore, no diluted earnings per share calculation is required.
10. STOCK OPTION
In 1997, the Company terminated the 1994 Employee Stock Option Plan and the
Directors Stock Option Plan. Options outstanding under these plans of 19,000 and
1,750, respectively, at December 31, 1996, were forfeited in 1997. The Company's
plans are the 1996 Officer and Director Stock Option Plan and the 1996 Employee
Stock Option Plan. The Compensation Committee of the Company's Board of
Directors, administers and interprets the plan and is authorized to grant
options to eligible participants.
The exercise price of all options granted by the Company equals the market price
at the date of grant. No compensation expense has been recognized.
Had compensation cost for the 1996 Officers and Directors Stock Option Plan and
1996 Employee Stock Option Plan issued to employees been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
123, the Company's net earnings (loss) and net earnings (loss) per common share
would have been changed to the pro forma amounts indicated below.
1998 1997
---- ----
Net (loss)
As reported $ (7,380,953) $ (1,526,152)
Pro forma $ (8,802,349) $ (2,781,916)
Net (loss)
As reported $ (.39) $ (.28)
Pro forma $ (.47) $ (.51)
The above pro forma disclosures may not be representative of the efforts on
reported net income for future years as options vest over several years and the
Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using the
binomial option-pricing model with the following weighted-average assumptions
used for grants in 1998 and 1997, respectively: dividend yield of 0.0 percent in
both years; expected volatility of 169.88 and 143.73 percent: risk-free interest
rates of 5.42 - 5.798 and 5.70 - 6.60 percent; and expected holding period up to
10 years.
A summary of the status of the Company's fixed stock options as of December 31,
1998 and 1997, and changes during the years ending on those dates is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
WEIGHTED - WEIGHTED -
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 4,252,000 $ .87 175,000 $ 3.83
Granted 2,250,000 1.26 4,125,000 .79
Exercised (2,450,000) .50 - -
Expired - - - -
Forfeited - (48,000) (1.50)
</TABLE>
F-19
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
WEIGHTED - WEIGHTED -
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at end of year 4,052,000 $ 1.28 4,252,000 $ .87
========= ========== ========= ==========
Options exercisable at end
of year 2,080,333 2,802,000
========= =========
Weighted-average fair
value of options
granted during the year $1.23 $ .68
===== =========
</TABLE>
The following information applies to options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED -
REMAINING WEIGHTED - AVERAGE
RANGE OF CONTRACTUAL AVERAGE EXERCISE
EXERCISE PRICES SHARES LIFE EXERCISE PRICE SHARES PRICE
--------------- ------ ---- -------------- ------ -----
<S> <C> <C> <C> <C> <C>
$ 0 - .50 75,000 1.02 .50 75,000 .50
$1.19 - $1.50 3,977,000 6.75 1.28 2,005,333 1.28
</TABLE>
11. WARRANTS
During the year ended December 31, 1998, the Company issued warrants to acquire
common stock of the Company. Each warrant represents the right to purchase one
share of common stock for prices ranging from $.50 to $3.00 per warrant.
Warrants unexercised as of December 31, 1998 are as follows:
NUMBER OF WARRANTS EXERCISE PRICE EXPIRATION DATE
------------------ -------------- ---------------
240,000 .50 January 1999
500,000 .625 September 2003
240,000 1.25 September 1999
141,750 1.50 December 2000
100,000 1.50 February 2001
100,000 1.50 December 2002
16,667 1.75 July 1999
16,667 2.00 July 1999
150,000 2.00 November 2002
100,000 2.00 December 2002
150,000 2.50 December 2002
16,667 2.75 July 1999
400,000 2.50 July 2001
250,000 3.00 November 1999
12. 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.
13. RELATED PARTY TRANSACTIONS
JEAN JOHNSTONE
In June 1996, the Company entered into an Agreement with Jean Johnstone, the
Company's former Chairman of the Board and a former director of the Company,
whereby among other things, the Company repurchased 20,000 shares of the
Company's common stock at a price of $284,000 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
F-20
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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.
BRADLEY RAY AGREEMENT
In June 1996, the Company entered into an Agreement with Bradley Ray, as a
former consultant to the Company and the son of Ms. Johnstone whereby, among
other things, the Company repurchased 15,000 shares of the Company's common
stock at a price of $214,286 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.
The parties also executed mutual general releases.
CONSULTING AGREEMENTS
During 1997, 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
1997, the firm received $30,000 in the form of common stock for these services.
14. SETTLEMENT OF REGULATION S LITIGATION
In February 1997, a lawsuit was filed in the United States District Court,
Southern District of New York, by Tula Business, Inc. et al alleging 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 sought
additional shares. The Company was in the process of determining the damages to
its operations, reputation and its ability to raise funds as a basis for its own
lawsuit when a settlement was reached. 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 in conversion of the preferred stock, 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 the Company's claims for operating and other issues against the
plaintiffs.
In October 1997, the Company entered into a settlement agreement with Glick
Enterprises, Inc., and certain other investors, who had sued the Company in
March 1997, claiming in the Supreme Court of the State of New York, County of
New York, that the Company had issued an inadequate number of shares in January
1996 when they converted 62,120.5 shares of Series D Convertible Preferred Stock
and that the Company also was liable under the penalty provisions of the
Subscription Agreement.
As part of the settlement, the Company was required to issue 4.7 million
unrestricted common shares to Glick and the other investors and Glick and the
other investors shall return to the Company 62,120.5 shares of Series D
Convertible Preferred which they still possessed along with a full release.
Glick and the other investors paid $1.5 million in cash to the Company as part
of their settlement for operating and other issues to the Company. The Company
released Glick and the other investors for any claims which the Company had
against them with respect to their purchase, sale or trading of the Company's
stock and effect on the Company's operations.
All Series C and D previously issued by the Company has now been converted into
common stock.
The $1,675,051 net proceeds from these litigation settlements, resulting from
the Company's claims, after deducting related legal and other expenses, has been
credited to other included in shareholders' equity.
F-21
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
15. LITIGATION AND CONTINGENCIES
In January 1997, a complaint was filed in the Circuit Court of Dade County,
Florida against the Company and a former subsidiary. The complaint alleges that
the Company defaulted on payments to employees and to independent consultants.
The plaintiffs are seeking approximately $100,000 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 a plaintiff. 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 $290,000 in cash and 70,000 unrestricted
shares of the Company's common stock.
16. COMMITMENTS
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 five years. Future minimum payments
committed by the Company under these contracts as of December 31, 1998 are as
follows:
1999 1,650,000
2000 1,650,000
2001 1,410,000
2002 830,000
----------
$5,540,000
==========
17. LINE OF CREDIT
In July 1998, the Company entered into a line of credit agreement with a
California finance company. This line of credit agreement is for $1,500,000 and
has an interest rate of prime plus 2.65% (11.4% at December 31, 1998), with a
maturity of July 2000. The security interest in the assets of the Company is
limited to the accounts receivable for Heart Labs, Global, Valley, and FPII. As
of December 31, 1998, the Company had an outstanding balance in the amount of
$1,006,116.
The Company entered into a line of credit agreement with a South Carolina bank.
This line of credit agreement is for $250,000 and has an interest rate of 8%,
with a maturity of May 8, 1999. The security interest in the assets of the
Company is limited to furniture, fixtures and equipment of Ivanhoe. As of
December 31, 1998, the Company had an outstanding balance in the amount of
$229,800.
The Company entered into a line of credit agreement with a finance company. This
line of credit agreement is for $1,500,000 and has an interest rate of prime
plus 2% (10.75% at December 31, 1998) with a maturity of October 13, 2001. The
security interest in the assets of the Company is limited to all of the assets
of the Company's subsidiary, Your Good Health Network, Inc. As of December 31,
1998, the Company had an outstanding balance in the amount of $614,475.
The Company entered into a loan agreement with Pointe Bank, a Florida banking
corporation. This Line of Credit Agreement is for $250,000 and has an interest
rate of prime plus 2%, with a maturity date of November 17, 1998. The bank's
security interest in the assets of the Company is limited to the working capital
line of credit. This line of credit was paid off in 1998.
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.
F-22
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
19. SALE OF MOBILE LAB
On March 28, 1997, the Company entered into an asset purchase agreement whereby
it sold a mobile cardiac catheterization lab for $800,000 subsequently reduced
to $700,000, $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. This note was paid in March 1998.
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.
21. CONVERTIBLE SUBORDINATED DEBENTURES
In 1997, the Company issued $400,000 of convertible subordinated debentures.
These Debentures are unsecured debt securities, subordinated in right of payment
to any debt of the Company (defined in the Debentures as any indebtedness,
borrowed money or guarantee of such indebtedness) except debt that by its terms
is not senior ("Senior Debt") in right of payment to the Debentures. The
Debentures bear interest at the annual rate of 12% and mature between February
1999 and September 1999. Interest is payable monthly.
Pursuant to the terms of the Debentures as originally issued, the Debentures are
convertible into shares of Common Stock at the rate of one share of Common Stock
for each $2.00 of principal amount, subject to adjustment in the event of
certain events, including: dividends or distributions on the Common Stock
payable into shares of Common Stock; subdivisions, combinations or certain
reclassifications of Common Stock; distributions to all holders of the Common
Stock at less than the current market price at the time; or distributions to
such holders of Common Stock of assets or debt securities of the Company or
certain rights to purchase securities of the Company (excluding cash dividends
or distributions from current retained earnings). During 1998, the Company
repaid $275,000 of these subordinated debentures leaving an outstanding balance
of $125,000.
In June 1998, the Company issued 367,500 10% convertible subordinated debentures
calling for semi-annual interest with a maturity of June 2000. The holders of
the 10% convertible subordinated debentures received options to purchase 141,750
shares of the Company's common stock at an exercise price of $1.50.
On July 31 1998, the Company issued $3,000,000 of 6% convertible A debentures,
calling for semi-annual interest with a maturity date of July 29, 2001. The
holders of the 6% convertible A debentures received options to purchase 300,000
shares of the Company's common stock at an exercise price of $2.50. The
underwriter received options to purchase 60,000 shares of the Company's Common
stock at an exercise price of $2.00. The convertible A debentures were issued
through J.W. Genesis Financial Services Capital Markets and were issued to
accredited investors. The total offering price was $3,000,000 and the
underwriter's commission was $180,000.
The debentures are convertible into the Company's Common Stock based on the
lower of $2.00 per share or 82.5% of the three lowest closing bid prices during
the twenty-two (22) days immediately preceding the conversion date with a
minimum conversion price of $1.00. The debentures are convertible into common
stock at a maximum of 20% per month for each of the five months immediately
succeeding the issuance date.
F-23
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
EITF D-60 requires the Company to record a beneficial conversion feature (BCF)
when the Company issues convertible debt. The estimated fair value of the
beneficial conversion feature of these debentures based on the common stock that
can be converted at a discount to market aggregated $1,109,163 and has been
amortized as additional interest expense over the five-month period in which the
conversion can first take place which ended December 31, 1998. The estimated
fair market value of the debenture conversion feature was calculated as the
difference between the fair market value of the Company's common stock at the
date of commitment and the conversion price multiplied by the number of shares
to be issued upon conversion.
The Company has the right to redeem the debentures for cash at any time by
paying a premium. This premium is 115% at any time the closing bid price of the
Company's Common Stock is less than $1.00. If the closing bid price is greater
than or equal to the floor price, the Company has the right to redeem the
debentures for cash as follows:
REDEMPTION PERIOD REDEMPTION RATE
----------------- ---------------
7/29/98 - 1/29/99 = 107%
1/29/99 - 7/29/99 = 115%
7/29/99 - = 120%
If the Company redeems the debentures at a premium, the excess over the carrying
amount of the debentures, at the time, will be recorded as an extraordinary
expense early extinguishment of debt. This is in accordance with EITF D-60,
which was in effect at the time of the issuance of these debentures. If
applicable, any future similar issues of debentures will be treated in
accordance with EITF 98-5, which provides that, if the Company redeems the
debentures, the beneficial conversion feature will be recalculated at the date
of redemption and reduce additional paid in capital by the amount calculated. To
the extent the premium paid is less than or greater than the value of the
beneficial conversion feature calculated at the date of extinguishment, a gain
or loss may result.
The Company is anticipating that these debentures will be converted into common
stock or redeemed by the Company prior to maturity. The Company was obligated to
file a registration statement covering the resale of the shares of common stock
underlying the debentures. However, since the registration statement is not yet
effective, the Company is subject to late filing penalties commencing November
31, 1998 of $30,000 per month ($30,000 at December 31, 1998).
22. DISCONTINUED OPERATIONS
During the third quarter of 1998, the Company reviewed the operations of two of
its subsidiaries, FPII and PRN. The Company determined that it was in the best
interest of its shareholders to sell FPII to Dr. A. Razzak Tai and discontinue
PRN.
The results of FPII and PRN have been classified as discontinued operations in
the accompanying financial statements. The Company ceased the operations of FPII
as of December 31, 1998. PRN ceased operations effective September 30, 1998.
With respect to the discontinuation of FPII, the Company entered into a
Settlement Agreement with Dr. A. Razzak Tai, effective December 31, 1998. In
settlement of all matters between the Company and FPII with respect to the
acquisition of FPII by the Company and the employment of Dr. Tai, the Company
agreed to provide Dr. Tai (i) 400,000 shares of the Company's common stock,
which was previously provided at the initial closing; (ii) $150,000 in cash;
(iii) 150,000 options to purchase the Company's stock, all of which were
previously granted; and (iv) certain furniture, fixtures, equipment, supplies
and leases. In exchange, Dr. Tai executed a complete release in favor of the
Company and has forfeited all rights he may have with respect to any additional
MIOA stock, options, compensation or other consideration.
Net liabilities of the discontinued operations at December 31, 1998 consist
primarily of trade payables and accrued expenses. The loss on disposal of the
discontinued operations at December 31, 1998 is $1,510,308, consisting of a loss
on disposal of $1,108,231 and a provision of $402,077 for anticipated future
expenses related to these discontinued operations.
F-24
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Summarized results of FPII and PRN since inception are as follows:
1998 1997
------------- ------------
Loss from operations $ (1,441,799) $ (444,721)
Loss on disposal (1,510,308) -
------------- -----------
Total loss on discontinued operations $ (2,952,107) $ (444,721)
============= ===========
23. BUSINESS SEGMENT INFORMATION
The Company adopted SFS No. 131, "Disclosures About Segments of An Enterprise
and Related Information," in 1998 which changes the way the Company reports
information about its operating segments. With the October 15, 1998 acquisition
of YGHN, the Company reorganized itself into four main business units:
Cardiology Ancillary Services, International Air Ambulance, Pain/Sleep
Management, and Pharmacy Services. The information for 1997 has been restated in
order to conform to the 1998 presentation.
CARDIOLOGY ANCILLARY SERVICES currently operates three mobile cardiac
catheterization laboratories which perform outpatient cardiology procedures and
diagnostic tests. The cardiology ancillary services unit typically contracts
with smaller, non-urban hospitals which may not have in-house cardiac
catheterization capabilities, or larger hospitals which use the mobile labs for
when they exceed their existing capacity.
INTERNATIONAL AIR AMBULANCE offers national and international fixed-wing air
ambulance transport services to ill, injured or otherwise incapacitated persons
requiring relocation and possible emergency medical care during flight.
Circumstances requiring Global's transport services include the relocation of
patients requiring specialized medical procedures such as organ transplants,
cancer treatment, specialized cardiac surgery, burn care, stroke care and
advanced brain and spinal cord surgery, as well as transportation to hospitals
and medical facilities recognized nationally for excellence in their respective
fields. The flights are generally long distance in nature.
PAIN AND SLEEP MANAGEMENT offers sleep and disordered breathing diagnostic
programs to physicians and hospitals, and provides pain rehabilitation and
occupational, speech, and physical therapy services.
PHARMACY SERVICES is a closed network pharmacy located in Lakeland, Florida,
provides unit-dosed medications to over 2,000 residents in assisted-living
facilities across Florida. Pharmacy services delivers medications to the
facilities, provides training workshops, and does third-party billing.
The accounting policies of the reportable segments are the same as those
described in Note A to the Company's Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based upon income
before taxes and nonrecurring and extraordinary items.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. Corporate related items, results of insignificant
operations, and as it relates to segment profit (loss) and income and expense
not allocated to reportable segments are included in the reconciliations to
consolidated results.
Segment information for the years 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
CARDIOLOGY
ANCILLARY INTERNATIONAL PAIN/SLEEP
SERVICES AIR AMBULANCE MANAGEMENT PHARMACY TOTAL
---------------- -------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
1998
----
Net sales 1,017,544 7,179,566 2,961,767 2,565,887 13,724,764
Operating earnings (665,617) (975,770) 150,775 (14,273) (1,504,885)
Depreciation and
amortization 153,731 956,687 170,347 50,392 1,331,157
Total assets 1,013,867 12,567,707 9,036,238 1,755,507 24,373,319
1997
----
Net sales 2,375,309 - - - 2,375,309
Operating earnings 647,806 - - - 647,806
Depreciation and
amortization 181,793 - - - 181,793
Total assets 188,304 11,603,319 - - 11,791,623
</TABLE>
F-25
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Reconciliation to consolidated amounts:
1998 1997
----------- -----------
Revenues
Total revenues for reportable segments 13,724,764 2,375,309
Other Revenues 1,006,562 182,757
----------- -----------
Total consolidated revenues 14,731,326 2,558,066
----------- -----------
Operating Loss
Total earnings for reportable segments (1,504,885) 647,806
Intercompany allocations 62,763
Unallocated amounts
Corporate headquarters expense (2,884,365) (1,729,237)
Gain on retirement of debt 169,566
Equity in net income (loss) of investee 80,685
Loss on sale of building (234,862)
Merger costs (117,748)
Loss from discontinued operation (2,952,107) (444,721)
----------- -----------
Consolidated operating loss (7,380,953) (1,526,152)
=========== ===========
Assets
Total assets for reportable segments 24,373,319 11,791,623
Other assets 3,840,485 9,930,568
Corporate headquarters - fixed assets 118,906 555,922
----------- -----------
Total consolidated assets 28,332,710 22,278,113
=========== ===========
24. 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
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 was met in 1996, 1995 or 1994;
therefore, 47,500 Escrow Shares were forfeited and contributed to the capital of
the Company in 1998.
25. SUBSEQUENT EVENTS
Effective March 1, 1999, the Company acquired 100% of the outstanding stock of
Air Response, Inc. in exchange for $5,800,000. One half of the consideration
will be paid in common stock of the Company at a rate of $.75 per share with the
balance under an earnings arrangement payable over three years.
The Company has signed a Definitive Agreement to merge with American Enterprise
Solutions, Inc. The agreement calls for the Company's shareholders to own 50% or
more of the outstanding stock of the combined entities. The merger is subject to
completion of satisfactory due diligence, audited financial statements, and the
approval of the shareholders of each company.
In 1999, the Company, pursuant to a private placement, offered up to $2,000,000
of 12% convertible debentures. At March 31, 1999, $470,000 were sold. The
debenture is convertible into common stock at $.50 per share, the approximate
fair market value at the time. There are also warrants to purchase common stock
at $.50 per share for each dollar invested.
F-26
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
10-QSB - QUARTER ENDED SEPTEMBER 30, 1999
INDEX
FORM 10-QSB FORM 10-QSB FORM 10-QSB
PART NO. ITEM NO. DESCRIPTION PAGE NO.
I. FINANCIAL INFORMATION
1. Financial Statements
- Condensed Consolidated Balance
Sheet as of September 30, 1999 F-31
- Condensed Consolidated Statements of Operations
and Accumulated Deficit for the Three and Nine
Months Ended September 30, 1999 and 1998 F-33
- Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1999 and 1998 F-34
- Notes to Condensed Consolidated Financial
Statements F-36
2. Management's Discussion and Analysis
or Plan of Operations F-40
F-27
<PAGE>
CYBER-CARE, INC. F/K/A MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 784,704
Accounts receivable - trade, net of allowance for
doubtful accounts of $1,654,985.......................... 6,256,236
Current portion of mortgage and notes receivable .......... 73,573
Inventories of medical supplies ........................... 204,564
Prepaid expenses and other current assets ................. 1,167,447
------------
Total current assets .................................... 8,486,524
============
PROPERTY AND EQUIPMENT:
Aircraft and related equipment ............................ 20,899,836
Medical equipment ......................................... 1,789,782
Furniture, office and other equipment and improvements .... 1,701,308
------------
24,390,926
Less: accumulated depreciation and amortization ........... (3,093,689)
------------
Net property and equipment .............................. 21,297,237
============
OTHER ASSETS:
Mortgage and notes receivable, less current portion ....... 140,207
Goodwill, net of accumulated amortization of $256,532 ..... 8,087,452
Investment in equity securities ........................... 2,754,184
Medical technology and other licenses ..................... 12,558,890
Other assets .............................................. 1,787,131
------------
Total other assets ................................... 25,327,864
------------
TOTAL ASSETS ......................................... $ 55,111,625
============
The Accompanying Notes Are an Integral Part of the Condensed Consolidated
Financial Statements
F-28
<PAGE>
CYBER-CARE, INC. F/K/A MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
------------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES:
Line of credit ........................................................................... $ 3,554,051
Current maturities of long-term debt and notes payable ................................... 2,302,359
Current maturities of capital lease obligations .......................................... 186,350
Current maturities of convertible subordinated debentures ................................ 75,000
Accounts payable ......................................................................... 4,802,542
Accrued liabilities ...................................................................... 3,553,344
------------
Total current liabilities ....................................................... 14,473,646
------------
LONG-TERM LIABILITIES:
Long-term debt and notes payable, less current maturities ................................ 12,159,694
Capital lease obligations, less current maturities ....................................... 614,615
Subordinated debentures .................................................................. 367,500
Convertible subordinated debentures, less current maturities ............................. 850,000
------------
Total long-term liabilities ..................................................... 13,991,809
------------
Total Liabilities ............................................................... 28,465,455
============
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares, authorized 20,000,000 shares - none issued and
outstanding
Common shares, $.0025 par value, authorized 200,000,000; 39,136,416 issued
and outstanding ........................................................................ 97,841
Additional paid-in capital ............................................................... 53,333,245
Accumulated deficit ...................................................................... (26,784,916)
------------
Total shareholders' equity ..................................................... 26,646,170
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................... $ 55,111,625
============
</TABLE>
The Accompanying Notes Are an Integral Part of the Condensed Consolidated
Financial Statements
F-29
<PAGE>
CYBER-CARE, INC. F/K/A MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Revenue from operations ................ $ 10,772,612 $ 3,678,198 $ 27,520,587 $ 11,025,372
Equity in net income of investee ....... -- 78,984 90,300 136,413
Gain on sale of investment in equity
securities ........................... 76,790 -- 76,790 --
Gain on sale of subsidiary ............. -- -- 1,255,959 --
------------ ------------ ------------ ------------
Total income ................ 10,849,402 3,757,182 28,943,636 11,161,785
------------ ------------ ------------ ------------
Expenses:
Cost of revenues ....................... 6,394,024 1,443,532 15,497,641 5,358,301
General and administrative expenses .... 2,834,749 1,372,033 7,956,812 3,434,496
Depreciation and amortization .......... 766,770 545,687 2,080,985 951,123
Interest expense, net .................. 486,603 295,376 1,665,480 642,250
Interest - beneficial conversion feature 132,156 -- 884,289 --
------------ ------------ ------------ ------------
Total expenses .............. 10,614,302 3,656,628 28,085,207 10,386,170
------------ ------------ ------------ ------------
Income from continuing operations ............ 235,100 100,554 858,429 775,615
Merger costs ................................. -- 117,748 -- 117,748
Loss from discontinued operations ............ -- 1,476,098 -- 1,598,704
Loss from disposal of discontinued operations -- 678,529 -- 678,529
------------ ------------ ------------ ------------
Net income (loss) ............................ 235,100 (2,171,821) 858,429 (1,619,366)
Accumulated deficit-beginning of periods ..... (27,020,016) (19,709,936) (27,643,345) (20,262,391)
------------ ------------ ------------ ------------
Accumulated deficit-end of periods............ $(26,784,916) $(21,881,757) $(26,784,916) $(21,881,757)
------------ ------------ ------------ ------------
Earnings (loss) per share of common stock:
Basic earnings per share:
Income from continuing operations $ .01 $ .01 $ .03 $ .04
Discontinued operations .......... $ -- $ (.12) $ -- $ (.13)
------------ ------------ ------------ ------------
Net income (loss) ................ $ .01 $ (.11) $ .03 $ (.09)
============ ============ ============ ============
Diluted earnings (loss) per share .... $ .01 $ (.11) $ .03 $ (.09)
============ ============ ============ ============
Weighted average shares outstanding:
Basic ................................. 30,752,747 19,472,557 26,058,396 18,398,760
============ ============ ============ ============
Diluted ............................... 35,793,678 19,472,557 30,149,801 18,398,760
============ ============ ============ ============
</TABLE>
The Accompanying Notes Are an Integral Part of the Condensed Consolidated
Financial Statements
F-30
<PAGE>
CYBER-CARE, INC. F/K/A MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Income from continuing operations ................... $ 858,429 $ 775,615
Loss from discontinued operations ................... -- (1,598,704)
Loss from disposal of discontinued operations ....... -- (678,529)
Writedown of merger costs ........................... -- (117,748)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization .................. 2,080,985 951,123
Beneficial conversion feature .................. 884,289 --
Common stock issued for services rendered ...... 84,032 22,894
Equity in loss from unconsolidated company ..... (90,300) (136,413)
Gain on sale of subsidiary ..................... (1,255,959) --
Gain on sale of investment in equity securities (76,790) --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable - Trade ................. (4,367,792) (2,914,041)
Inventories of medical supplies ............. (79,039) (31,153)
Prepaid expenses and other current assets ... (186,086) (499,419)
Other assets ................................ (655,657) (564,840)
Increase (decrease) in:
Accounts payable ............................ 1,377,894 751,254
Accrued liabilities ......................... (265,736) 141,701
----------- -----------
Net cash used in operating activities ........... (1,691,730) (3,898,260)
----------- -----------
Investing activities:
Issuance of notes receivable ........................ -- (805,468)
Payment of notes receivable ......................... 205,365 852,010
Purchases of property and equipment ................. (1,866,586) (1,107,130)
Purchase of goodwill ................................ (27,041) (313,760)
Proceeds from sale of investment in equity securities 60,833 --
----------- -----------
Net cash used in investing activities ............ (1,627,429) (1,374,348)
----------- -----------
Financing activities:
Proceeds from long-term debt ........................ 276,203 3,395,179
Proceeds from convertible subordinated debentures ... 2,800,000 3,367,500
Repurchase of debentures ............................ -- (275,000)
Net advances on line of credit ...................... 1,662,250 --
Payments of capital lease obligations ............... (127,787) (127,480)
Payments of long-term debt .......................... (1,299,380) (1,056,399)
Proceeds from exercise of warrants and stock options 94,000 --
----------- -----------
Net cash provided by financing activities ........ 3,405,286 5,303,800
----------- -----------
Net increase in cash and cash equivalents ........... 86,127 31,192
Cash and cash equivalents at the beginning of period 698,577 958,902
----------- -----------
Cash and cash equivalents at the end of period ...... $ 784,704 $ 990,094
=========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of the Condensed Consolidated
Financial Statements
F-31
<PAGE>
CYBER-CARE, INC. F/K/A MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
<TABLE>
Supplemental disclosure of cash flow information:
<S> <C> <C>
Interest paid ....................................... $ 1,613,857 $ 536,927
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
On April 1, 1998, the Company exchanged 680,000 common shares of the
Company valued at approximately $1.50 per share and a note payable in the amount
of $90,000 to acquire 100% of the outstanding common stock of Pharmacy Care
Specialists, Inc. ("PCS").
On April 1, 1998, the Company exchanged 607,500 common shares of the
Company valued at approximately $1.50 per share for an 81% interest in Ivanhoe
Medical Systems, Inc. ("Ivanhoe").
Effective September 1, 1998, the Company exchanged 1,320,000 common shares
of the Company valued at $1 per share to acquire 100% of the outstanding stock
of Valley Pain Centers, Inc. ("Valley").
On March 1, 1999, the Company exchanged 3,866,667 common shares of the
Company, valued at $2,900,000 for 100% of the outstanding common stock of Air
Response, Inc.
During the nine months ended September 30, 1999, the Company issued
135,750 shares of the Company's common stock in lieu of services rendered valued
at $84,032.
During the nine months ended September 30, 1999, the Company issued 40,000
shares as part of a 1998 settlement to a former employee.
In January 1999, certain debenture holders exercised their option to
convert $102,077 of subordinated debentures and accrued interest into common
stock which the Company issued 102,077 shares of common stock.
On May 3, 1999, the Company sold Valley Pain Center to two former officers
of the Company for 1,544,036 shares of the Company's common stock with a market
value of $2,702,000 ($1.75 a share), cash and other consideration of $352,000,
and the repayment of approximately $300,000 of liabilities owed by Valley,
resulting in a gain of $1,255,959. The Company retired 1,544,036 shares of the
Company's common stock from this transaction.
During the nine months ended September 30, 1999, the Company issued
298,578 common shares in lieu of cash payments on subordinated debentures valued
at $294,000.
During the nine months ended September 30, 1999, the Company repurchased
54,806 common shares of the Company at $1.75 from a former officer and director.
In payment of all obligations due the former officer, the Company issued a note
in the amount of $100,000.
During the nine months ended September 30, 1999, the Company issued 57,630
common shares as partial consideration for the purchase of certain operating
assets. The shares were valued at $62,500.
Effective September 1, 1999, the Company exchanged 7,399,996 common shares
of the Company valued at $1.12 per share to acquire 100% of the outstanding
stock of Cybercare, Inc.
In partial payment on the sale of shares of Westmark common stock, the
Company received $272,500 of its outstanding preferred stock held by Westmark.
F-32
<PAGE>
During the nine months ended September 30, 1999, the Company used
6,918,001 shares of the Company's common stock for conversion of subordinated
debentures totaling $5,000,000.
In July 1999, the Company issued 118,223 shares of the Company's common
stock to officers and employees in repayment of loans valued at $.60 per share
or $70,934.
In August 1999, the Company issued 34,090 additional shares of the
Company's common stock for the balance due on an acquisition for the assets of a
rehabilitation company valued at $37,500.
The value of the above common shares was determined using the quoted
market prices on the dates the transactions took place.
The Accompanying Notes Are an Integral Part of the Condensed Consolidated
Financial Statements.
F-33
<PAGE>
CYBER-CARE, INC. F/K/A MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
Cyber-Care, Inc. F/K/A Medical Industries Of America, Inc. ("Cyber-Care"
or the "Company") was incorporated in the State of Florida on September 29, 1989
and commenced operations on February 27, 1990. At the 1999 Annual Shareholder
meeting, which took place on August 26, 1999, the shareholders of the Company
approved the change in the Corporation's name to Cyber-Care, Inc.
The Company is a technology assisted disease management company and also
operates physical, occupational and speech therapy centers, provides
pharmaceutical services, sleep apnea, international air ambulance transport
services and other services.
The Company currently has approximately 5,200 shareholders.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements are
unaudited. These statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the consolidated financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary to state
fairly the consolidated financial position and consolidated results of
operations as of and for the periods indicated. These consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31, 1998,
included in the Company's Form 10-KSB/A as filed with the Securities and
Exchange Commission.
The Company's consolidated financial statements include the activity of
the Company and its wholly owned subsidiaries. The consolidated financial
statements include, from the date of acquisition, the results of operations of
Air Response, Inc., and Cybercare, Inc. (see Note 2)
Earnings Per Common Share
Basic earnings per common share are calculated by dividing earnings by the
weighted average common shares outstanding. Diluted earnings per share have been
computed based on the assumption that all of the convertible preferred stock and
convertible subordinated debentures are converted into common shares, and that
all stock options where the exercise price is less than the market value have
been considered exercised under the treasury stock method. Under this
assumption, the weighted average number of common shares outstanding has been
increased accordingly.
Goodwill and Medical technology and other licenses
Goodwill was recorded at cost and is amortized using the straight-line
method over twenty-five years.
Medical technology and other licenses were recorded at cost and are
amortized using the straight-line method over ten to seventeen years.
F-34
<PAGE>
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 the
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 amount the
carrying value exceeds its fair value.
Estimates
The preparation of financial statements in conformity with general
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2 - Businesses Acquired
Effective March 1, 1999, the Company acquired 100% of the outstanding
common stock of Air Response, Inc. ("Air Response") in exchange for $2,900,000
in common stock valued at $.75 per share plus an earn up arrangement payable
over three years. The maximum additional payout on the earnout over the
three-year period is $2,900,000 which will take the form of a convertible
interest-bearing debenture. The acquisition has been accounted for using the
purchase method of accounting. The net assets and revenue and expenses of Air
Response have been included in the Company's consolidated financial statements
from the date of acquisition.
Effective September 1, 1999, the Company acquired 100% of the outstanding
common stock of CyberCare, Inc. in exchange for 7,399,996 in common stock valued
at $1.12 per share and changed its name to Cyber-Care, Inc. The acquisition has
been accounted for using the purchase method of accounting. The net assets and
revenue and expenses of Cybercare, Inc. have been included in the Company's
consolidated financial statements from the date of acquisition. The former
shareholders of Cybercare, Inc. have been given registration rights which
provide that if the fair market value of the Company's common stock at the
effective date of the registration statement is less then $1.50, enough
additional shares will be issued to ensure that those shareholders have received
at least $1.50 per share value.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisitions of Air Response, Inc. and
CyberCare, Inc. had occurred on January 1, 1998, 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.
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
Revenue ....................... $ 31,047,597 $ 20,670,059
------------ ------------
Loss from continuing operations (736,370) (194,306)
------------ ------------
Net loss ...................... (736,370) (2,436,812)
------------ ------------
Basic loss per share .......... $ (.02) $ (.08)
------------ ------------
Note 3 - Private Placement
During the nine months ended September 30, 1999, the Company, pursuant to
a private placement, sold $2,000,000 of 12% convertible debentures together with
2,000,000 three-year detachable warrants. The warrants may be exercised at any
time through April, 2002 for $.50 per share. The debentures are due through
April 2002 with interest payable semi-annually. The debentures are convertible
at any time into common stock at $.50 per
F-35
<PAGE>
share. The market price of the Company's common stock was between $.656 and
$1.125 per share on the dates the debentures were issued. The majority of the
debentures were issued when the Company's stock price was approximately $.656
per share. The proceeds were used for general corporate purpose. The securities
issued in connection with the private placement are exempt from registration
pursuant to Regulation D, rule 506. This transaction was approved by the
Company's shareholders.
During the quarter ended September 30, 1999, the Company, pursuant to a
private placement sold $850,000 of 10% convertible debentures together with
847,000 three-year warrants at $1.25 per share, a substantial discount. This
transaction was approved by the Company's shareholders. Subsequent to September
30, 1999, the Company sold $3,220,000 of convertible debentures together with
1,188,000 three-year warrants.
During the quarter ended September 30, 1999, certain debenture holders
exercised their options to convert $5,000,000 of subordinated debentures at
various conversion prices for which the Company issued 6,918,001 shares of
common stock.
In accordance with EITF D-60, the Company is required to amortize as
additional interest expense the difference between the market price of the
Company's common stock and the conversion rate of the subordinated debentures at
the commitment date (i.e., Beneficial Conversion Feature or "BCF"). The term of
the amortization is for the period from the date of closing through the date the
debenture can be first converted.
EITF D-60 requires a beneficial conversion feature (BCF) to be recorded (a
non-recurring item) when convertible debt is issued. The Company recorded a BCF
on the issuance of subordinated debentures totaling $799,218, of which $231,830
has been recorded in the first quarter of 1999, $468,000 was recorded in the
second quarter of 1999 and $99,388 was recorded in the third quarter of 1999. In
accordance with SFAS 123 "Accounting for Stock Based Compensation," the
detachable warrants issued in conjunction with the sale of the debentures have a
fair market value of $727,700, which is being amortized over the life of the
debentures in accordance with APB 14, paragraph 16. The Company amortized
$32,768 and $85,071 during the three and nine month periods ended September 30,
1999, respectively, as additional interest expense relative to the fair market
value of the warrants.
Note 4 - Litigation and Contingencies
The Company is engaged in litigation with various parties regarding
matters of dispute which have arisen in the normal course of business. In each
instance of litigation where there is a material amount at dispute the Company
has the benefit of indemnification from a third party.
Note 5 - Segment and Related Information
The Company's reportable segments are international air ambulance
transport, physical and occupational rehabilitation, pharmacy services and
technology assisted disease management.
INTERNATIONAL AIR AMBULANCE TRANSPORT offers national and international
fixed-wing air ambulance transport services to ill, injured or otherwise
incapacitated persons requiring relocation and possible emergency medical care
during flight. Circumstances requiring the Company's transport services include
the relocation of patients requiring specialized medical procedures such as
organ transplants, cancer treatment, specialized cardiac surgery, burn care,
stroke care and advanced brain and spinal cord surgery, as well as
transportation to hospitals and medical facilities recognized nationally for
excellence in their respective fields. The flights are generally long distance
in nature.
PHYSICAL AND OCCUPATIONAL REHABILITATION provides physical rehabilitation
and occupational and speech therapy services and offers sleep and disordered
breathing diagnostic programs to physicians and hospitals.
PHARMACY SERVICES is a closed network pharmacy located in
F-36
<PAGE>
Lakeland, Florida which provides unit-dosed medications to over 2,000 residents
in assisted-living facilities across Florida. Pharmacy Services delivers
medications to the facilities, provides training workshops, and does third-party
billing.
TECHNOLOGY ASSISTED DISEASE MANAGEMENT segment is currently in the startup
stages, and will provide hardware and software products using internet
technology for use in disease management services, data gathering and research.
The accounting policies of the reportable segments are the same as those
described in Note 1 to the Company's Condensed Consolidated Financial
Statements. The Company evaluates the performance of its operating segments
based upon income before taxes and nonrecurring charges such as beneficial
conversion feature and extraordinary items.
Segment information for the nine months ended September 30, 1999 and
1998 is as follows:
For the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
International Physical and Technology
Air Ambulance Occupational Assisted Disease
Transport Rehabilitation Pharmacy Management Other Services Total
------------ -------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
operations ........... $ 14,936,461 $ 7,007,720 $ 3,560,629 $ 16,457 $ 694,176 $ 26,215,443
Income from continuing
operations ........... 898,859 639,409 272,423 (757,911) (278,750) 774,030
Depreciation and
amortization ......... 1,407,212 268,642 70,709 75 149,950 1,896,588
Total assets ......... $ 26,711,543 $ 8,217,367 $ 2,194,594 $ 11,757,330 $ 768,760 $ 49,649,594
</TABLE>
For the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Physical and
International Occupational
Air Ambulance Rehabilitation Pharmacy Other Services Total
------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from
operations ........... $ 4,473,044 $ 907,221 $ 1,667,265 $ 2,791,891 $ 9,839,421
Income from continuing
operations ........... (122,259) 317,146 77,379 789,308 1,061,574
Depreciation and
amortization ......... 676,750 69,133 34,151 87,221 867,255
Total assets ......... $ 13,338,664 $ 4,578,842 $ 1,729,065 $ 3,033,600 $ 22,680,171
</TABLE>
Reconciliation to consolidated amounts:
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Revenues
Total revenues for reportable segments $ 26,215,443 $9,839,421
Other revenues 1,305,144 1,185,951
------------------- --------------------
Total revenues from operations $ 27,520,587 $11,025,372
=================== ====================
Operating earnings
Total earnings for reportable segments $ 774,030 $1,061,574
Unallocated amounts
Corporate headquarters expense 84,399 (403,706)
Loss from discontinued operations and disposal - (2,277,233)
------------------- --------------------
Net income (loss) $ 858,429 $(1,619,366)
=================== ====================
</TABLE>
F-37
<PAGE>
Note 6 - Investment in Westmark Group Holdings, Inc. ("Westmark")
Prior to September 30, 1999 the Company held 683,457 of Westmark's common
stock, or an ownership of 20.6% and 333,333 shares, or an ownership of 20.7%, as
of September 30, 1998. As a result of the Company's ownership in Westmark, the
Company is required to account for this investment on the equity method. The
equity method requires the Company to include in its statement of operations its
proportionate ownership percentage of Westmark's quarterly profit.
On September 30, 1999, the Company exercised its right to require Westmark
to repurchase $333,333 of Westmark's common stock held by the Company at a price
of $5.73 per share. The consideration received by the Company was $60,833, in
cash and return of all of the Company's outstanding preferred stock held by
Westmark valued at $272,500. Effective with this repurchase, the Company's
ownership in Westmark decreased to 18.9% and will require the Company to change
its accounting for this investment to the cost method.
Note 7 - Sale of Valley Pain Center Subsidiary
On May 3, 1999, the Company sold Valley Pain Centers, Inc. ("Valley") to
two former officers of the Company for 1,544,036 shares of the Company's common
stock with a market value of $2,702,000 ($1.75 a share), cash and other
consideration of $352,000, and the repayment of approximately $300,000 of
liabilities owed by Valley, which resulted in a gain on the sale of $1,255,959.
The Company retired 1,544,036 shares of the Company's common stock as a result
of this transaction.
Note 8 - Line of Credit
During the nine months ended September 30, 1999, the Company increased its
availability under its line of credit from $1,500,000 to $3,500,000.
Note 9 - Sale of Common Stock
On July 21, 1999, the Company entered into a commitment with a financial
institution for the sale of up to $25,000,000 of the Company's common stock in
amounts that could exceed 20% or more of the Company's issued and outstanding
common stock as of a certain date subject to shareholder approval at the
Company's annual meeting. At the Company's option, this line of credit using
underwritten stock, may or may not be used to finance various activities of the
Company. No shares have been sold under this agreement as of September 30, 1999.
This transaction was approved by the Company's shareholders.
Note 10 - Termination of merger agreement
On August 11, 1999, the Company terminated the definitive agreement,
originally entered into in March 1999, to merge with American Enterprise
Solutions, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENT
This Quarterly Report on Form 10-QSB contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, changes in the regulation of the
healthcare industry at either the federal and state levels, changes in
reimbursement for services by government or private payors,
F-38
<PAGE>
competitive pressures in the healthcare industry and the Company's response
thereto, the Company's ability to obtain and retain favorable arrangements with
third-party payors, the Company's ability to obtain capital in favorable terms
and conditions, and general conditions in this economy.
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the Company's condensed
consolidated unaudited Financial Statements listed in Part I, Item I and the
Notes thereto appearing elsewhere in this Form 10-QSB, and the Company's audited
Financial Statements and the Notes thereto appearing in the Company's 1998
Annual Report on Form 10-KSB/A.
COMPARISON OF THE RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Revenue increased 150% to $27.5 million for the nine months ended
September 30, 1999 from $11 million for the 1998 period, driven by increases in
all business segments except technology assisted disease management which is
further explained below. Net income increased to $858,000 for the nine months
ended September 30, 1999 in comparison to a net loss of $1.6 million for the
same period in 1998. The results were driven by internal growth, reduction in
expenses and acquisitions which were partially offset by increased interest
expense including a beneficial conversion feature of $884,000.
International Air Ambulance's revenue increased 233%, or $10.4 million, to
$14.9 million for the nine months ended September 30, 1999, driven by the
acquisition of Air Response, Inc. effective March 1, 1999 and internal growth.
Operating income increased 822% or $1 million to $899,000 for the nine months
ended September 30, 1999, reflecting the acquisition of Air Response, increased
utilization of aircraft and decrease in overall operating costs, as a percentage
of revenue, due to synergies.
Physical and Occupation Rehabilitation's revenue increased 672%, or $6.1
million, to $7 million, driven by the acquisition of Your Good Health Network,
effective October 15, 1998, and internal growth. Operating income increased 102%
or $322,000, to $639,000 for the nine months ended September 30, 1999,
reflecting the acquisition of Your Good Health Network and internal growth.
Pharmacy's revenue increased 114%, or $1.9 million, to $3.6 million for
the nine months ended September 30, 1999. The increase reflects three additional
months of activity over 1998 and substantial internal growth. Operating income
increased 252%, or $195,000, to $272,000 for the nine months ended September 30,
1999, reflecting increase in gross margins and decrease in operating costs as a
percentage of revenue.
Technology assisted disease management segment had minimal revenue for the
period. We have incurred approximately $758,000 in expenses for the period since
acquisition. We will incur similar costs including amortization of licenses
through the first quarter of 2000 at which time we anticipate generating
revenue.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenue increased 192% to $10.8 million for the quarter ended September
30, 1999 from $3.7 million for the 1998 period driven by increases in all
business segments except Technology assisted disease management which is further
explained below. Net income increased to $235,000, from a loss of $2.2 million
for the 1998 period. These results were driven by internal growth, reduction in
expenses, and acquisitions which were partially offset by increased interest
including beneficial conversion feature of $132,000.
International Air Ambulance's revenue increased 200%, or $4.2 million, to
$5.6 million for the nine months ended September 30, 1999, driven by the
acquisition of Air Response, Inc. and internal growth.
F-39
<PAGE>
Operating income increased by $373,000 to $224,000 for the nine months ended
September 30, 1999, reflecting the acquisition of Air Response, increased
utilization of aircraft and decrease in overall operating costs as a percentage
of revenue due to the synergies.
Physical and Occupational Rehabilitation's revenue increased 767% or $2.3
million to $2.6 million for the nine months ended September 30, 1999, driven by
the acquisition of Your Good Health Network, effective October 15, 1998 and
internal growth, but is offset by the sale of Valley Pain Centers, Inc.
Operating income increased by $68,000 to $9,000 reflecting the acquisition of
Your Good Health Network and internal growth but offset by the reduction in
profits due to the sale of Valley Pain.
Pharmacy revenue increased 50%, or $451,000, to $1,345,000 for the nine
months ended September 30, 1999, due to internal growth. Operating income
decreased 97%, or $56,000, to $2,000 for the nine months ended September 30,
1999, due to higher costs for pharmaceutical drugs and an increase in overhead
to accommodate the infrastructure necessary for significantly higher volume.
Technology Assisted Disease Management segment had minimal revenue for the
period. We have incurred approximately $791,000 in expenses for the period since
acquisition. We will incur similar costs including amortization of licenses
through the first quarter of 2000 at which time we anticipate generating
revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities - The Company's net cash flow from
operating activities resulted in deficits of $1.7 million and $3.9 million for
the nine months ended September 30, 1999 and 1998, respectively. The $2.2
million decrease is due primarily to the increase in profitability before
non-cash items, such as depreciation and amortization.
Cash used in investing activities - The Company's net cash used in
investing activities for the nine months ended September 30, 1999 was $1.6
million as compared to net cash used in investing activities for the nine months
ended September 30, 1998 of $1.4 million. This is due primarily to an increase
in equipment purchases relating to aircraft.
Cash flow from financing activities - The Company's net cash flows from
financing activities during the nine months ended September 30, 1999 decreased
by $1.9 million to $3.4 million from $5.3 million during the nine months ended
September 30, 1998, due primarily to an increase in private placement proceeds
received during the nine months ended September 30, 1999 and net advances on the
line of credit.
During the nine months ended September 30, 1999, the Company, pursuant to
a private placement, sold $1.9 million of 12% convertible debentures. The
proceeds are to be used for general working capital purposes. All of these
debentures were converted into common stock as of September 30, 1999.
During the quarter ended September 30, 1999, the Company, pursuant to a
private placement and approval by the Company's shareholders, sold $850,000 of
10% convertible debentures together with 847,000 three year warrants at
substantially $1.25 per share. Subsequent to September 30, 1999, the Company
sold $3,220,000 of convertible debentures together with 1,188,000 three year
warrants. The proceeds are to be used for general working capital purposes.
The Company had a working capital deficiency of $6 million at September
30, 1999 compared to working capital deficiency of $2.5 million at December 31,
1998. The increase in working capital deficiency is due to the Company
generating a substantial portion of its revenue utilizing long-term assets which
are financed by short-term liabilities.
F-40
<PAGE>
The Company's capital requirements in connection with its business plans
will be significant. The Company believes that net proceeds of future
anticipated securities offerings, and giving effect to revenues which are
projected to be realized from operations, should be sufficient to fund ongoing
operations and its business plan. Notwithstanding, there is no assurance that
such anticipated offerings will be undertaken, and if undertaken, will be
successful or that such proceeds derived therefrom, will in fact be sufficient
to fund operations and meet the needs of the Company's business plans.
Year 2000 Costs
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14 that costs associated with
modifying computer software for the year 2000 be expended as incurred. The
Company has made several acquisitions and is assessing the extent of the
necessary modification to their computer software but anticipates that it will
not have a material effect on the Company's financial statements.
Until the completion of the resale of the common stock included in this
prospectus, all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
F-41
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
REPORT ON AUDIT OF
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
F-42
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
PAGE #
------
Report of independent accountants F-43
Financial statements:
Balance sheet F-44
Statement of operations F-45
Statement of shareholders' deficit F-46
Statement of cash flows F-47
Notes to financial statements F-48-52
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
CyberCare, Inc.
We have audited the accompanying balance sheet of CyberCare, Inc. (a Development
Stage Company) as of December 31, 1998, and the related statements of
operations, shareholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of CyberCare, Inc. as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/S/ Templeton & Company, P.A.
Royal Palm Beach, Florida
June 16, 1999
F-44
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current assets:
Cash ......................................................... $ 30,854
Other current assets ......................................... 1,000
---------
Total current assets ....................................... 31,854
Property and equipment, net ..................................... 20,508
---------
Total assets ........................................... $ 52,362
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................. $ 20,381
Licensing fees payable ....................................... 487,912
Accrued expenses ............................................. 20,013
---------
Total current liabilities .................................. 528,306
=========
Commitments (Notes 4 and 6)
Shareholders' deficit:
Common stock, no par value; 24,000,000 shares
authorized; 5,086,663 shares issued and
outstanding ................................................ 365,000
Common stock subscribed (Note 4) ............................. 91,250
Deficit accumulated during the development stage ............. (932,194)
---------
Total shareholders' deficit .............................. (475,944)
---------
Total liabilities and shareholders' deficit ............ $ 52,362
=========
See accompanying notes to Financial Statements
F-45
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
Net sales ..................................................... $ --
---------
Research and development expenses:
Technology licensing fees .................................. 601,662
Compensation and related expenses .......................... 243,525
Professional fees .......................................... 29,414
Occupancy expenses ......................................... 15,223
Depreciation ............................................... 5,127
Other expenses ............................................. 37,243
---------
Total research and development expenses .................. 932,194
---------
Loss before provision for income taxes ........................ (932,194)
Provision for income taxes .................................... --
---------
Net loss incurred during the development stage ........... $(932,194)
=========
See accompanying notes to Financial Statements
F-46
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Accumulated
Common Stock Issued Stock During the
----------------------- Subscribed Development
No. Shares Amount (Note 4) Stage
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 ...... -- $ -- $ -- $ --
Issuance of 5,086,663
shares of common stock ..... 5,086,663 365,000 -- --
Common Stock Subscription
for 1,271,667 shares ....... -- -- 91,250 --
Net loss incurred during
the development stage ...... -- -- -- (932,194)
----------- --------- ---------- -----------
Balance, December 31, 1998 .... 5,086,663 $ 365,000 $ 91,250 $ (932,194)
=========== ========= ========== ===========
</TABLE>
See accompanying notes to Financial Statements
F-47
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
Cash flows from operating activities:
Net loss incurred during the development stage ............. $(932,194)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ........................................... 5,127
Earnings charge for common stock subscribed ............ 91,250
Increase in accounts payable ........................... 20,381
Increase in licensing fees payable ..................... 487,912
Increase in accrued expenses ........................... 20,013
Increase in other current assets ....................... (1,000)
---------
Net cash used in operating activities ......................... (308,511)
---------
Cash flows from investing activities:
Purchases of property and equipment ........................ (25,635)
---------
Cash flows from financing activities:
Proceeds from issuance of common stock ..................... 365,000
---------
Net increase in cash .......................................... 30,854
Cash, beginning of year ....................................... --
---------
Cash, end of year ............................................. $ 30,854
=========
See accompanying notes to Financial Statements
F-48
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION
CyberCare, Inc. (the Company) was formed in October 1997 to design, develop,
produce, and market a unique, user-friendly, multi-purpose system healthcare
providers can use to monitor chronically ill patients at remote locations using
internet and telecommunications technology (the System). The System's data
collection unit is designed to be placed at a patient's home to collect the
patient's vital medical data and transmit such data to the healthcare provider
over the internet using proprietary software. The Company initially expects to
market the System in the United States to healthcare providers including the
Veterans' Administration, United States Army, managed healthcare organizations,
nursing homes, assisted living facilities and others.
The System is based upon the technology developed by and acquired from certain
research institutions pursuant to technology licensing agreements (see Note 4).
The Company is in its development stage at December 31, 1998 as its activities
have related to planning, product development, market development, and raising
capital. Accordingly, the financial statements are prepared in accordance with
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 7, applicable to
development-stage companies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used in preparing the
accompanying financial statements follows:
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
the accelerated methods over the estimated useful life of the assets,
which is five years.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, include temporary cash investments. The
Company places its cash with high credit quality financial institutions.
Such balances may exceed the FDIC insurance limit.
F-49
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to operations in the period
incurred.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair market value of the shares at the
date of grant. The Company has elected to follow Accounting Principles Board
(APB) Opinion Number 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25),
and related Interpretations in accounting for its employee stock options
because the alternative fair value accounting provided for under Financial
Accounting Standards Board (FASB) Statement Number 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (FAS 123), requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's employee stock options
generally equals the exercise price of the underlying stock on the date of
grant, no compensation expense is recognized (see Note 8).
INCOME TAXES
Income Taxes are provided in accordance with the provisin of FASB Statement
Number 109, ACCOUNTING FOR INCOME TAXES (FAS 109).
MANAGEMENT ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
Office furniture, fixtures, and
equipment .................................. $ 25,635
Less accumulated depreciation ................. (5,127)
--------
$ 20,508
========
F-50
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 4 - TECHNOLOGY LICENSING AGREEMENTS
The Company acquired the rights to certain technology under a licensing
agreement (the Agreement) with the Georgia Tech Research Center (GTRC) and the
Medical College of Georgia (MCG). Under the terms of the Agreement, the Company
is required to engage GTRC and MCG to provide additional research and
development services through May 2002 for total aggregate fees of $2,100,000, of
which $510,412 has been incurred through December 31, 1998. Licensing fees are
generally payable as the related services are performed; however, outstanding
amounts do not bear interest and there are no specified payment terms. The
Agreement entitles GTRC and MCG to each maintain a 10% equity position in the
Company until the total number of outstanding shares in the Company exceeds
8,000,000. For financial reporting purposes, the Company records a charge to
earnings for technology licensing fees and a related credit to common stock
subscribed as common stock is issued based on the underlying stock issuance
price. Such charges to earnings totaled $91,250 during 1998 relating to
1,271,667 shares subscribed. Subsequent to December 31, 1998, the Company
recorded charges to earnings of $144,998 relating to 178,333 shares subscribed.
During May 1999, the Company issued a combined total of 1,450,000 shares to GTRC
and MCG pursuant to this arrangement.
In addition, the Agreement requires the Company to pay an aggregate royalty fee
of 4% of gross sales of the System less any installation expenses and normal
trade discounts once sales of the System commence.
The Company is also obligated under a technology license agreement with
Footmark, Inc. (Footmark), a company owned by a shareholder, to pay a 6% royalty
on System sales which use Footmark's technology through 2000. The Company is
required to pay Footmark a termination fee of $55,000 if the Company elects not
to use Footmark's technology after that date.
NOTE 5 - INCOME TAXES
The Company reported a loss of $326,326 for federal income tax purposes for the
year ended December 31, 1998. Accordingly, no current provision for income taxes
is reflected in the accompanying financial statements. For federal income tax
purposes, the loss may be carried forward to offset future taxable income
through 2013.
Deferred income taxes are provided to reflect the tax consequences in
F-51
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 5 - INCOME TAXES, CONTINUED
future years of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts and of tax loss carryforwards.
A valuation allowance is recorded when it is more likely than not that some
portion or all
of the deferred tax assets will not be realized. Since the Company had not
commenced its planned principal operations as of December 31, 1998, a valuation
allowance was provided for all deferred tax assets recognized.
The following table presents the total deferred tax assets for all temporary
differences and the tax loss carryforward and the related valuation allowance at
December 31, 1998:
Net operating loss tax benefit ............... $ 122,699
Payables not recognized for tax
purposes .................................. 193,074
---------
Net deferred tax asset .................... 315,773
Less: valuation allowance ................... (315,773)
---------
Net deferred tax .......................... $ --
=========
NOTE 6 - LEASE COMMITMENT
The Company leases its office space pursuant to a month-to-month leasing
arrangement. Rent expense totaled $12,509 in 1998.
NOTE 7 - STOCK WARRANTS
In connection with certain common stock sales during 1998, the Company granted
warrants to purchase up to 413,329 shares of common stock which may be exercised
at any time through 2000 and warrants to purchase up to 73,334 shares of common
stock which may be exercised through 2001. All such warrants are exercisable at
$.75 per share. No charges to earnings were recorded in connection with these
warrants.
NOTE 8 - SUBSEQUENT EVENTS
COMMON STOCK
Subsequent to December 31, 1998, the Company issued 713,332 shares of common
stock to certain individuals for cash proceeds of $580,000.
F-52
<PAGE>
CYBERCARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 8 - SUBSEQUENT EVENTS, CONTINUED
STOCK OPTIONS AND WARRANTS
Subsequent to December 31, 1998, the following stock options and warrants
were granted:
During January 1999, the Company's Board of Directors (the Board)
granted warrants to an individual to purchase up to 13,334 shares of
common stock at $.75 per share which are exercisable at any time through
January 2002.
During May 1999, the Board granted to certain key employees options to
purchase 300,000 shares of common stock at an exercise price of $.75 per
share (estimated fair value at the date of grant). These options are
exercisable at any time through May 2004.
In addition during May 1999, the Board granted options to purchase
80,000 shares of common stock at an exercise price of $.75 per share to
another employee which vest over a three-year period.
No charges to earnings will be recorded in connection with these
transactions.
LETTER OF INTENT
During June 1999, the Company entered into a letter of intent to merge with
Medical Industries of America, Inc., a publicly-traded company, (MIOA).
Under the terms of the letter of intent, the Company's shareholders will
receive one share of of MIOA's common stock for each share of the Company's
common stock. Additionally, any outstanding options and warrants for the
Company's common stock will be converted to options and warrants in MIOA
with comparable terms and discounts. Completion of the merger is subject to
the signing of a definitive agreement and approval by MIOA's shareholders.
F-53
<PAGE>
The Resale of
__________ Shares
of
Common Stock
Offered by
Selling Shareholders
CYBER-CARE, INC.
PROSPECTUS
November 30, 1999
45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to our Articles of Incorporation, and as permitted by the Florida
Business Corporation Act, we may indemnify our directors and officers under
certain circumstances against reasonable expenses (including court costs and
attorney's fees), judgments, penalties, fines, and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of his being a director, officer, employee, or
agent of the Company if it is determined that he acted in accordance with the
applicable standard of conduct set forth in such statutory provisions. Thus, the
indemnification provisions will protect officers and directors from liability
only if the officer or director meets the applicable standard of conduct and the
Company has the financial ability to honor the indemnity.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the registration and distribution of
the securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:
Registration Fee - Securities and Exchange Commission $ 7,753
Printing and Engraving.............................. 1,000*
Legal Fees and Expenses............................. 25,000*
Accounting Fees..................................... 20,000*
Blue Sky Fees and Expenses.......................... 1,000*
--------
Total............................................... $54,753*
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information with respect to all common
stock, $.0025 par value, of the Registrant sold by it within the three-year
period preceding the date of this Registration Statement:
(a) The Registrant offered and sold the following described securities,
either for cash or in consideration of services rendered as indicated
below, without registration under the Securities Act of 1933, as amended;
and exemption for such sales from registration under the Act is claimed in
reliance upon the exemption provided by Section 4(2) thereof on the basis
that such offers and sales were transactions not involving any public
offering. Appropriate precautions against transfer have been taken,
including the placing of a restrictive legend on all certificates
evidencing such securities. All such sales were effected without the aid of
underwriters, and no sales commissions were paid.
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PURCHASE PRICE
NAME DATE OF SALE COMMON SHARES PURCHASE PRICE PER SHARE
- ---- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PRN of North Carolina ............ 10/1/97 400,000 95,785 0.24
Pyramid Holdings ................. 10/30/97 72,790 113,622 1.56
West America ..................... 10/23/97 139,096 280,000 2.01
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Friends of Tzohar ................ 11/20/97 2,500 3,438 1.38
Global Air Charter et al ......... 12/31/97 3,609,285 5,413,928 1.50
Michael Mayer .................... 1/1/98 25,000 31,875 1.28
Pharmacy Care Specialists ........ 4/1/98 680,000 1,079,840 1.59
Your Good Health Network ......... 10/15/98 3,333,333 2,500,000 0.75
Continental Capital .............. 2/22/99 50,000 25,000 0.5
James Shanks ..................... 3/17/99 25,000 15,000 0.6
Air Response, Inc. ............... 3/1/99 3,886,667 2,900,000 0.75
Cynthia Lubinsky ................. 5/20/99 25,000 18,750 0.75
Institute for Wellness ........... 4/1/99 57,630 62,500 1.08
Cybercare, Inc. .................. 9/1/99 7,399,996 8,324,996 1.13
Frank Sadler ..................... 10/4/99 13,337 10,000 0.75
</TABLE>
47
<PAGE>
ITEM 27. EXHIBITS.
The Exhibits to this Registration Statement are listed in the Exhibit
Index commencing at page EX-1 hereof.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or
in the aggregate, represent a fundamental change in the
information in this Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this registration,
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment to
this Registration Statement any of the securities being registered which
remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the Florida Business Corporation Act, the Articles of
Incorporation, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or person controlling the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the Registrant in connection with any
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boynton Beach, State of Florida, on the date below.
DATED: November 30, 1999 CYBER-CARE, INC.
BY: /S/ PAUL C. PERSHES
Paul C. Pershes
President and Director
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/S/ MICHAEL F. MORRELL Chairman, Director, September 30, 1999
Michael F. Morrell Chief Executive Officer
/S/ ARTHUR KOBRIN Senior Vice President September 30, 1999
Arthur Kobrin of Financial Operations
/S/ LINDA MOORE Senior Vice President September 30, 1999
Linda Moore and Secretary
/S/ JOHN HAINES Senior Vice President September 30, 1999
John Haines and Director
/S/ LOUIS R. CAPECE Director September 30, 1999
Louis R. Capece
/S/ GLEN BARBER Director September 30, 1999
Glen Barber
/S/ TED ORLANDO Director September 30, 1999
Ted Orlando
/S/ DANA PUSATERI Director September 30, 1999
Dana Pusateri
/S/ TERRY LAZAR Director September 30, 1999
Terry Lazar
49
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM SB-2
Registration Statement
Under The Securities Act of 1933
EXHIBITS
CYBER-CARE, INC.
(Exact name of registrant as specified in our charter)
50
<PAGE>
EXHIBIT INDEX
CYBER-CARE, INC.
The following exhibits are included as part of this registration statement,
except those exhibits marked (1), which have previously been filed with the
Securities and Exchange Commission and are incorporated by reference to another
registration statement, report or document. References to the "Company" in this
Exhibit Index mean CYBER-CARE, INC., a Florida corporation.
EXHIBIT NO. DOCUMENT NO.
- ----------- ------------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.0 Instruments establishing rights of security holders
4.1 Investment Agreement
4.2 Registration Rights Agreement
4.3 Escrow Agreement and Instructions
4.4 Warrant to Purchase Common Stock of Medical Industries
of America, Inc. ("N" Shares)
4.5 Warrant to Purchase Common Stock of Medical Industries
of America, Inc. ("425,000" Shares)
4.6 Letter to Corporate Stock Transfer
4.7 Agreement
4.8 Acknowledgement
5.0 Opinion re legality
5.1 Legal opinion of Atlas, Pearlman, Attorneys at Law (9)
10.0 Material contracts
10.1 Form of Indemnification Agreement between the Registrant
and each of its directors and certain executive officers (1)
10.2 Form of agreement between the Company and its client hospitals (1)
10.3 Master Lease Agreement, dated October 16, 1991, between the
Registrant and Comdisco Medical Leasing Group, Inc. (1)
10.4 Agreement between the Registrant and Northwest Broward
Invasive Cardiology Associates (1)
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. (2)
10.6 Financial Consulting Agreement (1)
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 (1)
10.8 Technomed, Inc. Share Exchange Agreement (3)
10.9 Westmark Group Holdings, Inc. Agreement (4)
10.10 Greenworld Technologies, Inc. Agreement (4)
10.11 Employment Agreement - Harry Kobrin (4)
10.12 Employment Agreement - Dawn M. Drella (4)
10.13 Essential Care Share Exchange Agreement (4)
10.14 Amendment to Essential Care Share Exchange Agreement (4)
10.15 Employment Agreement - Michael Morrell (5)
10.16 Employment Agreement - Arthur Kobrin (6)
10.17 Employment Agreement - Linda Moore (6)
51
<PAGE>
EXHIBIT NO. DOCUMENT NO.
- ----------- -----------
10.18 Share Exchange Agreement between MIOA Acquisition
Company I, Inc. and Global Air Rescue, Inc. (7)
10.19 Share Exchange Agreement between MIOA Acquisition
Company I, Inc. and Global Air Charter, Inc. (7)
10.20 Share Exchange Agreement between MIOA Acquisition
Company I, Inc. and Clearwater Jet Center, Inc. (7)
10.21 Agreement and Plan of Merger between Medical Industries
of America, Inc.,MIOA Acquisition Company V, Inc., David
S. Klein, M.D., P.C. and David S. Klein, M.D. (8)
23.0 Consents of experts and counsel
23.1 Consent of Templeton & Company, P.A.
23.2 Consent of Atlas, Pearlman, Attorneys at Law (included in
Exhibit 5.1)
23.3 Consent of Grant Thornton, Certified Public Accountants
99.0 Additional exhibits
- ------------------------------------------------------------------------------
(1) Incorporated by reference from the Exhibit with the same reference number
in the Company's Registration Statement.
(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1992.
(3) Previously filed as an exhibit to the Company's Form 8-K dated August 23,
1995.
(4) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(5) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.
(6) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(7) Previously filed as an exhibit to the Company's Form 8-K dated January 6,
1998.
(8) Previously filed as an exhibit to the Company's Form 8-K dated August 6,
1998.
(9) To be filed.
52
EXHIBIT 4.1
MEDICAL INDUSTRIES OF AMERICA, INC.
INVESTMENT AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY
MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE FEDERAL AND STATE SECURITIES LAWS.
THIS INVESTMENT AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED
BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. THE
INVESTOR MUST RELY ON ITS OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF
THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN THE ATTACHED
DISCLOSURE DOCUMENTS AS EXHIBIT J.
SEE ADDITIONAL LEGENDS AT SECTIONS 4.7.
THIS INVESTMENT AGREEMENT (this "Agreement" or "Investment
Agreement") is made as of the 21ST day of July, 1999, by and between Medical
Industries of America, Inc., a corporation duly organized and existing under the
laws of the State of Florida (the "Company"), and the undersigned Investor
executing this Agreement ("Investor").
RECITALS:
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor, and the
Investor shall purchase from the Company, from time to time as provided herein,
shares of the Company's Common Stock , as part of an offering of Common Stock by
the Company to Investor, for a maximum aggregate offering amount of Twenty Five
Million Dollars ($25,000,000) (the "Maximum Offering Amount"); and
<PAGE>
WHEREAS, the solicitation of this Investment Agreement and, if accepted by
the Company, the offer and sale of the Common Stock are being made in reliance
upon the provisions of Regulation D ("Regulation D") promulgated under the Act,
Section 4(2) of the Act, and/or upon such other exemption from the registration
requirements of the Act as may be available with respect to any or all of the
purchases of Common Stock to be made hereunder.
2
<PAGE>
TERMS:
NOW, THEREFORE, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement (including the recitals
above), the following terms shall have the following meanings (such meanings to
be equally applicable to both the singular and plural forms of the terms
defined):
"20% Approval" shall have the meaning set forth in Section 5.26.
"Accredited Investor" shall have the meaning set forth in Section 3.1.
"Act" shall mean the Securities Act of 1933, as amended.
"Advance Put Notice" shall have the meaning set forth in Section 2.3.1(a),
the form of which is attached hereto as EXHIBIT E.
"Advance Put Notice Confirmation" shall have the meaning set forth in
Section 2.3.1(a), the form of which is attached hereto as EXHIBIT F.
"Advance Put Notice Date" shall have the meaning set forth in Section
2.3.1(a).
"Affiliate" shall have the meaning as set forth Section 6.5.
"Aggregate Issued Shares" equals the aggregate number of shares of Common
Stock issued to Investor pursuant to the terms of this Agreement or the
Registration Rights Agreement as of a given date, including Put Shares and
Warrant Shares.
"Agreed Upon Procedures Report" shall have the meaning set forth in
Section 2.6.3(b).
"Agreement" shall mean this Investment Agreement.
"Automatic Termination" shall have the meaning set forth in Section
2.3.2.
"Bring Down Cold Comfort Letters" shall have the meaning set forth in
Section 2.3.6(b).
"Business Day" shall mean any day during which the Principal Market is
open for trading.
"Calendar Month" shall mean the period of time beginning on the numeric
day in question in a calendar month and for Calendar Months thereafter,
beginning on the earlier of (i) the same numeric day of the next calendar month
or (ii) the last day of the next calendar month. Each Calendar Month shall end
on the day immediately preceding the beginning of the next succeeding Calendar
Month.
"Cap Amount" shall have the meaning set forth in Section 2.3.11.
"Capital Raising Limitations" shall have the meaning set forth in
Section 6.6.1.
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"Capitalization Schedule" shall have the meaning set forth in Section
3.2.4, attached hereto as EXHIBIT K.
"Closing" shall mean one of (i) the Investment Commitment Closing and (ii)
each closing of a purchase and sale of Common Stock pursuant to Section 2.
"Closing Bid Price" means, for any security as of any date, the last
closing bid price for such security on the Nasdaq Small Cap Market, or the
Nasdaq National Market, whichever is then the principal securities exchange or
trading market for such security, or, if neither the Nasdaq Small Cap Market nor
the Nasdaq National Market is the principal securities exchange or trading
market for such security, the last closing bid price of such security on the
principal securities exchange or trading market where such security is listed or
traded as reported by such principal securities exchange or trading market, or
if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security,
or, if no closing bid price is reported for such security, the average of the
bid prices of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot
be calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the Investor in this Offering. If the
Company and the Investor in this Offering are unable to agree upon the fair
market value of the Common Stock, then such dispute shall be resolved by an
investment banking firm mutually acceptable to the Company and the Investor in
this offering and any fees and costs associated therewith shall be paid by the
Company.
"Commitment Evaluation Period" shall have the meaning set forth in
Section 2.7.
"Commitment Warrants" shall have the meaning set forth in Section 2.7.
"Commitment Warrant Exercise Price" shall have the meaning set forth in
Section 2.7.
"Common Shares" shall mean the shares of Common Stock of the Company.
"Common Stock" shall mean the common stock of the Company.
"Company" shall mean Medical Industries of America, Inc., a corporation
duly organized and existing under the laws of the State of Florida.
"Company Designated Maximum Put Dollar Amount" shall have the meaning set
forth in Section 2.3.1(a).
"Company Designated Minimum Put Share Price" shall have the meaning set
forth in Section 2.3.1(a).
"Company Termination" shall have the meaning set forth in Section 2.3.14.
"Conditions to Investor's Obligations" shall have the meaning as set
forth in Section 2.2.4.
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"Delisting Event" shall mean any time during the term of this Investment
Agreement, that the Company's Common Stock is not listed for and actively
trading on the Nasdaq Small Cap Market, the Nasdaq National Market, the American
Stock Exchange, the O.T.C. Bulletin Board, or the New York Stock Exchange or is
suspended or delisted with respect to the trading of the shares of Common Stock
on such market or exchange.
"Disclosure Documents" shall have the meaning as set forth in Section
3.2.4.
"Due Diligence Review" shall have the meaning as set forth in Section 2.6
"Effective Date" shall have the meaning set forth in Section 2.3.1.
"Escrow Agreement" shall have the meaning set forth in Section 2.3.1(f).
"Escrow Agent" shall have the meaning set forth in Section 2.3.1(f).
"Evaluation Day" shall have the meaning set forth in Section 2.3.7(b).
"Equity Securities" shall have the meaning set forth in Section 6.6.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Excluded Day" shall have the meaning set forth in Section 2.3.7(b).
"Extended Put Period" shall mean the period of time between the Advance
Put Notice Date until the Pricing Period End Date.
"First Pricing Date" shall have the meaning set forth in Section 2.3.1(d).
"First Pricing Period" shall have the meaning set forth in Section
2.3.1(d).
"First Put Limit" shall have the meaning set forth in Section 2.3.1(b).
"First Volume Limitation" shall have the meaning set forth in Section
2.3.1(b).
"Impermissible Put Cancellation" shall have the meaning set forth in
Section 2.3.1(e).
"Indemnified Liabilities" shall have the meaning set forth in Section 9.
"Indemnities" shall have the meaning set forth in Section 9.
"Indemnitor" shall have the meaning set forth in Section 9.
"Individual Put Limit" shall have the meaning set forth in Section 2.3.1
(b).
"Ineffective Period" shall mean any period of time that the Registration
Statement or any Supplemental Registration Statement (each as defined in the
Registration Rights Agreement) becomes ineffective or unavailable for use for
the sale or resale, as applicable, of any or all of the Registrable Securities
(as defined in the Registration Rights Agreement) for any reason (or in the
event the prospectus under either of the above is not current and deliverable)
during any time period required under the Registration Rights Agreement.
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"Intended Put Share Amount" shall have the meaning set forth in Section
2.3.1(a).
"Investment Commitment Closing" shall have the meaning set forth in
Section 2.2.3.
"Investment Agreement" shall mean this Investment Agreement.
"Investment Commitment Opinion of Counsel" shall mean an opinion from
Company's independent counsel, substantially in the form attached as EXHIBIT B,
or such other form as agreed upon by the parties, as to the Investment
Commitment Closing.
"Investment Date" shall mean the date of the Investment Commitment
Closing.
"Investor" shall have the meaning set forth in the preamble hereto.
"Key Employee" shall have the meaning set forth in Section 5.18, as set
forth in EXHIBIT N.
"Late Payment Amount" shall have the meaning set forth in Section 2.3.8.
"Legend" shall have the meaning set forth in Section 4.7.
"Major Transaction" shall mean and shall be deemed to have occurred at
such time upon any of the following events:
(i) a consolidation, merger or other business combination or event
or transaction following which the holders of Common Stock of the Company
immediately preceding such consolidation, merger, combination or event either
(i) no longer hold a majority of the shares of Common Stock of the Company or
(ii) no longer have the ability to elect the board of directors of the Company
(a "Change of Control"); provided, however, that if the other entity involved in
such consolidation, merger, combination or event is a publicly traded company
with "Substantially Similar Trading Characteristics" (as defined below) as the
Company and the holders of Common Stock are to receive solely Common Stock,
and/or replacement warrants and options, or no consideration (if the Company is
the surviving entity) or solely common stock of such other entity (if such other
entity is the surviving entity), such transaction shall not be deemed to be a
Major Transaction (provided the surviving entity, if other than the Company,
shall have agreed to assume all obligations of the Company under this Agreement
and the Registration Rights Agreement). For purposes hereof, an entity shall
have Substantially Similar Trading Characteristics as the Company if the average
daily dollar trading volume of the common stock of such entity is equal to or in
excess of $100,000 for the 90th through the 31st day prior to the public
announcement of such transaction;
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
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(iii) a purchase, tender or exchange offer made to the holders of
outstanding shares of Common Stock, such that following such purchase, tender or
exchange offer a Change of Control shall have occurred. Notwithstanding the
above, the following transaction shall not be deemed to be a Major Transaction:
the effectuation of that certain stock exchange agreement between the Company
and American Enterprise Solutions, Inc. to close prior to December 31, 1999.
"Market Price" shall equal the lowest intra-day trade price for the Common
Stock on the Principal Market during the ten (10) Business Days immediately
preceding the applicable Pricing Date.
"Material Facts" shall have the meaning set forth in Section 2.3.6(a).
"Maximum Put Dollar Amount" shall mean the lesser of (i) the Company
Designated Maximum Put Dollar Amount, if any, specified by the Company in a Put
Notice, and (ii) $5 million.
"Maximum Offering Amount" shall mean Twenty Five Million Dollars
($25,000,000).
"Nasdaq 20% Rule" shall have the meaning set forth in Section 2.3.11.
"NASD" shall have the meaning set forth in Section 6.10.
"NYSE" shall have the meaning set forth in Section 6.10.
"Numeric Day" shall mean the numerical day of the month of the Investment
Date or the last day of the calendar month in question, whichever is less.
"Offering" shall mean the Company's offering of common stock and warrants
issued under this Investment Agreement.
"Officer's Certificate" shall mean a certificate, signed by an officer of
the Company, to the effect that the representations and warranties of the
Company in this Agreement required to be true for the applicable Closing are
true and correct in all material respects and all of the conditions and
limitations set forth in this Agreement for the applicable Closing are
satisfied.
"Opinion of Counsel" shall mean, as applicable, the Investment Commitment
Opinion of Counsel, the Put Opinion of Counsel, the Registration Opinion and the
Purchase Warrant Opinion of Counsel.
"Payment Due Date" shall have the meaning set forth in Section 2.3.8.
"Pricing Dates" shall have the meaning set forth in Section 2.3.1(d).
"Pricing Period" shall mean the First Pricing Period or the Second Pricing
period, as applicable.
"Pricing Period End Date" shall mean the last Business Day of any Pricing
Period.
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"Principal Market" shall mean the Nasdaq Small Cap Market, the Nasdaq
National Market, the American Stock Exchange, the O.T.C. Bulletin Board, or the
New York Stock Exchange, whichever is at the time the principal trading exchange
or market for the Common Stock.
"Proceeding" shall have the meaning as set forth Section 5.1.
"Purchase" shall have the meaning set forth in Section 2.3.7(a).
"Purchase Warrants" shall have the meaning set forth in Section 2.4.2.
"Purchase Warrant Exercise Price" shall have the meaning set forth in
Section 2.4.2.
"Purchase Warrant Opinion of Counsel" shall mean an opinion from Company's
independent counsel, substantially in the form attached as EXHIBIT O, or such
other form as agreed upon by the parties, as to the issuance of Purchase
Warrants to the Investor.
"Put" shall have the meaning set forth in Section 2.3.1(d).
"Put Cancellation" shall have the meaning set forth in Section 2.3.13(a).
"Put Cancellation Notice Confirmation" shall have the meaning set forth in
Section 2.3.13(c), the form of which is attached hereto as EXHIBIT S.
"Put Cancellation Date" shall have the meaning set forth in Section
2.3.13(a).
"Put Cancellation Notice" shall have the meaning set forth in Section
2.3.13(a), the form of which is attached hereto as EXHIBIT Q.
"Put Closing" shall have the meaning set forth in Section 2.3.8.
"Put Closing Date" shall have the meaning set forth in Section 2.3.8.
"Put Date" shall mean the date that is specified by the Company in any Put
Notice for which the Company intends to exercise a Put under Section 2.3.1,
unless the Put Date is postponed pursuant to the terms hereof, in which case the
"Put Date" is such postponed date.
"Put Dollar Amount" shall be determined by multiplying the Put Share
Amount by the Put Share Price with respect to such Put Date, subject to the
limitations herein.
"Put Notice" shall have the meaning set forth in Section 2.3.1(d), the
form of which is attached hereto as EXHIBIT G.
"Put Notice Confirmation" shall have the meaning set forth in Section
2.3.1(d), the form of which is attached hereto as EXHIBIT H.
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"Put Opinion of Counsel" shall mean an opinion from Company's independent
counsel, in the form attached as EXHIBIT I, or such other form as agreed upon by
the parties, as to any Put Closing.
"Put Share Amount" shall mean the Individual Put Limit for the applicable
Put.
"Put Share Price" shall have the meaning set forth in Section 2.3.1(c).
"Put Shares" shall mean shares of Common Stock that are purchased by the
Investor pursuant to a Put.
"Registrable Securities" shall have the meaning as set forth in the
Registration Rights Agreement.
"Registration Opinion" shall have the meaning set forth in Section
2.3.6(a).
"Registration Opinion Deadline" shall have the meaning set forth in
Section 2.3.6(a).
"Registration Rights Agreement" shall mean that certain registration
rights agreement entered into by the Company and Investor on even date herewith,
in the form attached hereto as EXHIBIT A, or such other form as agreed upon by
the parties.
"Registration Statement" shall have the meaning as set forth in the
Registration Rights Agreement.
"Regulation D" shall mean Regulation D promulgated under the Act.
"Reporting Issuer" shall have the meaning set forth in Section 6.2.
"Required Put Documents" shall have the meaning set forth in Section
2.3.5.
"Risk Factors" shall have the meaning set forth in Section 3.2.4, attached
hereto as EXHIBIT J.
"Schedule of Exceptions" shall have the meaning set forth in Section 5,
and is attached hereto as Exhibit C.
"SEC" shall mean the Securities and Exchange Commission.
"Second Pricing Date" shall have the meaning set forth in Section
2.3.1(d).
"Second Pricing Period" shall have the meaning set forth in Section
2.3.1(d).
"Second Put Limit" shall have the meaning set forth in Section 2.3.1(b).
"Second Volume Limitation" shall have the meaning set forth in Section
2.3.1(b).
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"Securities" shall mean this Investment Agreement, together with the
Common Stock of the Company, the Warrants and the Warrant Shares issuable
pursuant to this Investment Agreement.
"Semi-Annual Non-Usage Fee" shall have the meaning set forth in Section
2.7.
"Share Authorization Increase Approval" shall have the meaning set forth
in Section 5.26.
"Six Month Anniversary" shall mean the date that is the same Numeric Day
of the sixth (6th) calendar month after the Investment Date, and the date that
is the same Numeric Day of each sixth (6th) calendar month thereafter, provided
that if such date is not a Business Day, the next Business Day thereafter.
"Stockholder 20% Approval" shall have the meaning set forth in Section
6.12.
"Supplemental Registration Statement" shall have the meaning set forth in
the Registration Rights Agreement.
"Term" shall mean the term of this Agreement, which shall be a period of
time beginning on the date of this Agreement and ending on the Termination Date.
"Termination Date" shall mean the earlier of (i) the date that is three
(3) years after the date of this Agreement, or (ii) the date that is thirty (30)
Business Days after the later of (a) the Put Closing Date on which the sum of
the aggregate Put Share Price for all Put Shares equal the Maximum Offering
Amount, (b) the date that the Company has delivered a Termination Notice to the
Investor, (c) the date of an Automatic Termination, and (d) the date that all of
the Warrants have been exercised.
"Termination Fee" shall have the meaning as set forth in Section 2.7.
"Termination Notice" shall have the meaning as set forth in Section
2.3.14.
"Third Party Report" shall have the meaning set forth in Section 3.2.4.
"Transfer Agent Instructions" shall mean the Company's instructions to its
transfer agent, substantially in the form attached as EXHIBIT T, or such other
form as agreed upon by the parties.
"Transaction Documents" shall have the meaning set forth in Section 9.
"Trigger Price" shall have the meaning set forth in Section 2.3.7(b).
"Truncated Pricing Period" shall have the meaning set forth in Section
2.3.7(b).
"Truncated Put Share Amount" shall have the meaning set forth in Section
2.3.13(b).
"Unlegended Share Certificates" shall mean a certificate or certificates
(or electronically delivered shares, as appropriate) (in denominations as
instructed by Investor) representing the shares of Common Stock to which the
Investor is then entitled to receive, registered in the name of Investor or its
nominee (as instructed by Investor) and not containing a restrictive legend or
stop transfer order, including but not limited to the Put Shares for the
applicable Put and Warrant Shares.
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"Use of Proceeds Schedule" shall have the meaning as set forth in Section
3.2.4, attached hereto as EXHIBIT L.
"Warrant Shares" shall mean the Common Stock issuable upon exercise of the
Warrants.
"Warrants" shall mean Purchase Warrants and Commitment Warrants.
2. PURCHASE AND SALE OF COMMON STOCK.
2.1 OFFER TO SUBSCRIBE.
Subject to the terms and conditions herein and the satisfaction of
the conditions to closing set forth in Sections 2.2 and 2.3 below, Investor
hereby agrees to purchase such amounts of Common Stock and accompanying Warrants
as the Company may, in its sole and absolute discretion, from time to time elect
to issue and sell to Investor according to one or more Puts pursuant to Section
2.3 below.
2.2 INVESTMENT COMMITMENT.
2.2.1 [Intentionally Left Blank].
2.2.2 [Intentionally Left Blank].
2.2.3 INVESTMENT COMMITMENT CLOSING. The closing of this
Agreement (the "Investment Commitment Closing") shall be deemed to occur when
this Agreement and the Registration Rights Agreement have been executed by both
Investor and the Company, the Transfer Agent Instructions have been executed by
both the Company and the Transfer Agent, and the other Conditions to Investor's
Obligations set forth in Section 2.2.4 below have been met.
2.2.4 CONDITIONS TO INVESTOR'S OBLIGATIONS. As a prerequisite
to the Investment Commitment Closing and the Investor's obligations hereunder,
all of the following (the "Conditions to Investor's Obligations") shall have
been satisfied prior to or concurrently with the Company's execution and
delivery of this Agreement:
(a) the following documents shall have been delivered to the
Investor: (i) the Registration Rights Agreement (executed by
the Company and Investor), (ii) the Investment Commitment
Opinion of Counsel (signed by the Company's counsel), (iii)
the Transfer Agent Instructions (executed by the Company and
the Transfer Agent), and (iv) a Secretary's Certificate as to
(A) the resolutions of the Company's board of directors
authorizing this transaction, (B) the Company's Articles of
Incorporation, and (C) the Company's Bylaws;
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(b) this Investment Agreement, accepted by the Company, shall have
been received by the Investor;
(c) [Intentionally Left Blank];
(d) the Company's Common Stock shall be listed for trading and
actually trading on the Nasdaq Small Cap Market, the Nasdaq
National Market, the American Stock Exchange, the O.T.C.
Bulletin Board, or the New York Stock Exchange;
(e) other than continuing losses described in the Risk Factors set
forth in the Disclosure Documents (provided for in Section
3.2.4), as of the Closing there have been no material adverse
changes in the Company's business or financial condition since
the date of the last balance sheet included in the Disclosure
Documents, including but not limited to incurring material
liabilities; and
(f) the representations and warranties of the Company in this
Agreement shall be true and correct in all material respects
and the conditions to Investor's obligations set forth in this
Section 2.2.4 shall have been satisfied as of such Closing;
and the Company shall deliver an Officer's Certificate, signed
by an officer of the Company, to such effect to the Investor.
2.3 PUTS OF COMMON SHARES TO THE INVESTOR.
2.3.1 PROCEDURE TO EXERCISE A PUT. Subject to the Individual
Put Limit, the Maximum Offering Amount and the Cap Amount (if applicable), and
the other conditions and limitations set forth in this Agreement, at any time
beginning on the date on which the Registration Statement is declared effective
by the SEC (the "Effective Date"), the Company may, in its sole and absolute
discretion, elect to exercise one or more Puts according to the following
procedure, provided that each subsequent Put Date after the first Put Date shall
be no sooner than twenty (20) Business Days following the preceding Put Date:
(a) DELIVERY OF ADVANCE PUT NOTICE. At least ten (10)
Business Days but not more than twenty (20) Business Days prior to any intended
Put Date (unless otherwise agreed in writing by the Investor), the Company shall
deliver advance written notice (the "Advance Put Notice," the form of which is
attached hereto as EXHIBIT E, the date of such Advance Put Notice being the
"Advance Put Notice Date") to Investor stating the Put Date for which the
Company shall, subject to the limitations and restrictions contained herein,
exercise a Put and stating the number of shares of Common Stock (subject to the
Individual Put Limit and the Maximum Put Dollar Amount) which the Company
intends to sell to the Investor for the Put (the "Intended Put Share Amount").
The Company may, at its option, also designate in any Advance Put Notice
(i) a maximum dollar amount of Common Stock, not to exceed $5,000,000, which it
shall sell to Investor during the Put (the "Company Designated Maximum Put
Dollar Amount") and/or (ii) a minimum purchase price per Put Share at which the
Investor may purchase Shares pursuant to such Put Notice (a "Company Designated
Minimum Put Share Price"). The Company Designated Minimum Put Share Price, if
applicable, shall be no greater than 85% of the Closing Bid Price of the
Company's Common Stock on the Advance Put Notice Date. The Company may decrease
(but not increase) the Company Designated Minimum Put Share Price for a Put at
any time by giving the Investor written notice of such decrease not later than
12:00 Noon, New York City time, on the Business Day immediately preceding the
Business Day that such decrease is to take effect. A decrease in the Company
Designated Minimum Put Share Price shall have no retroactive effect on the
determination of Trigger Prices and Excluded Days for days preceding the
Business Day that such decrease takes effect.
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Notwithstanding the above, if, at the time of delivery of an Advance Put
Notice, more than two (2) Calendar Months have passed since the previous Put
Date, such Advance Put Notice shall provide at least twenty (20) Business Days
notice of the intended Put Date, unless waived in writing by the Investor. In
order to effect delivery of the Advance Put Notice, the Company shall (i) send
the Advance Put Notice by facsimile on such date so that such notice is received
by the Investor by 6:00 p.m., New York, NY time, and (ii) surrender such notice
on such date to a courier for overnight delivery to the Investor (or two (2) day
delivery in the case of an Investor residing outside of the U.S.). Upon receipt
by the Investor of a facsimile copy of the Advance Put Notice, the Investor
shall, within two (2) Business Days, send, via facsimile, a confirmation of
receipt (the "Advance Put Notice Confirmation," the form of which is attached
hereto as EXHIBIT F) of the Advance Put Notice to the Company specifying that
the Advance Put Notice has been received and affirming the intended Put Date and
the Intended Put Share Amount.
(b) INDIVIDUAL PUT LIMIT. The "Individual Put Limit"
is the number of shares of Common Stock that the Investor shall be obligated to
purchase in a given Put, and shall equal the sum of the First Put Limit and the
Second Put Limit for that Put, but shall not exceed 9.9% of the total amount of
the Company's Common Stock that would be outstanding upon completion of the Put.
The "First Put Limit" shall mean a number of Put Shares equal to the lesser of
(i) 17.5% of the sum of the aggregate daily reported trading volumes in the
outstanding Common Stock on the Company's Principal Market, excluding any block
trades which exceed "X" shares of Common Stock made by persons other than the
Investor or any affiliates of the Investor, for all Evaluation Days (as defined
in Section 2.3.7(b) below) in the First Pricing Period (this limitation is
referred to herein as the "First Volume Limitation"), where "X" shall equal the
lesser of (x) 100,001 shares or (y) 25% of that day's trading volume, (ii) the
Intended Put Share Amount, and (iii) the number of Put Shares which, when
multiplied by their respective Put Share Prices, equals the Maximum Put Dollar
Amount. The "Second Put Limit" shall mean a number of Put Shares equal to the
lesser of (i) 17.5% of the sum of the aggregate daily reported trading volumes
in the outstanding Common Stock on the Company's Principal Market, excluding any
block trades which exceed "X" (as defined above) shares of Common Stock made by
persons other than the Investor or any affiliates of the Investor, for all
Evaluation Days (as defined in Section 2.3.7(b) below) in the Second Pricing
Period (this limitation is referred to herein as the "Second Volume Limitation,"
which, together with the First Volume Limitation is referred to as the Volume
Limitations), (ii) the difference of the Intended Put Share Amount minus the
First Put Limit, and (iii) the number of Put Shares which, when multiplied by
their respective Put Share Prices, and added to the First Put Limit, equals the
Maximum Put Dollar Amount. Company agrees not to trade Common Stock or arrange
for Common Stock to be traded for the purpose of artificially increasing the
Volume Limitations. Notwithstanding the above, in no event shall the sum of the
First Put Limit and the Second Put Limit exceed 17.5% of the sum of the
aggregate daily reported trading volumes in the outstanding Common Stock on the
Company's Principal Market, excluding any block trades which exceed "X" (as
defined above) shares of Common Stock made by persons other than the Investor or
any affiliates of the Investor, for the twenty (20) Trading Days immediately
preceding the Put Date (this limitation, together with the limitation in (i)
immediately above, are collectively referred to herein as the "Volume
Limitations"). In the event of any future change in the Nasdaq's "double
counting" rules, the 17.5% percentage of the aggregate daily trading volumes
used to calculate the Individual Put Limit shall be adjusted, based upon a
formulation mutually agreeable to the Company and the Investor, to account for
such change. In the event that the parties, in good faith, are unable to agree
upon a mutually acceptable formulation to account for such change, the Company,
at its option, may terminate the Investment Agreement without incurring a
Termination Fee.
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(c) PUT SHARE PRICE. The purchase price per share for
the Put Shares (the "Put Share Price") shall equal the lesser of (i) the Market
Price on the applicable Pricing Date, minus $.10, or (ii) 91% of the Market
Price on the applicable Pricing Date, but shall in no event be less than the
Company Designated Minimum Put Share Price in effect for such Put, if
applicable.
(d) PRICING DATES/PRICING PERIODS. With respect to
each Put, the Put Share Price for a number of Put Shares equal to the First Put
Limit for that Put shall be determined on the First Pricing Date, and the Put
Share Price for a number of Put Shares equal to the Second Put Limit for that
Put shall be determined on the Second Pricing Date.
For purposes hereof:
The "First Pricing Date" shall mean the tenth (10th)
Business Day after each Put Date.
The "Second Pricing Date" shall mean the twentieth
(20th) Business Day after each Put Date.
The First Pricing Date and the Second Pricing Date shall
be referred to singularly as a "Pricing Date" and collectively as "Pricing
Dates."
The "First Pricing Period" with respect to any Put shall
mean the period of time beginning on the Business Day immediately following the
Put Date for that Put, and ending on the First Pricing Date.
The "Second Pricing Period" with respect to any Put
shall mean the period of time beginning on the Business Day immediately
following the First Pricing Date and ending on the Second Pricing Date.
(e) DELIVERY OF PUT NOTICE. After delivery of an Advance
Put Notice, on the Put Date specified in the Advance Put Notice the Company
shall deliver written notice (the "Put Notice," the form of which is attached
hereto as EXHIBIT G) to Investor stating (i) the Put Date, (ii) the Intended Put
Share Amount as specified in the Advance Put Notice (such exercise a "Put"),
(iii) the Company Designated Maximum Put Dollar Amount (if applicable), and (iv)
the Company Designated Minimum Put Share Price (if applicable). In order to
effect delivery of the Put Notice, the Company shall (i) send the Put Notice by
facsimile on the Put Date so that such notice is received by the Investor by
6:00 p.m., New York, NY time, and (ii) surrender such notice on the Put Date to
a courier for overnight delivery to the Investor (or two (2) day delivery in the
case of an Investor residing outside of the U.S.). Upon receipt by the Investor
of a facsimile copy of the Put Notice, the Investor shall, within two (2)
Business Days, send, via facsimile, a confirmation of receipt (the "Put Notice
Confirmation," the form of which is attached hereto as EXHIBIT H) of the Put
Notice to Company specifying that the Put Notice has been received and affirming
the Put Date and the Intended Put Share Amount.
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(f) DELIVERY OF REQUIRED PUT DOCUMENTS. On or before
the Put Date for such Put, the Company shall deliver the Required Put Documents
(as defined in Section 2.3.5 below), other than the Put Share Certificates, to
the Investor (or to an agent of Investor, if Investor so directs) and shall
deliver the Put Share Certificates (or electronically delivered shares, as
appropriate) to the escrow agent for the Offering, First Union National Bank,
N.A. (the "Escrow Agent") pursuant to the Escrow Agreement and Instructions (the
"Escrow Agreement") in the form of EXHIBIT V attached hereto or in such other
form as agreed to by the parties, executed by the Escrow Agent, the Company and
the Investor. Unless otherwise agreed by the Company and the Investor, the Put
Shares of Common Stock shall be transmitted electronically pursuant to such
electronic delivery system in accordance with the Escrow Agreement; otherwise
delivery shall be by physical certificates. If the Company has not delivered all
of the Required Put Documents to the Investor and the Put Share Certificates (or
electronically delivered shares, as appropriate) to the Escrow Agent on or
before the Put Date, the Put shall be automatically cancelled, unless the
Investor agrees to delay the Put Date by up to three (3) Business Days, in which
case the Pricing Period begins on the Business Day following such new Put Date.
If the Company has not delivered all of the Required Put Documents to the
Investor and the Put Share Certificates (or electronically delivered shares, as
appropriate) to the Escrow Agent on or before the Put Date (or new Put Date, if
applicable), and the Investor has not agreed in writing to delay the Put Date,
the Put is automatically canceled (an "Impermissible Put Cancellation") and,
unless the Put was otherwise canceled in accordance with the terms of Section
2.3.13, the Company shall pay the Investor $3,750 for its reasonable due
diligence expenses incurred in preparation for the canceled Put and the Company
may deliver an Advance Put Notice for the subsequent Put no sooner than ten (10)
Business Days after the date that such Put was canceled, unless otherwise agreed
by the Investor.
2.3.2 TERMINATION OF RIGHT TO PUT. The Company's right to
require the Investor to purchase any subsequent Put Shares shall terminate
permanently (each, an "Automatic Termination") upon the occurrence of any of the
following:
(a) the Company shall not exercise a Put or any Put
thereafter if, at any time, either the Company or any director or executive
officer of the Company has engaged in a transaction or conduct related to the
Company that results in (i) a Securities and Exchange Commission enforcement
action, or (ii) a civil judgment or criminal conviction for fraud or
misrepresentation, or for any other offense that, if prosecuted criminally,
would constitute a felony under applicable law;
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(b) the Company shall not exercise a Put or any Put
thereafter, on any date after a cumulative time period or series of time
periods, including both Ineffective Periods and Delisting Events, that lasts for
an aggregate of four (4) months;
(c) the Company shall not exercise a Put or any Put
thereafter if at any time the Company has filed for and/or is subject to any
bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors instituted by or against the Company or any subsidiary of the Company;
provided that in the event that an involuntary bankruptcy petition is filed
against the Company, the Company shall have sixty (60) days to obtain dismissal
of such petition before such Put prohibition shall initiate, during which period
the Company shall not be entitled to initiate any Puts;
(d) the Company shall not exercise a Put after the
sooner of (i) the date that is three (3) years after the date of this Agreement,
or (ii) the Put Closing Date on which the aggregate of the Put Dollar Amounts
for all Puts equal the Maximum Offering Amount; and
(e) the Company shall not exercise a Put after the
Company has breached any covenant in Section 2.7, Section 6, or Section 9
hereof; provided that if such breach is curable, no Automatic Termination shall
occur if the Company has cured such breach within thirty (30) days of the first
date the Company becomes aware of such breach, provided that the Company shall
not be entitled to initiate any Puts prior to such cure.
2.3.3 PUT LIMITATIONS. The Company's right to exercise a
Put shall be limited as follows:
(a) [Intentionally Left Blank].
(b) notwithstanding the amount of any Put, the Investor
shall not be obligated to purchase any additional Put Shares once the aggregate
Put Dollar Amount paid by Investor equals the Maximum Offering Amount;
(c) the Investor shall not be obligated to acquire
and pay for the Put Shares with respect to any Put for which the Company has
announced a subdivision or combination, including a reverse split, of its Common
Stock or has subdivided or combined its Common Stock during the Extended Put
Period for that Put;
(d) the Investor shall not be obligated to acquire
and pay for the Put Shares with respect to any Put for which the Company has
paid a dividend of its Common Stock or has made any other distribution of its
Common Stock during the Extended Put Period for that Put;
(e) the Investor shall not be obligated to acquire
and pay for the Put Shares with respect to any Put for which the Company has
made, during the Extended Put Period, a distribution of all or any portion of
its assets or evidences of indebtedness to the holders of its Common Stock;
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(f) the Investor shall not be obligated to acquire and
pay for the Put Shares with respect to any Put for which a Major Transaction has
occurred during the Extended Put Period;
2.3.4 CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO
DELIVER AN ADVANCE PUT NOTICE OR A PUT NOTICE AND THE OBLIGATION OF THE INVESTOR
TO PURCHASE PUT SHARES. The right of the Company to deliver an Advance Put
Notice or a Put Notice and the obligation of the Investor hereunder to acquire
and pay for the Put Shares incident to a Closing is subject to the satisfaction,
on (i) the date of delivery of such Advance Put Notice or Put Notice and (ii)
the applicable Put Closing Date, of each of the following conditions:
(a) the Company's Common Stock shall be listed for and trading on
the Nasdaq Small Cap Market, the Nasdaq National Market, the
O.T.C. Bulletin Board, the American Stock Exchange or the New
York Stock Exchange and the Put Shares shall be so listed, and
to the Company's knowledge there is no notice of any
suspension or delisting with respect to the trading of the
shares of Common Stock on such market or exchange;
(b) the Company shall have satisfied any and all obligations
pursuant to the Registration Rights Agreement, including, but
not limited to, the filing of the Registration Statement with
the SEC with respect to the resale of all Registrable
Securities and the requirement that the Registration Statement
shall have been declared effective by the SEC for the resale
of all Registrable Securities and the Company shall have
satisfied and shall be in material compliance with any and all
obligations pursuant to this Agreement and the Warrants;
(c) [Intentionally Left Blank].
(d) the representations and warranties of the Company are true and
correct in all material respects as if made on such date and
the conditions to Investor's obligations set forth in this
Section 2.3.4 are satisfied as of such Closing, and the
Company shall deliver a certificate, signed by an officer of
the Company, to such effect to the Investor;
(e) the Company shall have reserved for issuance a sufficient
number of Common Shares for the purpose of enabling the
Company to satisfy any obligation to issue Common Shares
pursuant to any Put and to effect exercise of the Warrants;
(f) the Registration Statement is not subject to an Ineffective
Period as defined in the Registration Rights Agreement, the
prospectus included therein is current and deliverable, and to
the Company's knowledge there is no notice of any
investigation or inquiry concerning any stop order with
respect to the Registration Statement; and
(g) if the Aggregate Issued Shares after the Closing of the Put,
when added to the number of Warrant Shares issuable upon
exercise of all Warrants then outstanding, would exceed the
Cap Amount, the Company shall have obtained the Stockholder
20% Approval as specified in Section 6.12.
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2.3.5 DOCUMENTS REQUIRED TO BE DELIVERED ON THE PUT DATE AS
CONDITIONS TO CLOSING OF ANY PUT. The Closing of any Put and Investor's
obligations hereunder shall additionally be conditioned upon the delivery to the
Investor (or, in the case of the Put Shares, delivery to the Escrow Agent) of
each of the following (the "Required Put Documents") on or before the applicable
Put Date:
(a) a number of Unlegended Share Certificates (or freely
tradeable electronically delivered shares, as appropriate) equal to the Intended
Put Share Amount, in denominations (if applicable) of not more than 50,000
shares per certificate;
(b) the following documents: Put Opinion of Counsel,
Officer's Certificate, Put Notice, any required Registration Opinion, and any
report or disclosure required under Section 2.3.6 or Section 2.6;
(c) current Risk Factors; and
(d) all documents, instruments and other writings
required to be delivered on or before the Put Date pursuant to any provision of
this Agreement in order to implement and effect the transactions contemplated
herein.
2.3.6 ACCOUNTANT'S LETTER AND REGISTRATION OPINION.
(a) The Company shall have caused to be delivered to
the Investor, (i) whenever required by Section 2.3.6(b) or by Section 2.6.3, and
(ii) on the date that is three (3) Business Days prior to each Put Date (the
"Registration Opinion Deadline"), an opinion of the Company's independent
counsel, in substantially the form of EXHIBIT R (the "Registration Opinion"),
addressed to the Investor stating, inter alia, that, to its knowledge, no facts
("Material Facts") exist that would cause it to believe that the Registration
Statement is subject to an Ineffective Period or to believe that the
Registration Statement, any Supplemental Registration Statement (as each may be
amended, if applicable), and any related prospectuses, contain an untrue
statement of material fact or omits a material fact required to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. If a Registration Opinion cannot be delivered by the
Company's independent counsel to the Investor on the Registration Opinion
Deadline due to the existence of Material Facts or an Ineffective Period, the
Company shall promptly notify the Investor and as promptly as possible amend
each of the Registration Statement and any Supplemental Registration Statements,
as applicable, and any related prospectus or otherwise use its reasonable best
efforts to cause such Ineffective Period to terminate, as the case may be, and
deliver such Registration Opinion and updated prospectus as soon as possible
thereafter. If at any time after a Put Notice shall have been delivered to
Investor but before the related Pricing Period End Date, the Company acquires
knowledge of such Material Facts or any Ineffective Period occurs, the Company
shall promptly notify the Investor and shall deliver a Put Cancellation Notice
to the Investor pursuant to Section 2.3.13 by facsimile and overnight courier by
the end of that Business Day.
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(b) (i) the Company shall engage its independent
auditors to perform the procedures in accordance with the provisions of
Statement on Auditing Standards No. 71, as amended, as agreed to by the parties
hereto, and reports thereon (the "Bring Down Cold Comfort Letters") as shall
have been reasonably requested by the Investor with respect to certain financial
information contained in the Registration Statement and shall have delivered to
the Investor such a report addressed to the Investor, on the date that is three
(3) Business Days prior to each Put Date.
(ii) in the event that the Investor shall have
requested delivery of an "Agreed Upon Procedures Report" pursuant to Section
2.6.3, the Company shall engage its independent auditors to perform certain
agreed upon procedures and report thereon as shall have been reasonably
requested by the Investor with respect to certain financial information of the
Company and the Company shall deliver to the Investor a copy of such report
addressed to the Investor. In the event that the report required by this Section
2.3.6(b) cannot be delivered by the Company's independent auditors, the Company
shall, if necessary, promptly revise the Registration Statement and the Company
shall not deliver a Put Notice until such report is delivered.
2.3.7 MECHANICS OF PURCHASE OF PUT SHARES.
(a) INVESTOR'S OBLIGATION AND RIGHT TO PURCHASE SHARES.
Subject to the conditions set forth in this Agreement, following the Investor's
receipt of a validly delivered Put Notice, the Investor shall be required to
purchase (each a "Purchase") from the Company a number of Put Shares equal to
the Put Share Amount, in the manner described below.
(b) TRUNCATED PRICING PERIOD. If a Put Cancellation
Notice has been delivered to the Investor during a Pricing Period, that Pricing
Period shall end at the close of trading on the last full trading day on the
Principal Market that ends prior to the moment of initial delivery of the Put
Cancellation Notice (a "Truncated Pricing Period") to the Investor.
For purposes of this Agreement:
"Trigger Price" for any Pricing Period shall mean the greater of (i)
the Company Designated Minimum Put Share Price, plus $.10, or (ii) the Company
Designated Minimum Put Share Price divided by .91.
An "Excluded Day" shall mean each Business Day during a Pricing
Period where either:
(A) the number of shares of Common Stock, if any, that trade on the
Principal Market on such Business Day at a trade price below the
applicable Trigger Price exceeds the lesser of (i) twenty percent
(20%) of the total trading volume of the Common Stock on the
Principal Market for that day, or (ii) 20,000 shares (the lesser of
which is referred to as the "Trading Trigger Amount"), or
(B) the Closing Bid Price on such Business Day is below the Trigger
Price and, on the following Business Day, the number of shares of
Common Stock that trade at a trade price above the applicable
Trigger Price is less than the Trading Trigger Amount for the day
being evaluated as to its status as an Excluded Day.
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An "Evaluation Day" shall mean each Business Day during a Pricing
Period that is not an Excluded Day.
2.3.8 MECHANICS OF PUT CLOSING. Each of the Company
and the Investor shall deliver all documents, instruments and writings required
to be delivered by either of them pursuant to this Agreement at or prior to each
Closing. Subject to such delivery and the satisfaction of the conditions set
forth in Sections 2.3.4 and 2.3.5, the closing of the purchase by the Investor
of Shares shall occur by 5:00 PM, New York City Time, on the date which is four
(4) Business Days following the applicable Pricing Period End Date (or such
other time or later date as is mutually agreed to by the Company and the
Investor) (the "Payment Due Date") at the offices of Investor. On or before each
Payment Due Date, the Investor shall deliver to the Escrow Agent, in the manner
specified in the Escrow Agreement, the Put Dollar Amount to be paid for such Put
Shares, determined as aforesaid. The closing (each a "Put Closing") for each Put
shall occur on the date that both (i) the Company has delivered all Required Put
Documents (excluding the Put Shares) to the Investor and has delivered the Put
Shares to the Escrow Agent, and (ii) the Investor has delivered to the Escrow
Agent such Put Dollar Amount and any Late Payment Amount, if applicable (each a
"Put Closing Date").
If the Investor does not deliver to the Company the Put Dollar Amount for
such Put Closing on or before the Payment Due Date, then the Investor shall pay
to the Company, in addition to the Put Dollar Amount, an amount (the "Late
Payment Amount") at a rate of X% per month, accruing daily, multiplied by such
Put Dollar Amount, where "X" equals one percent (1%) for the first month
following the date in question, and increases by an additional one percent (1%)
for each month that passes after the date in question, up to a maximum of five
percent (5%) per month; provided, however, that in no event shall the amount of
interest that shall become due and payable hereunder exceed the maximum amount
permissible under applicable law.
2.3.9 [Intentionally Left Blank].
2.3.10 LIMITATION ON SHORT SALES. The Investor and its
Affiliates shall not engage in short sales of the Company's Common Stock;
provided, however, that the Investor may enter into any short exempt sale or any
short sale or other hedging or similar arrangement it deems appropriate with
respect to Put Shares after it receives a Put Notice with respect to such Put
Shares so long as such sales or arrangements do not involve more than the number
of such Put Shares specified in the Put Notice, and so long as such short sale
or other hedging or similar arrangement is not at a price below the Trigger
Price.
2.3.11 CAP AMOUNT. Unless the Company has obtained Stockholder
20% Approval as set forth in Section 6.12 or unless otherwise permitted by
Nasdaq, in no event shall the Aggregate Issued Shares exceed the maximum number
of shares of Common Stock (the "Cap Amount") that the Company can, without
stockholder approval, so issue pursuant to Nasdaq Rule 4460(i)(1)(d)(ii) (or any
other applicable Nasdaq Rules or any successor rule) (the "Nasdaq 20% Rule").
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2.3.12 [Intentionally Left Blank]
2.3.13 PUT CANCELLATION.
(a) MECHANICS OF PUT CANCELLATION. If at any time
during an Extended Put Period the Company discovers the existence of Material
Facts or any Ineffective Period or Delisting Event occurs, the Company shall
cancel the Put (a "Put Cancellation"), by delivering written notice to the
Investor (the "Put Cancellation Notice"), attached as EXHIBIT Q, by facsimile
and overnight courier. The "Put Cancellation Date" shall be the date that the
Put Cancellation Notice is first received by the Investor, if such notice is
received by the Investor by 6:00 p.m., New York, NY time, and shall be the
following date, if such notice is received by the Investor after 6:00 p.m., New
York, NY time.
(b) EFFECT OF PUT CANCELLATION. Anytime a Put
Cancellation Notice is delivered to Investor after the Put Date, the Put, shall
remain effective with respect to a number of Put Shares (the "Truncated Put
Share Amount"), which shall equal the Individual Put Limit for the Truncated
Pricing Period.
(c) PUT CANCELLATION NOTICE CONFIRMATION. Upon receipt
by the Investor of a facsimile copy of the Put Cancellation Notice, the Investor
shall promptly send, via facsimile, a confirmation of receipt (the "Put
Cancellation Notice Confirmation," a form of which is attached as EXHIBIT S) of
the Put Cancellation Notice to the Company specifying that the Put Cancellation
Notice has been received and affirming the Put Cancellation Date.
2.3.14 INVESTMENT AGREEMENT CANCELLATION. The Company may
terminate (a "Company Termination") its right to initiate future Puts by
providing written notice ("Termination Notice") to the Investor, by facsimile
and overnight courier, at any time other than during an Extended Put Period,
provided that such termination shall have no effect on the parties' other rights
and obligations under this Agreement, the Registration Rights Agreement or the
Warrants. Notwithstanding the above, any cancellation occurring during an
Extended Put Period is governed by Section 2.3.13. Unless otherwise provided
herein, in the event of a Company Termination, the Company shall be required to
pay the Termination Fee.
2.3.15 RETURN OF EXCESS COMMON SHARES. In the event that the
number of Shares purchased by the Investor pursuant to its obligations hereunder
is less than the Intended Put Share Amount, the Investor shall cause the Escrow
Agent to promptly return to the Company any shares of Common Stock in the
Investor's possession that are not being purchased by the Investor.
2.4 WARRANTS.
2.4.1 [Intentionally Omitted].
2.4.2 PURCHASE WARRANTS. Within five (5) Business Days of the
end of the Second Pricing Period for each Put, the Company shall issue and
deliver to the Investor a warrant ("Purchase Warrant"), in the form attached
hereto as EXHIBIT D, or such other form as agreed upon by the parties, to
purchase a number of shares of Common Stock equal to 10% of the number of Put
Shares issued to Investor in that Put. Each Purchase Warrant shall be
exerciseable at a price (the "Purchase Warrant Exercise Price") which shall
initially equal 115% of the
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average Closing Bid Price for the five (5) Business Days immediately preceding
the Put Date, and shall have reset provisions as set forth in the Warrant. Each
Purchase Warrant shall be immediately exercisable at the Purchase Warrant
Exercise Price, and shall have a term beginning on the date of issuance and
ending on the date that is five (5) years thereafter. The Warrant Shares shall
be registered for resale pursuant to the Registration Rights Agreement.
Concurrently with the issuance and delivery of the Purchase Warrant to the
Investor, the Company shall deliver to the Investor a Purchase Warrant Opinion
of Counsel (signed by the Company's independent counsel).
2.5 [Intentionally Left Blank].
2.6 DUE DILIGENCE REVIEW. The Company shall make available for
inspection and review by the Investor (the "Due Diligence Review"), advisors to
and representatives of the Investor (who may or may not be affiliated with the
Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of Common Stock on behalf of the Investor
pursuant to the Registration Statement, any Supplemental Registration Statement,
or amendments or supplements thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
2.6.1 TREATMENT OF NONPUBLIC INFORMATION. The Company
shall not disclose nonpublic information to the Investor or to its advisors or
representatives unless prior to disclosure of such information the Company
identifies such information as being nonpublic information and provides the
Investor and such advisors and representatives with the opportunity to accept or
refuse to accept such nonpublic information for review. The Company may, as a
condition to disclosing any nonpublic information hereunder, require the
Investor and its advisors and representatives to enter into a confidentiality
agreement (including an agreement with such advisors and representatives
prohibiting them from trading in Common Stock during such period of time as they
are in possession of nonpublic information) in form reasonably satisfactory to
the Company and the Investor.
Nothing herein shall require the Company to disclose nonpublic
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate nonpublic information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, promptly notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
nonpublic information (whether or not requested of the Company specifically or
generally during the course of due diligence by and such persons or entities),
which, if not disclosed in the Prospectus included in the Registration
Statement, would cause such Prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading. Nothing contained in this Section 2.6 shall be construed to mean
that such persons or entities other than the Investor (without the written
consent of the Investor prior to disclosure of such information) may not obtain
nonpublic information in the course of conducting due diligence in accordance
with the terms of this Agreement; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any nonpublic information
discovered by such advisors or representatives in the course of their due
diligence without the written consent of the Investor prior to disclosure of
such information.
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2.6.2 DISCLOSURE OF MISSTATEMENTS AND OMISSIONS. The
Investor's advisors or representatives shall make complete disclosure to the
Investor's counsel of all events or circumstances constituting nonpublic
information discovered by such advisors or representatives in the course of
their due diligence upon which such advisors or representatives form the opinion
that the Registration Statement contains an untrue statement of a material fact
or omits a material fact required to be stated in the Registration Statement or
necessary to make the statements contained therein, in the light of the
circumstances in which they were made, not misleading. Upon receipt of such
disclosure, the Investor's counsel shall consult with the Company's independent
counsel in order to address the concern raised as to the existence of a material
misstatement or omission and to discuss appropriate disclosure with respect
thereto; provided, however, that such consultation shall not constitute the
advice of the Company's independent counsel to the Investor as to the accuracy
of the Registration Statement and related Prospectus.
2.6.3 PROCEDURE IF MATERIAL FACTS ARE REASONABLY BELIEVED TO
BE UNTRUE OR ARE OMITTED. In the event after such consultation the Investor or
the Investor's counsel reasonably believes that the Registration Statement
contains an untrue statement or a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading,
(a) the Company shall file with the SEC an
amendment to the Registration Statement responsive to such alleged untrue
statement or omission and provide the Investor, as promptly as practicable, with
copies of the Registration Statement and related Prospectus, as so amended, or
(b) if the Company disputes the existence of
any such material misstatement or omission, (i) the Company's independent
counsel shall provide the Investor's counsel with a Registration Opinion and
(ii) in the event the dispute relates to the adequacy of financial disclosure
and the Investor shall reasonably request, the Company's independent auditors
shall provide to the Company a letter ("Agreed Upon Procedures Report")
outlining the performance of such "agreed upon procedures" as shall be
reasonably requested by the Investor and the Company shall provide the Investor
with a copy of such letter.
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2.7 COMMITMENT PAYMENTS.
2.7.1 COMMITMENT WARRANTS. In partial consideration hereof,
following the execution of the Letter of Intent dated on or about May 19, 1999
between the Company and the Investor, the Company issued and delivered to
Investor, warrants (the "Commitment Warrants") in the form attached hereto as
EXHIBIT U, or such other form as agreed upon by the parties, to purchase 425,000
shares of Common Stock. The Commitment Warrants shall be exerciseable at a price
(the "Commitment Warrant Exercise Price") which shall initially equal 115% of
the average Closing Bid Price for the five (5) trading days immediately
preceding May 19, 1999 ("Initial Exercise Price"), and shall have reset
provisions as set forth in the Warrant. Each Commitment Warrant shall be
immediately exercisable at the Commitment Warrant Exercise Price, and shall have
a term beginning on the date of issuance and ending on date that is five (5)
years thereafter. The Warrant Shares shall be registered for resale pursuant to
the Registration Rights Agreement. Concurrently with the issuance and delivery
of the Commitment Warrant to the Investor, the Company shall deliver to the
Investor an Investment Commitment Opinion of Counsel (signed by the Company's
independent counsel).
2.7.2 NON-USAGE FEES AND TERMINATION FEE. On the last Business Day
of each six (6) Calendar Month period following the Effective Date (each such
period a "Commitment Evaluation Period"), if the Company has not either (i) Put
to the Investor Put Shares having an aggregate Put Dollar Amount totaling at
least the Maximum Offering Amount in all Puts, or (ii) Put $1,000,000 in
aggregate Put Dollar Amount during that Commitment Evaluation Period, the
Company, in consideration of Investor's commitment costs, including, but not
limited to, due diligence expenses, shall pay to the Investor an amount (the
"Semi-Annual Non-Usage Fee ") equal to the difference of (i) $100,000, minus
(ii) 10% of the aggregate Put Dollar Amount of the Put Shares put to Investor
during that Commitment Evaluation Period. In the event that the Company delivers
a Termination Notice to the Investor or an Automatic Termination occurs, the
Company shall pay to the Investor (the "Termination Fee") the greater of (i) the
Semi-Annual Non-Usage Fee for the applicable Commitment Evaluation Period, or
(ii) the difference of (x) $200,000, minus (y) 10% of the aggregate Put Dollar
Amount of the Put Shares put to Investor during all Puts to date, and the
Company shall not be required to pay the Semi-Annual Non-Usage Fee thereafter.
No additional Non-Usage Fees shall accrue after (i) a Company Termination, (ii)
an Automatic Termination, or (iii) a termination under the terms of Section
2.7.4 or Section 6.14, provided that any Non-Usage Fees which have accrued prior
to the occurrence of (i), (ii), or (iii) above shall be payable within five (5)
business days of such occurrence.
Each Semi Annual Non-Usage Fee or Termination Fee is payable within five
(5) business days of the date it accrued in accordance with this Agreement, in
cash or in registered, unlegended, freely tradable Common Stock of the Company.
Where such payment is made in shares of Common Stock, each share of Common Stock
shall be valued at the lesser of (i) the average Closing Bid Price for the five
(5) Business Days preceding the date that such Semi-Annual Non-Usage Fee is due,
or (ii) the average Closing Bid Price for the five (5) Business Days preceding
the date that such shares are delivered to Investor. The Company shall not be
required to deliver any payments to Investor under this subsection until
Investor has paid all Put Dollar Amounts that are then due, subject to Section
2.7.4 below.
2.7.3 SUSPENSION WITHOUT ACCRUING NON-USAGE FEES. Notwithstanding
the above, the Company shall be entitled to suspend (a "Suspension") the Equity
Line for up to six (6) periods not to exceed an aggregate of nine (9) Calendar
Months for the purpose of effecting one or more secondary underwritten offerings
or for the purpose of Ineffective Periods, by giving written notice to the
Investor stating the beginning date and the duration of the Suspension. During
the term of the Suspension, the Company may not deliver any Advance Put Notices
or effect any Puts.
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The Non-Usage Fees for any Commitment Evaluation Period(s) which occur
during a Suspension will be reduced by 1/6 for each full Calendar Month (or pro
rata for each partial Calendar month) of the Suspension.
2.7.4 TERMINATION WITHOUT ACCRUAL OF TERMINATION FEE. In the event
that the Investor has not made full payment for any Put Shares by the applicable
Payment Due Date, and the Investor has failed to make such payment within three
(3) Business Days after receipt of written notification from the Company (which
notification may be given anytime after the applicable Payment Due Date) that it
plans to terminate this Investment Agreement for non-payment, the Company may
terminate this Agreement without being required to pay a Termination Fee. In the
event that the Company terminates this Agreement for non-payment in conjunction
with the terms of this Section 2.7.4, the Warrants shall become null and void,
to the extent that that they have not yet been exercised as of the Payment Due
Date for such late payment, and the Investor shall immediately return the
unexercised portion(s) of the Warrants to the Company.
Furthermore, in the event that (i) the Company has filed the Registration
Statement by the date that is 45 days after the date hereof, (ii) the Company
has used its reasonable best efforts to have the Registration Statement declared
effective and has responded to any comments from the Securities and Exchange
Commission within 30 days of receipt thereof, AND (iii) a Registration Statement
has not been declared effective by the date that is 6 months from the date that
the registration statement was filed, then the Company may terminate this
Agreement without being required to pay the cash Termination Fee.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF INVESTOR. Investor hereby
represents and warrants to and agrees with the Company as follows:
3.1 ACCREDITED INVESTOR. Investor is an accredited investor
("Accredited Investor"), as defined in Rule 501 of Regulation D, and has checked
the applicable box set forth in Section 10 of this Agreement.
3.2 INVESTMENT EXPERIENCE; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
3.2.1 ACCESS TO INFORMATION. Investor or Investor's
professional advisor has been granted the opportunity to ask questions of and
receive answers from representatives of the Company, its officers, directors,
employees and agents concerning the terms and conditions of this Offering, the
Company and its business and prospects, and to obtain any additional information
which Investor or Investor's professional advisor deems necessary to verify the
accuracy and completeness of the information received.
3.2.2 RELIANCE ON OWN ADVISORS. Investor has relied completely
on the advice of, or has consulted with, Investor's own personal tax,
investment, legal or other advisors and has not relied on the Company or any of
its affiliates, officers, directors, attorneys, accountants or any affiliates of
any thereof and each other person, if any, who controls any of the foregoing,
within the meaning of Section 15 of the Act for any tax or legal advice (other
than reliance on information in the Disclosure Documents as defined in Section
3.2.4 below and on the Opinion of Counsel). The foregoing, however, does not
limit or modify Investor's right to rely upon covenants, representations and
warranties of the Company in this Agreement.
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3.2.3 CAPABILITY TO EVALUATE. Investor has such knowledge and
experience in financial and business matters so as to enable such Investor to
utilize the information made available to it in connection with the Offering in
order to evaluate the merits and risks of the prospective investment, which are
substantial, including without limitation those set forth in the Disclosure
Documents (as defined in Section 3.2.4 below).
3.2.4 DISCLOSURE DOCUMENTS. Investor, in making Investor's
investment decision to subscribe for the Investment Agreement hereunder,
represents that (a) Investor has received and had an opportunity to review (i)
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998,
(ii) the Company's quarterly report on Form 10-QSB for the quarters ended March
31, 1999, (iii) the Risk Factors, attached as EXHIBIT J, (the "Risk Factors")
(iv) the Capitalization Schedule, attached as EXHIBIT K, (the "Capitalization
Schedule") (v) the Use of Proceeds Schedule, attached as EXHIBIT L, (the "Use of
Proceeds Schedule"), and (vi) the other material transactions described in
Schedule 3.2.4; (b) Investor has read, reviewed, and relied solely on the
documents described in (a) above, the Company's representations and warranties
and other information in this Agreement, including the exhibits, documents
prepared by the Company which have been specifically provided to Investor in
connection with this Offering (the documents described in this Section 3.2.4 (a)
and (b) are collectively referred to as the "Disclosure Documents"), and an
independent investigation made by Investor and Investor's representatives, if
any; (c) Investor has, prior to the date of this Agreement, been given an
opportunity to review material contracts and documents of the Company which have
been filed as exhibits to the Company's filings under the Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and has had an opportunity
to ask questions of and receive answers from the Company's officers and
directors; and (d) is not relying on any oral representation of the Company or
any other person, nor any written representation or assurance from the Company
other than those contained in the Disclosure Documents or incorporated herein or
therein. The foregoing, however, does not limit or modify Investor's right to
rely upon covenants, representations and warranties of the Company in Sections 5
and 6 of this Agreement. Investor acknowledges and agrees that the Company has
no responsibility for, does not ratify, and is under no responsibility
whatsoever to comment upon or correct any reports, analyses or other comments
made about the Company by any third parties, including, but not limited to,
analysts' research reports or comments (collectively, "Third Party Reports"),
and Investor has not relied upon any Third Party Reports in making the decision
to invest. During the course of its due diligence, nothing has come to the
Investor's attention to indicate that the Disclosure Documents are not true and
correct.
3.2.5 INVESTMENT EXPERIENCE; FEND FOR SELF. Investor has
substantial experience in investing in securities and it has made investments in
securities other than those of the Company. Investor acknowledges that Investor
is able to fend for Investor's self in the transaction contemplated by this
Agreement, that Investor has the ability to bear the economic risk of Investor's
investment pursuant to this Agreement and that Investor is an "Accredited
Investor" by virtue of the fact that Investor meets the investor qualification
standards set forth in Section 3.1 above. Investor has not been organized for
the purpose of investing in securities of the Company, although such investment
is consistent with Investor's purposes.
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3.3 EXEMPT OFFERING UNDER REGULATION D.
3.3.1 [Intentionally Left Blank].
3.3.2 NO GENERAL SOLICITATION. The Investment Agreement was
not offered to Investor through, and Investor is not aware of, any form of
general solicitation or general advertising, including, without limitation, (i)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
3.3.3 RESTRICTED SECURITIES. Investor understands that the
Investment Agreement is, the Common Stock and Warrants issued at each Put
Closing will be, and the Warrant Shares will be, characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction exempt from the registration
requirements of the federal securities laws and that under such laws and
applicable regulations such securities may not be transferred or resold without
registration under the Act or pursuant to an exemption therefrom. In this
connection, Investor represents that Investor is familiar with Rule 144 under
the Act, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.3.4 DISPOSITION. Without in any way limiting the
representations set forth above, Investor agrees that until the Securities are
sold pursuant to an effective Registration Statement or an exemption from
registration, they will remain in the name of Investor and will not be
transferred to or assigned to any dealer or depositary, provided that the
Investor may direct the Escrow Agent to deliver any shares that the Investor is
entitled to receive into street name at a brokerage account specified by the
Investor. Investor further agrees not to sell, transfer, assign, or pledge the
Securities, or to otherwise dispose of all or any portion of the Securities
unless and until:
(a) There is then in effect a registration statement
under the Act and any applicable state securities laws covering such proposed
disposition and such disposition is made in accordance with such registration
statement and in compliance with applicable prospectus delivery requirements; or
(b) (i) Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition to the extent relevant
for determination of the availability of an exemption from registration, and
(ii) if reasonably requested by the Company, Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of the Securities under the Act
or state securities laws. It is agreed that the Company will not require the
Investor to provide opinions of counsel for transactions made pursuant to Rule
144 provided that Investor and Investor's broker, if necessary, provide the
Company with the necessary representations for counsel to the Company to issue
an opinion with respect to such transaction.
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The Investor is entering into this Agreement for its own account and
the Investor has no present arrangement (whether or not legally binding) at any
time to sell the Common Stock to or through any person or entity; provided,
however, that by making the representations herein, the Investor does not agree
to hold the Common Stock for any minimum or other specific term and reserves the
right to dispose of the Common Stock at any time in accordance with federal and
state securities laws applicable to such disposition.
3.4 DUE AUTHORIZATION.
3.4.1 AUTHORITY. The person executing this Investment
Agreement, if executing this Agreement in a representative or fiduciary
capacity, has full power and authority to execute and deliver this Agreement and
each other document included herein for which a signature is required in such
capacity and on behalf of the subscribing individual, partnership, trust,
estate, corporation or other entity for whom or which Investor is executing this
Agreement. Investor has reached the age of majority (if an individual) according
to the laws of the state in which he or she resides.
3.4.2 DUE AUTHORIZATION. If Investor is a corporation,
Investor is duly and validly organized, validly existing and in good tax and
corporate standing as a corporation under the laws of the jurisdiction of its
incorporation with full power and authority to purchase the Securities to be
purchased by Investor and to execute and deliver this Agreement.
3.4.3 PARTNERSHIPS. If Investor is a partnership, the
representations, warranties, agreements and understandings set forth above are
true with respect to all partners of Investor (and if any such partner is itself
a partnership, all persons holding an interest in such partnership, directly or
indirectly, including through one or more partnerships), and the person
executing this Agreement has made due inquiry to determine the truthfulness of
the representations and warranties made hereby.
3.4.4 REPRESENTATIVES. If Investor is purchasing in a
representative or fiduciary capacity, the representations and warranties shall
be deemed to have been made on behalf of the person or persons for whom Investor
is so purchasing.
4. ACKNOWLEDGMENTS Investor is aware that:
4.1 RISKS OF INVESTMENT. Investor recognizes that an investment in
the Company involves substantial risks, including the potential loss of
Investor's entire investment herein. Investor recognizes that the Disclosure
Documents, this Agreement and the exhibits hereto do not purport to contain all
the information, which would be contained in a registration statement under the
Act;
4.2 NO GOVERNMENT APPROVAL. No federal or state agency has
passed upon the Securities, recommended or endorsed the Offering, or made any
finding or determination as to the fairness of this transaction;
4.3 NO REGISTRATION, RESTRICTIONS ON TRANSFER. As of the date of
this Agreement, the Securities and any component thereof have not been
registered under the Act or any applicable state securities laws by reason of
exemptions from the registration requirements of the Act and such laws, and may
not be sold, pledged (except for any limited pledge in connection with a margin
account of Investor to the extent that such pledge does not require registration
under the Act or unless an exemption from such registration is available and
provided further that if such pledge is realized upon, any transfer to the
pledgee shall comply with the requirements set forth herein), assigned or
otherwise disposed of in the absence of an effective registration of the
Securities and any component thereof under the Act or unless an exemption from
such registration is available;
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<PAGE>
4.4 RESTRICTIONS ON TRANSFER. Investor may not attempt to sell,
transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws;
4.5 NO ASSURANCES OF REGISTRATION. There can be no assurance that
any registration statement will become effective at the scheduled time, or ever,
or remain effective when required, and Investor acknowledges that it may be
required to bear the economic risk of Investor's investment for an indefinite
period of time;
4.6 EXEMPT TRANSACTION. Investor understands that the Securities are
being offered and sold in reliance on specific exemptions from the registration
requirements of federal and state law and that the representations, warranties,
agreements, acknowledgments and understandings set forth herein are being relied
upon by the Company in determining the applicability of such exemptions and the
suitability of Investor to acquire such Securities.
4.7 LEGENDS. The certificates representing the Put Shares shall not
bear a Restrictive Legend. The certificates representing the Warrant Shares
shall not bear a Restrictive Legend unless they are issued at a time when the
Registration Statement is not effective for resale. It is understood that the
certificates evidencing any Warrant Shares issued at a time when the
Registration Statement is not effective for resale, subject to legend removal
under the terms of Section 6.9 below, shall bear the following legend (the
"Legend"):
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities laws,
nor the securities laws of any other jurisdiction. They may not be sold or
transferred in the absence of an effective registration statement under
those securities laws or pursuant to an exemption therefrom."
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes
the following representations and warranties to Investor (which shall be true at
the signing of this Agreement, and as of any such later date as contemplated
hereunder) and agrees with Investor that, except as set forth in the Schedule of
Exceptions attached hereto as EXHIBIT C:
5.1 ORGANIZATION, GOOD STANDING, AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Florida, USA and has all requisite corporate power and authority
to carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the business or properties of the Company and its subsidiaries taken
as a whole. The Company is not the subject of any pending, threatened or, to its
knowledge, contemplated investigation or administrative or legal proceeding (a
"Proceeding") by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, or the Securities and Exchange Commission, The
National Association of Securities Dealer, Inc., The Nasdaq Stock Market, Inc.
or any state securities commission, or any other governmental entity, which have
not been disclosed in the Disclosure Documents. None of the disclosed
Proceedings, if any, will have a material adverse effect upon the Company or the
market for the Common Stock. The Company has the subsidiaries set forth on
Schedule 5.1.
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5.2 CORPORATE CONDITION. The Company's condition is, in all material
respects, as described in the Disclosure Documents (as further set forth in any
subsequently filed Disclosure Documents, if applicable), except for changes in
the ordinary course of business and normal year-end adjustments that are not, in
the aggregate, materially adverse to the Company. Except for continuing losses,
there have been no material adverse changes to the Company's business, financial
or condition since the dates of such Disclosure Documents. The financial
statements as contained in the 10-KSB and 10-QSB have been prepared in
accordance with generally accepted accounting principles, consistently applied
(except as otherwise permitted by Regulation S-X of the Exchange Act), subject,
in the case of unaudited interim financial statements, to customary year end
adjustments and the absence of certain footnotes, and fairly present the
financial condition of the Company as of the dates of the balance sheets
included therein and the consolidated results of its operations and cash flows
for the periods then ended. The Company has paid all material taxes that are
due, except for taxes that it reasonably disputes. There is no material claim,
litigation, or administrative proceeding pending or, to the best of the
Company's knowledge, threatened against the Company, except as disclosed in the
Disclosure Documents. This Agreement and the Disclosure Documents do not contain
any untrue statement of a material fact and do not omit to state any material
fact required to be stated therein or herein necessary to make the statements
contained therein or herein not misleading in the light of the circumstances
under which they were made.
5.3 AUTHORIZATION. All corporate action on the part of the Company
by its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder and the authorization, issuance and delivery of the Common
Stock being sold hereunder and the issuance (and/or the reservation for
issuance) of the Warrants and the Warrant Shares have been taken, and this
Agreement and the Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance with their terms,
except insofar as the enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or other similar laws affecting creditors' rights
generally or by principles governing the availability of equitable remedies. The
Company has obtained all consents and approvals required for it to execute,
deliver and perform each agreement referenced in the previous sentence, except
that the Company has not obtained the Stockholder 20% Approval.
5.4 VALID ISSUANCE OF COMMON STOCK. The Common Stock and the
Warrants, when issued, sold and delivered in accordance with the terms hereof,
for the consideration expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations of Investor in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Warrant Shares, when issued in accordance with the
terms of the Warrants, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Investor, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Put Shares, the Warrants and the Warrant Shares will
be issued free of any preemptive rights.
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5.5 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation (a "Violation") or default of any provisions of its Certificate of
Incorporation or Bylaws, each as amended and in effect on and as of the date of
the Agreement, or of any material provision ("Material Provision") of any
material instrument or material contract to which it is a party or by which it
is bound or of any provision of any federal or state judgment, writ, decree,
order, statute, rule or governmental regulation applicable to the Company, which
would have a material adverse effect on the Company's business, or on the
performance of its obligations under this Agreement or the Registration Rights
Agreement. The execution, delivery and performance of this Agreement and the
other agreements entered into in conjunction with the Offering and the
consummation of the transactions contemplated hereby and thereby will not (a)
result in any such Violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such Material Provision, instrument or contract or an event which results in the
creation of any lien, charge or encumbrance upon any assets of the Company,
which would have a material adverse effect on the Company's business, or on the
performance of its obligations under this Agreement, the Registration Rights
Agreement, (b) violate the Company's Certificate of Incorporation or By-Laws or
(c) violate any statute, rule or governmental regulation applicable to the
Company which violation would have a material adverse effect on the Company's
business.
5.6 REPORTING COMPANY. The Company is subject to the reporting
requirements of the Exchange Act, has a class of securities registered under
Section 12 of the Exchange Act, and has, since January of 1997, filed all
reports required by the Exchange Act since the date the Company first became
subject to such reporting obligations. The Company undertakes to furnish
Investor with copies of such reports as may be reasonably requested by Investor
prior to consummation of this Offering and thereafter, to make such reports
available, for the full term of this Agreement, including any extensions
thereof, and for as long as Investor holds the Securities. The Common Stock is
duly listed on the Nasdaq Small Cap Market. The Company is not in violation of
the listing requirements of the Nasdaq Small Cap Market and does not reasonably
anticipate that the Common Stock will be delisted by the Nasdaq Small Cap Market
for the foreseeable future, other than as set forth in Nasdaq response letter
dated May 14, 1999. The Company has filed all reports required under the
Exchange Act since January of 1997. The Company has not, to its knowledge,
furnished to the Investor any material nonpublic information concerning the
Company.
5.7 CAPITALIZATION. The capitalization of the Company as of July 21,
1999, is, and the capitalization as of the Closing, subject to exercise of any
outstanding warrants and/or exercise of any outstanding stock options, after
taking into account the offering of the Securities contemplated by this
Agreement and all other share issuances occurring prior to this Offering, will
be, as set forth in the Capitalization Schedule as set forth in EXHIBIT K. There
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities. Except as disclosed in
the Capitalization Schedule, as of the date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its subsidiaries, and (ii) there are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of its or their securities under the Act
(except the Registration Rights Agreement), other than set forth on Schedule
5.7.
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5.8 INTELLECTUAL PROPERTY. The Company has valid ownership of or
rights to use the patents, trademarks, trademark registrations, trade names,
copyrights, know-how, technology and other intellectual property necessary to
the conduct of its business. EXHIBIT M lists all patents, trademarks, trademark
registrations, trade names and copyrights of the Company. The Company has
granted such licenses or has assigned or otherwise transferred a portion of (or
all of) such valid, unrestricted and exclusive patents, trademarks, trademark
registrations, trade names, copyrights, know-how, technology and other
intellectual property necessary to the conduct of its business as set forth in
EXHIBIT M. The Company has been granted licenses, know-how, technology and/or
other intellectual property necessary to the conduct of its business as set
forth in EXHIBIT M. To the best of the Company's knowledge after due inquiry,
other than as set forth in Schedule 5.8, the Company is not infringing on the
intellectual property rights of any third party, nor is any third party
infringing on the Company's intellectual property rights. There are no
restrictions in any agreements, licenses, franchises, or other instruments that
preclude the Company from engaging in its business as presently conducted.
5.9 USE OF PROCEEDS. As of the date hereof, the Company expects to
use the proceeds from this Offering (less fees and expenses) for the purposes
and in the approximate amounts set forth on the Use of Proceeds Schedule set
forth as EXHIBIT L hereto. These purposes and amounts are estimates and are
subject to change without notice to any Investor.
5.10 NO RIGHTS OF PARTICIPATION. No person or entity, including, but
not limited to, current or former stockholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the financing contemplated by this Agreement which has not been waived.
5.11 COMPANY ACKNOWLEDGMENT. The Company hereby acknowledges that
Investor may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Warrants, and other agreements
contemplated hereby, and the Company further acknowledges that Investor has made
no representations or warranties, either written or oral, as to how long the
Securities will be held by Investor or regarding Investor's trading history or
investment strategies.
5.12 NO ADVANCE REGULATORY APPROVAL. The Company acknowledges that
this Investment Agreement, the transaction contemplated hereby and the
Registration Statement contemplated hereby have not been approved by the SEC, or
any other regulatory body and there is no guarantee that this Investment
Agreement, the transaction contemplated hereby and the Registration Statement
contemplated hereby will ever be approved by the SEC or any other regulatory
body. The Company is relying on its own analysis and is not relying on any
representation by Investor that either this Investment Agreement, the
transaction contemplated hereby or the Registration Statement contemplated
hereby has been or will be approved by the SEC or other appropriate regulatory
body.
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5.13 UNDERWRITER'S FEES AND RIGHTS OF FIRST REFUSAL. The Company is
not obligated to pay any compensation or other fees, costs or related
expenditures in cash or securities to any underwriter, broker, agent or other
representative other than the Investor in connection with this Offering.
5.14 [INTENTIONALLY LEFT BLANK].
5.15 NO INTEGRATED OFFERING. To the Company's knowledge, neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any of the
Company's securities or solicited any offers to buy any security under
circumstances that would prevent the parties hereto from consummating the
transactions contemplated hereby pursuant to an exemption from registration
under Regulation D of the Act or would require the issuance of any other
securities to be integrated with this Offering under the Rules of Nasdaq. The
Company has not engaged in any form of general solicitation or advertising in
connection with the offering of the Common Stock or the Warrants.
5.16 [INTENTIONALLY LEFT BLANK].
5.17 FOREIGN CORRUPT PRACTICES. Neither the Company, nor any of its
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of its actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
as amended; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment to any foreign or domestic government official or
employee.
5.18 KEY EMPLOYEES. Each "Key Employee" (as defined in EXHIBIT N) is
currently serving the Company in the capacity disclosed in EXHIBIT N. No Key
Employee, to the best knowledge of the Company and its subsidiaries, is, or is
now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best knowledge of the Company and
its subsidiaries, any intention to terminate his employment with, or services
to, the Company or any of its subsidiaries.
5.19 REPRESENTATIONS CORRECT. The foregoing representations,
warranties and agreements are true, correct and complete in all material
respects, and shall survive any Put Closing and the issuance of the shares of
Common Stock thereby for a period not to exceed six (6) months.
5.20 TAX STATUS. The Company has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and as set aside on its books provision reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.
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5.21 TRANSACTIONS WITH AFFILIATES. Except as set forth in the
Disclosure Documents, none of the officers or directors of the Company is
presently a party to any transaction with the Company (other than for services
as officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer or director or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer or director
has a substantial interest or is an officer, director, trustee or partner.
5.22 APPLICATION OF TAKEOVER PROTECTIONS. The Company and its board
of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under Florida law which is or could become
applicable to the Investor as a result of the transactions contemplated by this
Agreement, including, without limitation, the issuance of the Common Stock, any
exercise of the Warrants and ownership of the Common Shares and Warrant Shares.
The Company has not adopted and will not adopt any "poison pill" provision that
will be applicable to Investor as a result of transactions contemplated by this
Agreement.
5.23 OTHER AGREEMENTS. The Company has not, directly or indirectly,
made any agreements with the Investor under a subscription in the form of this
Agreement for the purchase of Common Stock, relating to the terms or conditions
of the transactions contemplated hereby or thereby except as expressly set forth
herein, respectively, or in exhibits hereto or thereto.
5.24 MAJOR TRANSACTIONS. There are no other Major Transactions
currently pending or contemplated by the Company.
5.25 FINANCINGS. There are no other financings currently pending or
contemplated by the Company, except as disclosed in writing to the Investor.
5.26 SHAREHOLDER AUTHORIZATION. The Company shall, at its next
annual shareholder meeting or at a special meeting to be held as soon as
practicable thereafter, use its best efforts to obtain approval of its
shareholders to (i) authorize the issuance of the full number of shares of
Common Stock which would be issuable under this Agreement and eliminate any
prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or any of its securities with respect to the
Company's ability to issue shares of Common Stock in excess of the Cap Amount
(such approvals being the "20% Approval") and (ii) the increase in the number of
authorized shares of Common Stock of the Company (the "Share Authorization
Increase Approval") such that at least 25,000,000 shares can be reserved for
this Offering. In connection with such shareholder vote, the Company shall use
its best efforts to cause all officers and directors of the Company to promptly
enter into irrevocable agreements to vote all of their shares in favor of
eliminating such prohibitions. As soon as practicable after the 20% Approval and
the Share Authorization Increase Approval, the Company agrees to use its best
efforts to reserve 25,000,000 shares of Common Stock for issuance under this
Agreement.
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<PAGE>
5.27 ACKNOWLEDGMENT OF LIMITATIONS ON PUT AMOUNTS. The Company
understands and acknowledges that the amounts available under this Investment
Agreement are limited, among other things, based upon the liquidity of the
Company's Common Stock traded on its Principal Market.
6. COVENANTS OF THE COMPANY
6.1 INDEPENDENT AUDITORS. The Company shall, until at least the
Termination Date, maintain as its independent auditors an accounting firm
authorized to practice before the SEC.
6.2 CORPORATE EXISTENCE AND TAXES. The Company shall, until at least
the Termination Date, maintain its corporate existence in good standing and,
shall remain a"Reporting Issuer" (defined as a Company which files periodic
reports under the Exchange Act) (provided, however, that the foregoing covenant
shall not prevent the Company from entering into any merger or corporate
reorganization as long as the surviving entity in such transaction, if not the
Company, assumes the Company's obligations with respect to the Common Stock and
has Common Stock listed for trading on a stock exchange or on Nasdaq and is a
Reporting Issuer) and shall pay all its taxes when due except for taxes which
the Company disputes.
6.3 REGISTRATION RIGHTS. The Company will enter into a registration
rights agreement covering the resale of the Common Shares and the Warrant Shares
substantially in the form of the Registration Rights Agreement attached as
EXHIBIT A.
6.4 [Intentionally Omitted].
6.5 ASSET TRANSFERS. The Company shall not (i) transfer, sell,
convey or otherwise dispose of any of its material assets having a value in
excess of $3 million (on any one occasion) to any Subsidiary except for a cash
or cash equivalent consideration and for a proper business purpose or (ii)
transfer, sell, convey or otherwise dispose of any of its material assets to any
Affiliate, as defined below, during the Term of this Agreement. For purposes
hereof, "Affiliate" shall mean any officer of the Company, director of the
Company or owner of twenty percent (20%) or more of the Common Stock or other
securities of the Company.
6.6 CAPITAL RAISING LIMITATIONS AND RIGHTS OF FIRST REFUSAL.
6.6.1 CAPITAL RAISING LIMITATIONS. During the period from the
date of this Agreement until the date that is ninety (90) days after the
Termination Date (or in the event that the Company terminates this Agreement,
then until the date that is thirty (30) days after the Termination Date), the
Company shall not issue or sell, or agree to issue or sell Equity Securities (as
defined below), for cash in private capital raising transactions, other than the
transaction set forth on Schedule 6.6.1, without obtaining the prior written
approval of the Investor of the Offering, which approval shall not be
unreasonably withheld (the limitations referred to in this subsection 6.6.1 are
collectively referred to as the "Capital Raising Limitations"). For purposes
hereof, the following shall be collectively referred to herein as, the "Equity
Securities": (i) Common Stock or any other equity securities, (ii) any debt or
equity securities which are convertible into, exercisable or exchangeable for,
or carry the right to receive additional shares of Common Stock or other equity
securities, or (iii) any securities of the Company pursuant to an equity line
structure or format similar in nature to this Offering.
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<PAGE>
6.6.2 INVESTOR'S RIGHT OF FIRST REFUSAL. For any private
capital raising transactions of Equity Securities which close after the date
hereof and on or prior to the Termination Date of this Agreement, not including
any warrants issued in conjunction with this Investment Agreement, the Company
agrees to deliver to Investor, at least ten (10) days prior to the closing of
such transaction, written notice describing the proposed transaction, including
the terms and conditions thereof, and providing the Investor an option during
the ten (10) day period following delivery of such notice to purchase the
securities being offered in such transaction on the same terms as contemplated
by such transaction.
6.6.3 EXCEPTIONS TO CAPITAL RAISING LIMITATIONS AND RIGHTS OF
FIRST REFUSAL. Notwithstanding the above, the Capital Raising Limitations and
Rights of First Refusal shall not apply to any transaction involving issuances
of securities in connection with a merger, consolidation, acquisition or sale of
assets, or in connection with any strategic partnership or joint venture (the
primary purpose of which is not to raise equity capital), or in connection with
the disposition or acquisition of a business, product or license by the Company
or exercise of options by employees, consultants or directors, or a primary
underwritten offering of the Company's Common Stock, or the transactions set
forth on Schedule 6.6.3.
6.7 FINANCIAL 10-KSB STATEMENTS, ETC. AND CURRENT REPORTS ON FORM
8-K. The Company shall deliver to the Investor copies of its annual reports on
Form 10-KSB, and quarterly reports on Form 10-QSB and shall deliver to the
Investor current reports on Form 8-K within two (2) days of filing for the Term
of this Agreement.
6.8 OPINION OF COUNSEL. Investor shall receive an opinion letter
from the Company's legal counsel, in the form attached as EXHIBIT B or in such
form as agreed upon by the parties, as to the Investment Commitment Closing and
shall receive an opinion letter from the Company's legal counsel, in the form
attached as EXHIBIT I or in such form as agreed upon by the parties, as to any
Put Closing.
6.9 REMOVAL OF LEGEND. If the certificates representing any
Securities are issued with a restrictive Legend in accordance with the terms of
this Agreement, the Legend shall be removed and the Company shall issue a
certificate without such Legend to the holder of any Security upon which it is
stamped, and a certificate for a security shall be originally issued without the
Legend, if (a) the sale of such Security is registered under the Act, or (b)
such holder provides the Company with an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable transactions (the
reasonable cost of which shall be borne by the Investor), to the effect that a
public sale or transfer of such Security may be made without registration under
the Act, or (c) such holder provides the Company with reasonable assurances that
such Security can be sold pursuant to Rule 144. Each Investor agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act.
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<PAGE>
6.10 LISTING. Subject to the remainder of this Section 6.10, the
Company shall use its reasonable best efforts to ensure that its shares of
Common Stock (including all Warrant Shares) are listed and available for trading
on the Nasdaq Small Cap Market. Thereafter, the Company shall (i) use its
reasonable best efforts to continue the listing and trading of its Common Stock
on the Nasdaq Small Cap Market or to become eligible for and listed and
available for trading on the NMS, the American Stock Exchange or the New York
Stock Exchange ("NYSE"); and (ii) comply in all material respects with the
Company's reporting, filing and other obligations under the By-Laws or rules of
the National Association of Securities Dealers ("NASD") and such exchanges, as
applicable.
6.11 THE COMPANY'S INSTRUCTIONS TO TRANSFER AGENT. The Company will
instruct the Transfer Agent of the Common Stock, by delivering instructions in
the form of EXHIBIT T hereto, to issue certificates, registered in the name of
each Investor or its nominee, or in such other name as the Escrow Agent shall
direct, for the Put Shares and Warrant Shares in such amounts as specified from
time to time by the Company upon any exercise by the Company of a Put and/or
exercise of the Warrants by the holder thereof. Such certificates shall not bear
a Legend unless issuance with a Legend is permitted by the terms of this
Agreement and Legend removal is not permitted by Section 6.9 hereof. Nothing in
this Section shall affect in any way Investor's obligations and agreement set
forth in Sections 3.3.3 or 3.3.4 hereof to resell the Securities pursuant to an
effective registration statement and to deliver a prospectus in connection with
such sale or in compliance with an exemption from the registration requirements
of applicable securities laws. If (a) an Investor provides the Company with an
opinion of counsel, which opinion of counsel shall be in form, substance and
scope customary for opinions of counsel in comparable transactions, to the
effect that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from registration or (b) an Investor transfers
Securities, pursuant to Rule 144, to an affiliate which is an accredited
investor, the Company shall permit the transfer, and, in the case of Put Shares
and Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denomination as specified by such
Investor. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to an Investor by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 6.11 will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 6.11, that an
Investor shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other
security being required.
6.12 STOCKHOLDER 20% APPROVAL. Prior to the closing of any Put that
would cause the Aggregate Issued Shares to exceed the Cap Amount, the Company
shall obtain approval of its stockholders to authorize (i) the issuance of the
full number of shares of Common Stock which would be issuable pursuant to this
Agreement but for the Cap Amount and eliminate any prohibitions under applicable
law or the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the Company
or any of its securities with respect to the Company's ability to issue shares
of Common Stock in excess of the Cap Amount (such approvals being the
"Stockholder 20% Approval"). For purposes of Stockholder 20% Approval, any
shares to be issued to the Investor shall not be included in the calculation of
stockholder approval.
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<PAGE>
6.13 PRESS RELEASE. The Company agrees that the Investor shall have
the right to review and comment upon any press release issued by the Company in
connection with the Offering which approval shall not be unreasonably withheld
by Investor.
6.14 CHANGE IN LAW OR POLICY. In the event of a change in law, or
policy of the SEC, as evidenced by a No-Action letter or other written
statements of the SEC or the NASD which causes the Company or the Investor to be
unable to perform its obligations hereunder, this Agreement shall be
automatically terminated and no further Non-Usage Fees shall accrue and no cash
Termination Fees shall be due.
7. INVESTOR COVENANT/MISCELLANEOUS.
7.1 REPRESENTATIONS AND WARRANTIES SURVIVE THE CLOSING;
SEVERABILITY. Investor's and the Company's representations and warranties shall
survive the Investment Date and any Put Closing contemplated by this Agreement
for a period of six (6) months from the date that such representations and
warranties were provided to the Investor, notwithstanding any due diligence
investigation made by or on behalf of the party seeking to rely thereon. In the
event that any provision of this Agreement becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, or is altered by a
term required by the Securities Exchange Commission to be included in the
Registration Statement, this Agreement shall continue in full force and effect
without said provision; provided that if the removal of such provision
materially changes the economic benefit of this Agreement to the Investor, this
Agreement shall terminate.
7.2 SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable
without the Company's written consent, If assigned, the terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Investor may assign Investor's rights hereunder, in
connection with any private sale of the Common Stock of such Investor, so long
as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement in a form acceptable to the Company and provides an original copy of
such acknowledgment to the Company.
7.3 EXECUTION IN COUNTERPARTS PERMITTED. This Agreement may be
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
7.4 TITLES AND SUBTITLES; GENDER. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. The use in this Agreement of a
masculine, feminine or neither pronoun shall be deemed to include a reference to
the others.
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<PAGE>
7.5 WRITTEN NOTICES, ETC. Any notice, demand or request required or
permitted to be given by the Company or Investor pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally, or by facsimile or upon receipt if by overnight or two (2) day
courier, addressed to the parties at the addresses and/or facsimile telephone
number of the parties set forth at the end of this Agreement or such other
address as a party may request by notifying the other in writing; provided,
however, that in order for any notice to be effective as to the Investor such
notice shall be delivered and sent, as specified herein, to all the addresses
and facsimile telephone numbers of the Investor set forth at the end of this
Agreement or such other address and/or facsimile telephone number as Investor
may request in writing.
7.6 EXPENSES. Except as set forth in the Registration Rights
Agreement, each of the Company and Investor shall pay all costs and expenses
that it respectively incurs, with respect to the negotiation, execution,
delivery and performance of this Agreement.
7.7 ENTIRE AGREEMENT; WRITTEN AMENDMENTS REQUIRED. This Agreement,
including the Exhibits attached hereto, the Common Stock certificates, the
Warrants, the Registration Rights Agreement, and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and no party
shall be liable or bound to any other party in any manner by any warranties,
representations or covenants, whether oral, written, or otherwise except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
7.8 ACTIONS AT LAW OR EQUITY; JURISDICTION AND VENUE. The parties
acknowledge that any and all actions, whether at law or at equity, and whether
or not said actions are based upon this Agreement between the parties hereto,
shall be filed in any state or federal court sitting in Palm Beach County,
Florida. Florida law shall govern both the proceeding as well as the
interpretation and construction of the Transaction Documents and the transaction
as a whole. In any litigation between the parties hereto, the prevailing party,
as found by the court, shall be entitled to an award of all attorney's fees and
costs of court. Should the court refuse to find a prevailing party, each party
shall bear its own legal fees and costs.
8. SUBSCRIPTION AND WIRING INSTRUCTIONS; IRREVOCABILITY.
8.1 SUBSCRIPTION
(a) TRANSFER OF SUBSCRIPTION FUNDS. Investor shall deliver Put
Dollar Amounts (as payment towards any Put Share Price) to the
Escrow Agent in the manner specified in the Escrow Agreement.
(b) IRREVOCABLE SUBSCRIPTION. Investor hereby acknowledges and
agrees, subject to the provisions of any applicable laws
providing for the refund of subscription amounts submitted by
Investor, that this Agreement is irrevocable and that Investor
is not entitled to cancel, terminate or revoke this Agreement
or any other agreements executed by such Investor and
delivered pursuant hereto, and that this Agreement and such
other agreements shall survive the death or disability of such
Investor and shall be binding upon and inure to the benefit of
the parties and their heirs, executors, administrators,
successors, legal representatives and assigns. If the
Securities subscribed for are to be owned by more than one
person, the obligations of all such owners under this
Agreement shall be joint and several, and the agreements,
representations, warranties and acknowledgments herein
contained shall be deemed to be made by and be binding upon
each such person and his heirs, executors, administrators,
successors, legal representatives and assigns.
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<PAGE>
8.2 ACCEPTANCE OF SUBSCRIPTION. Ownership of the number of
securities purchased hereby will pass to Investor upon the Warrant Closing or
any Put Closing.
9. INDEMNIFICATION.
In consideration of the Investor's execution and delivery of the
Investment Agreement, the Registration Rights Agreement and the Warrants (the
"Transaction Documents") and acquiring the Securities thereunder and in addition
to all of the Company's other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless Investor and all of
its stockholders, officers, directors, employees and members, and any of the
foregoing person's agents, members, partners or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorney's fees and disbursements (the "Indemnified Liabilities"), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
documents contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby, or
(c) any cause of action, suit or claim, derivative or otherwise, by any
stockholder of the Company based on a breach or alleged breach by the Company or
any of its officers or directors of their fiduciary or other obligations to the
stockholders of the Company, provided, however, that the Company shall not be
responsible for any Indemnified Liabilities incurred as a direct result of
Indemnitees' fraud or gross negligence.
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which it
would be required to make if such foregoing undertaking was enforceable which is
permissible under applicable law.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 9, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
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<PAGE>
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 9, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 9 to the extent it is prejudicial.
[INTENTIONALLY LEFT BLANK]
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<PAGE>
10. ACCREDITED INVESTOR. Investor is an "accredited investor" because
(check all applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3) of
the Internal Revenue Code, or a corporation, limited duration
company, limited liability company, business trust, or
partnership not formed for the specific purpose of acquiring
the securities offered, with total assets in excess of
$5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person
who has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits
and risks of the prospective investment.
(c) [ ] a natural person, who
[ ] is a director, executive officer or general partner of the
issuer of the securities being offered or sold or a director,
executive officer or general partner of a general partner of
that issuer.
[ ] has an individual net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeding
$1,000,000.
[ ] had an individual income in excess of $200,000 in each of
the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in
the current year.
(d) [ ] an entity each equity owner of which is an entity
described in a - b above or is an individual who could check
one (1) of the last three (3) boxes under subparagraph (c)
above.
(e) [ ] other [specify]____________________________________________.
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<PAGE>
The undersigned hereby subscribes the Maximum Offering Amount and
acknowledges that this Agreement and the subscription represented hereby shall
not be effective unless accepted by the Company as indicated below.
IN WITNESS WHEREOF, the undersigned Investor does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Investor by the following signature(s) executed this Agreement.
Dated this 21ST day of JULY, 1999.
____________________________________ _____________________________________
Your Signature PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
____________________________________ SECURITY DELIVERY INSTRUCTIONS:
Name: Please Print Please type or print address where
your security is to be delivered
____________________________________ ATTN:________________________________
Title/Representative Capacity
(if applicable)
____________________________________ _____________________________________
Name of Company You Represent Street Address
(if applicable)
____________________________________ _____________________________________
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code
NOTICE DELIVERY INSTRUCTIONS: WITH A COPY DELIVERED TO:
Please print address where any Notice Please print address where Copy is
is to be delivered to be delivered
ATTN: ______________________________ ATTN:________________________________
____________________________________ _____________________________________
Street Address Street Address
____________________________________
____________________________________
City, State or Province, Country, City, State or Country, Offshore
Offshore Postal Code Offshore Postal Code
Telephone: _________________________ Telephone: __________________________
Facsimile: _________________________ Facsimile: __________________________
Facsimile: _________________________ Facsimile: __________________________
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF 100% OF THE MAXIMUM
OFFERING AMOUNT ON THE 21ST DAY OF JULY, 1999.
MEDICAL INDUSTRIES OF AMERICA, INC.
By: _______________________________________
Paul C. Pershes, President
Address:
Attn: Paul C. Pershes
MEDICAL INDUSTRIES OF AMERICA, INC.
1903 South Congress Ave., Suite 400
Boynton Beach, FL 33426
Telephone: (561) 737-2227
Facsimile: (561) 265-2869
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<PAGE>
ADVANCE PUT NOTICE
MEDICAL INDUSTRIES OF AMERICA, INC. (the "Company") hereby intends, subject to
the Individual Put Limit (as defined in the Investment Agreement), to elect to
exercise a Put to sell the number of shares of Common Stock of the Company
specified below, to _____________________________, the Investor, as of the
Intended Put Date written below, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about July 21, 1999.
Date of Advance Put Notice: ___________________
Intended Put Date :___________________________
Intended Put Share Amount: __________________
Company Designation Maximum Put Dollar Amount (Optional):
______________________________________________.
Company Designation Minimum Put Share Price (Optional):
______________________________________________.
MEDICAL INDUSTRIES OF AMERICA, INC.
By: __________________________________
Paul C. Pershes, President
Address:
Attn: Paul C. Pershes
MEDICAL INDUSTRIES OF AMERICA, INC.
1903 South Congress Ave., Suite 400
Boynton Beach, FL 33426
Telephone: (561) 737-2227
Facsimile: (561) 265-2869
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<PAGE>
EXHIBIT E
47
<PAGE>
CONFIRMATION OF ADVANCE PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
MEDICAL INDUSTRIES OF AMERICA, INC.'S (the "Company") Advance Put Notice on the
Advance Put Date written below, and its intention to elect to exercise a Put to
sell shares of common stock ("Intended Put Share Amount") of the Company to the
Investor, as of the intended Put Date written below, all pursuant to that
certain Investment Agreement (the "Investment Agreement") by and between the
Company and Swartz Private Equity, LLC dated on or about July 21, 1999.
Date of Confirmation: ____________________
Date of Advance Put Notice: _______________
Intended Put Date: ________________________
Intended Put Share Amount: ________________
Company Designation Maximum Put Dollar Amount (Optional):
____________________________________________.
Company Designation Minimum Put Share Price (Optional):
____________________________________________.
INVESTOR(S)
____________________________________
Investor's Name
By: ________________________________
(Signature)
Address: ____________________________________
____________________________________
____________________________________
Telephone No.: ___________________________________
Facsimile No.: ___________________________________
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<PAGE>
EXHIBIT F
49
<PAGE>
PUT NOTICE
MEDICAL INDUSTRIES OF AMERICA, INC. (the "Company") hereby elects to exercise a
Put to sell shares of common stock ("Common Stock") of the Company to
_____________________________, the Investor, as of the Put Date, at the Put
Share Price and for the number of Put Shares written below, all pursuant to that
certain Investment Agreement (the "Investment Agreement") by and between the
Company and Swartz Private Equity, LLC dated on or about July 21, 1999.
Put Date :_________________
Intended Put Share Amount (from Advance Put
Notice):_________________ Common Shares
Company Designation Maximum Put Dollar Amount (Optional):
_________________________________________.
Company Designation Minimum Put Share Price (Optional):
_________________________________________.
Note: Capitalized terms shall have the meanings ascribed to them in this
Investment Agreement.
MEDICAL INDUSTRIES OF AMERICA, INC.
By: ______________________________________
Paul C. Pershes, President
Address:
Attn: Paul C. Pershes
MEDICAL INDUSTRIES OF AMERICA, INC.
1903 South Congress Ave., Suite 400
Boynton Beach, FL 33426
Telephone: (561) 737-2227
Facsimile: (561) 265-2869
50
<PAGE>
EXHIBIT G
51
<PAGE>
CONFIRMATION OF PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
MEDICAL INDUSTRIES OF AMERICA, INC. (the "Company") Put Notice and election to
exercise a Put to sell ___________________________ shares of common stock
("Common Stock") of the Company to Investor, as of the Put Date, all pursuant to
that certain Investment Agreement (the "Investment Agreement") by and between
the Company and Swartz Private Equity, LLC dated on or about July 21, 1999.
Date of this Confirmation: ________________
Put Date :_________________
Number of Put Shares of
Common Stock to be Issued: _____________
Volume Evaluation Period: _____ Business
Days
Pricing Period: _____ Business Days
INVESTOR(S)
_____________________________________
Investor's Name
By: _________________________________
(Signature)
Address: _____________________________________
_____________________________________
_____________________________________
Telephone No.: __________________________________
Facsimile No.: __________________________________
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<PAGE>
EXHIBIT H
53
<PAGE>
PUT CANCELLATION NOTICE
MEDICAL INDUSTRIES OF AMERICA, INC. (the "Company") hereby cancels the Put
specified below, pursuant to that certain Investment Agreement (the "Investment
Agreement") by and between the Company and Swartz Private Equity, LLC dated on
or about July 21, 1999, as of the close of trading on the date specified below
(the "Cancellation Date," which date must be on or after the date that this
notice is delivered to the Investor), provided that such cancellation shall not
apply to the number of shares of Common Stock equal to the Truncated Put Share
Amount (as defined in the Investment Agreement).
Cancellation Date: __________________________
Put Date of Put Being Canceled: _____________
Number of Shares Put on Put Date: ___________
Reason for Cancellation (check one):
[ ] Material Facts, Ineffective
Registration Period.
[ ] Delisting Event
The Company understands that, by canceling this Put, it must give twenty (20)
Business Days advance written notice to the Investor before effecting the next
Put.
MEDICAL INDUSTRIES OF AMERICA, INC.
By: ____________________________________
Paul C. Pershes, President
Address:
Attn: Paul C. Pershes
MEDICAL INDUSTRIES OF AMERICA, INC.
1903 South Congress Ave., Suite 400
Boynton Beach, FL 33426
Telephone: (561) 737-2227
Facsimile: (561) 265-2869
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EXHIBIT Q
55
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PUT CANCELLATION NOTICE CONFIRMATION
The undersigned Investor to that certain Investment Agreement (the "Investment
Agreement") by and between the Company, and Swartz Private Equity, LLC dated on
or about July 21, 1999, hereby confirms receipt of Medical Industries of
America, Inc.'s (the "Company") Put Cancellation
Notice, and confirms the following:
DATE OF THIS CONFIRMATION: ________________
PUT CANCELLATION DATE: ____________________
INVESTOR(S)
___________________________________________
Investor's Name
By: _________________________________
(Signature)
Address: ____________________________________
______________________________________
______________________________________
Telephone No.: ___________________________________
Facsimile No.: ____________________________________
56
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EXHIBIT S
57
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
July 21, 1999, by and among Medical Industries of America, Inc., a corporation
duly incorporated and existing under the laws of the State of Florida (the
"Company") and the investor as named on the signature page hereto (hereinafter
referred to as "Investor").
RECITALS:
WHEREAS, pursuant to the Company's offering ("Offering") of up to Twenty
Five Million Dollars ($25,000,000), excluding any funds paid upon exercise of
the Warrants, of Common Stock of the Company pursuant to that certain Investment
Agreement of even date herewith (the "Investment Agreement") between the Company
and the Investor, the Company has agreed to sell and the Investor has agreed to
purchase, from time to time as provided in the Investment Agreement, shares of
the Company's Common Stock for a maximum aggregate offering amount of Twenty
Five Million Dollars ($25,000,000);
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to issue to the Investor, from time to time, Commitment Warrants and
Purchase Warrants, each as defined in the Investment Agreement, to purchase a
number of shares of Common Stock, exercisable for five (5) years from their
respective dates of issuance (collectively, the "Investor Warrants" or the
"Warrants"); and
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to provide the Investor with certain registration rights with respect
to the Common Stock to be issued in the Offering and the Common Stock issuable
upon exercise of the Investor Warrants as set forth in this Registration Rights
Agreement.
TERMS:
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in Agreement and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement (including the Recitals
above), the following terms shall have the following meanings (such meanings to
be equally applicable to both singular and plural forms of the terms defined):
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"Additional Registration Statement" shall have the meaning set forth
in Section 3(b).
"Amended Registration Statement" shall have the meaning set forth in
Section 3(b).
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"Business Day" shall have the meaning set forth in the Investment
Agreement.
"Closing Bid Price" shall have the meaning set forth in the
Investment Agreement.
"Common Stock" shall mean the common stock, par value $0.0025, of
the Company.
"Due Date" shall mean the date that is one hundred eighty (180) Days
after the date that the Registration Statement is first filed.
"Effective Date" shall have the meaning set forth in Section 2.4.
"Filing Date" shall mean the date that is forty five (45) days after
the date the date of execution of the Investment Agreement.
"Holder" shall mean Investor, and any other person or entity owning
or having the right to acquire Registrable Securities or any permitted assignee
thereof;
"Piggyback Registration" and "Piggyback Registration Statement"
shall have the meaning set forth in Section 4.
"Put" shall have the meaning as set forth in the Investment
Agreement.
"Register," "Registered," and "Registration" shall mean and refer to
a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and pursuant to Rule 415 under the Act or any successor rule, and the
declaration or ordering of effectiveness of such registration statement or
document.
"Registrable Securities" shall have the meaning set forth in Section
2.1.
"Registration Statement" shall have the meaning set forth in Section
2.2.
"Rule 144" shall mean Rule 144, as amended, promulgated under the
Act.
"Investor" shall have the meaning set forth in the preamble to this
Agreement.
"Investor Warrants" shall have the meaning set forth in the above
Recitals.
"Investment Agreement" shall have the meaning set forth in the
Recitals hereto.
"Supplemental Registration Statement" shall have the meaning set
forth in Section 3(b).
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"Warrants" shall have the meaning set forth in the above Recitals.
"Warrant Shares" shall mean shares of Common Stock issuable upon
exercise of any Warrant.
2. REQUIRED REGISTRATION.
2.1 REGISTRABLE SECURITIES. "Registrable Securities" shall mean
those shares of the Common Stock of the Company together with any capital stock
issued in replacement of, in exchange for or otherwise in respect of such Common
Stock, that are: (i) issuable or issued to the Investor pursuant to the
Investment Agreement or in this Agreement, and (ii) issuable or issued upon
exercise of the Investor Warrants; provided, however, that notwithstanding the
above, the following shall not be considered Registrable Securities:
(a) any Common Stock which would otherwise be deemed to be
Registrable Securities, if and to the extent that those shares of Common Stock
may be resold in a public transaction without volume limitations or other
material restrictions without registration under the Act, including without
limitation, pursuant to Rule 144 under the Act; and
(b) any shares of Common Stock which have been sold in a
private transaction in which the transferor's rights under this Agreement are
not assigned.
2.2 FILING OF INITIAL REGISTRATION STATEMENT. The Company shall, by
the Filing Date, file a registration statement ("Registration Statement") on
Form SB-2 (or other suitable form, at the Company's discretion, but subject to
the reasonable approval of Investor), covering the resale of a number of shares
of Common Stock as Registrable Securities equal to at least Twenty Five Million
(25,000,000) shares of Common Stock and shall cover, to the extent allowed by
applicable law, such indeterminate number of additional shares of Common Stock
that may be issued or become issuable as Registrable Securities by the Company
pursuant to Rule 416 of the Act.
2.3 [INTENTIONALLY LEFT BLANK].
2.4 REGISTRATION EFFECTIVE DATE. The Company shall use its
reasonable best efforts to have the Registration Statement declared effective by
the SEC (the date of such effectiveness is referred to herein as the "Effective
Date") by the Due Date.
2.5 [INTENTIONALLY LEFT BLANK].
2.6 [INTENTIONALLY LEFT BLANK].
2.7 SHELF REGISTRATION. The Registration Statement shall be prepared
as a "shelf" registration statement under Rule 415, and shall be maintained
effective until all Registrable Securities are resold pursuant to such
Registration Statement.
2.8 SUPPLEMENTAL REGISTRATION STATEMENT. Anytime the Registration
Statement
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does not cover a sufficient number of shares of Common Stock to cover all
outstanding Registrable Securities, the Company shall promptly prepare and file
with the SEC such Supplemental Registration Statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Act with respect to the disposition of all such
Registrable Securities and shall use its reasonable best efforts to cause such
Supplemental Registration Statement to be declared effective as soon as
possible.
3. OBLIGATIONS OF THE COMPANY. Whenever required under this Agreement to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously and reasonably possible:
(a) Prepare and file with the Securities and Exchange Commission
("SEC") a Registration Statement with respect to such Registrable Securities and
use its reasonable best efforts to cause such Registration Statement to become
effective and to remain effective until all Registrable Securities are resold
pursuant to such Registration Statement.
(b) Prepare and file with the SEC such amendments and supplements to
such Registration Statement and the prospectus used in connection with such
Registration Statement ("Amended Registration Statement") or prepare and file
any additional registration statement ("Additional Registration Statement,"
together with the Amended Registration Statement, "Supplemental Registration
Statements") as may be necessary to comply with the provisions of the Act with
respect to the disposition of all securities covered by such Supplemental
Registration Statements or such prior registration statement and to cover the
resale of all Registrable Securities.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such Registration Statement under such other securities or
Blue Sky laws of the jurisdictions in which the Holders are located, of such
other jurisdictions as shall be reasonably requested by the Holders of the
Registrable Securities covered by such Registration Statement and of all other
jurisdictions where legally required, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions or be required to undertake any act that would cause the
Company to incur tax liability in such states or jurisdictions.
(e) [Intentionally Omitted].
(f) As promptly as practicable after becoming aware of such event,
notify each Holder of Registrable Securities of the happening of any event of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, use its reasonable best efforts promptly
to prepare a
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<PAGE>
supplement or amendment to the Registration Statement to correct such untrue
statement or omission, and deliver a number of copies of such supplement or
amendment to each Holder as such Holder may reasonably request.
(g) Provide Holders with notice of the date that a Registration
Statement or any Supplemental Registration Statement registering the resale of
the Registrable Securities is declared effective by the SEC, and the date or
dates when the Registration Statement is no longer effective.
(h) Provide Holders and their representatives the opportunity and a
reasonable amount of time, based upon reasonable notice delivered by the
Company, to conduct a reasonable due diligence inquiry of Company's pertinent
financial and other records and make available its officers and directors for
questions regarding such information as it relates to information contained in
the Registration Statement.
(i) Provide Holders and their representatives the opportunity to
review the Registration Statement and all amendments or supplements thereto
prior to their filing with the SEC by giving the Holder at least three (3)
business days advance written prior to such filing.
(j) Provide each Holder with prompt notice of the issuance by the
SEC or any state securities commission or agency of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceeding for such purpose. The Company shall use its reasonable best efforts
to prevent the issuance of any stop order and, if any is issued, to obtain the
removal thereof at the earliest possible date.
(k) Use its reasonable best efforts to list the Registrable
Securities covered by the Registration Statement with all securities exchanges
or markets on which the Common Stock is then listed and prepare and file any
required filing with the NASD, American Stock Exchange, NYSE and any other
exchange or market on which the Common Stock is listed.
4. PIGGYBACK REGISTRATION. If anytime prior to the date that the
Registration Statement is declared effective or during any Ineffective Period
(as defined in the Investment Agreement), other than a valid Suspension Period
(as defined in the Investment Agreement), the Company proposes to register
(including for this purpose a registration effected by the Company for
shareholders other than the Holders) any of its Common Stock under the Act in
connection with the public offering of such securities solely for cash (other
than a registration relating solely for the sale of securities to participants
in a Company stock plan or a registration on Form S-4 promulgated under the Act
or any successor or similar form registering stock issuable upon a
reclassification, upon a business combination involving an exchange of
securities or upon an exchange offer for securities of the issuer or another
entity), the Company shall, at such time, promptly give each Holder written
notice of such registration (a "Piggyback Registration Statement"). Upon the
written request of each Holder given by fax within ten (10) days after mailing
of such notice by the Company, the Company shall cause to be included in such
registration statement under the Act all of the Registrable Securities that each
such Holder has requested to be registered ("Piggyback Registration") to the
extent such inclusion does not violate the registration rights of any other
security holder of the company granted prior to the date hereof; provided,
however, that nothing herein shall prevent the Company from withdrawing
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<PAGE>
or abandoning such registration statement prior to its effectiveness, and
provided that the Company shall not be required to include any unissued Put
Shares in a Piggyback Registration statement that is on Form S-3 unless the
Company then meets the requirements for filing a primary registration on Form
S-3.
5. LIMITATION ON OBLIGATIONS TO REGISTER UNDER A PIGGYBACK REGISTRATION.
In the case of a Piggyback Registration pursuant to an underwritten public
offering by the Company, if the managing underwriter determines and advises in
writing that the inclusion in the registration statement of all Registrable
Securities proposed to be included would interfere with the successful marketing
of the securities proposed to be registered by the Company, then the number of
such Registrable Securities to be included in the Piggyback Registration
Statement, to the extent such Registrable Securities may be included in such
Piggyback Registration Statement, shall be allocated among all Holders who had
requested Piggyback Registration pursuant to the terms hereof, in the proportion
that the number of Registrable Securities which each such Holder seeks to
register bears to the total number of Registrable Securities sought to be
included by all Holders. If required by the managing underwriter of such an
underwritten public offering, the Holders shall enter into a reasonable
agreement limiting the number of Registrable Securities to be included in such
Piggyback Registration Statement and the terms, if any, regarding the future
sale of such Registrable Securities.
6. DISPUTE AS TO REGISTRABLE SECURITIES. In the event the Company believes
that shares sought to be registered under Section 2 or Section 4 by Holders do
not constitute "Registrable Securities" by virtue of Section 2.1 of this
Agreement, and the status of those shares as Registrable Securities is disputed,
the Company shall provide, at its expense, an Opinion of Counsel, reasonably
acceptable to the Holders of the Securities at issue (and satisfactory to the
Company's transfer agent to permit the sale and transfer), that those securities
may be sold immediately, without volume limitation or other material
restrictions, without registration under the Act, by virtue of Rule 144 or
similar provisions.
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7. FURNISH INFORMATION. At the Company's request, each Holder shall
furnish to the Company such information regarding Holder, the Registrable
Securities held by it, and the intended method of disposition of such securities
to the extent required to effect the registration of its Registrable Securities
or to determine that registration is not required pursuant to Rule 144 or other
applicable provision of the Act.
8. EXPENSES. All expenses, other than commissions and fees and expenses of
counsel to the selling Holders, incurred in connection with registrations,
filings or qualifications pursuant hereto, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company, shall be borne by the Company.
9. INDEMNIFICATION. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers, directors, partners, legal counsel, and
accountants of each Holder, any underwriter (as defined in the Act, or as deemed
by the Securities Exchange Commission, or as indicated in a registration
statement) for such Holder and each person, if any, who controls such Holder or
underwriter ("Indemnitees") within the meaning of Section 15 of the Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements or
omissions: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, and the Company will reimburse each such Holder, officer
or director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 9(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, officer, director, underwriter or
controlling person or arises from any fraudulent or grossly negligent act of
Indemnitee.
(b) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume, the defense thereof with counsel mutually
satisfactory to the parties; provided, however,
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that an indemnified party shall have the right to retain its own counsel, with
the reasonably incurred fees and expenses of one such counsel to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential conflicting interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 9.
(c) In the event that the indemnity provided in paragraph (a) of
this Section 9 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, the Company and each Holder agree to contribute to the
aggregate claims, losses, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company and one or more of the Holders may
be subject in such proportion as is appropriate to reflect the relative fault of
the Company and the Holders in connection with the statements or omissions which
resulted in such Losses. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Company or by the Holders. The Company and the Holders agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation that does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person who controls a
Holder of Registrable Securities within the meaning of either the Securities Act
or the Exchange Act and each director, officer, partner, employee and agent of a
Holder shall have the same rights to contribution as such holder, and each
person who controls the Company within the meaning of either the Act or the
Exchange Act and each director and officer of the Company shall have the same
rights to contribution as the Company, subject in each case to the applicable
terms and conditions of this paragraph (c).
(d) The obligations of the Company and Holders under this Section 9
shall survive the resale, if any, of the Common Stock, the completion of any
offering of Registrable Securities in a Registration Statement under this
Agreement, and otherwise for a period not to exceed three (3) years from such
resale or offering, whichever is later, except in the case of liabilities
arising from acts or omissions of the Company that are deemed to be fraudulent,
in which case the obligations shall survive indefinitely.
10. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration, the Company
agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144; and
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(b) use its reasonable best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the Act and
the 1934 Act.
11. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the written consent of each Holder affected
thereby. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each Holder, each future Holder, and the Company.
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12. NOTICES. All notices required or permitted under this Agreement shall
be made in writing signed by the party making the same, shall specify the
section under this Agreement pursuant to which it is given, and shall be
addressed if to (i) the Company at: Attention: Paul C. Pershes, President, 1903
South Congress Ave., Suite 400, Boynton Beach, FL 33426; Phone: (561) 737-2227
Fax: (561) 265-2869 (or at such other location as directed by the Company in
writing) and (ii) the Holders at their respective last address as the party as
shown on the records of the Company. Any notice, except as otherwise provided in
this Agreement, shall be made by fax and shall be deemed given at the time of
transmission of the fax.
13. TERMINATION. This Agreement shall terminate on the date all
Registrable Securities cease to exist (as that term is defined in Section 2.1
hereof); but without prejudice to (i) the parties' rights and obligations
arising from breaches of this Agreement occurring prior to such termination (ii)
other indemnification obligations under this Agreement.
14. ASSIGNMENT. No assignment, transfer or delegation, whether by
operation of law or otherwise, of any rights or obligations under this Agreement
by the Company or any Holder, respectively, shall be made without the prior
written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, together with or prior to such
transferee's request to have such Registrable Securities included in a
Registration, a writing executed by such transferee agreeing to be bound as a
Holder by the terms of this Agreement), and the Company hereby agrees to file an
amended registration statement including such transferee or a selling security
holder thereunder; and provided further that the Company may transfer its rights
and obligations under this Agreement to a purchaser of all or a substantial
portion of its assets, or the acquiring party of a sale or exchange of more than
51% of the Company's capital stock, if the obligations of the Company under this
Agreement are assumed in connection with such transfer, either by merger or
other operation of law (which may include without limitation a transaction
whereby the Registrable Securities are converted into securities of the
successor in interest) or by specific assumption executed by the transferee.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida applicable to agreements made
in and wholly to be performed in that jurisdiction, except for matters arising
under the Act or the Securities Exchange Act of 1934, which matters shall be
construed and interpreted in accordance with such laws.
16. EXECUTION IN COUNTERPARTS PERMITTED. This Agreement may be executed in
any number of counterparts, each of which shall be enforceable against the
parties actually executing such counterparts, and all of which together shall
constitute one (1) instrument.
17. SPECIFIC PERFORMANCE. The Holder shall be entitled to the remedy of
specific performance in the event of the Company's breach of this Agreement, the
parties agreeing that a remedy at law would be inadequate.
18. [INTENTIONALLY LEFT BLANK].
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19. ENTIRE AGREEMENT; WRITTEN AMENDMENTS REQUIRED. This Agreement,
including the Exhibits attached hereto, the Investment Agreement, the Common
Stock certificates, and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein or therein. Except as expressly provided
herein,
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neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this 21ST day of July, 1999.
MEDICAL INDUSTRIES OF AMERICA, INC.
By: ________________________________
Paul C. Pershes, President
Address:
Attention: Paul C. Pershes, President
1903 South Congress Ave., Suite 400
Boynton Beach, FL 33426
Telephone: (561) 737-2227
Facsimile: (561) 265-2869
INVESTOR:
SWARTZ PRIVATE EQUITY, LLC.
By: ________________________________
Eric S. Swartz, Manager
Address:
1080 Holcomb Bridge Road
Bldg. 200, Suite 285
Roswell, GA 30076
Telephone: (770) 640-8130
Facsimile: (770) 640-7150
EXHIBIT 4.3
MEDICAL INDUSTRIES OF AMERICA, INC.
ESCROW AGREEMENT AND INSTRUCTIONS
This Escrow Agreement (the "Agreement") dated as of July 21, 1999 is made
by and among MEDICAL INDUSTRIES, INC., a Florida corporation ("Company"), Swartz
Private Equity, LLC ("Investor") and FIRST UNION NATIONAL BANK as escrow agent
("Escrow Agent").
RECITALS:
WHEREAS, the Company wishes, subject to certain conditions and
limitations, to sell to Investor common stock issued by Company (the "Common
Stock") at an aggregate purchase price of up to Twenty Five Million Dollars
($25,000,000), excluding Warrants;
WHEREAS, as contemplated by that certain Investment Agreement, of even
date herewith, by and between the Company and the Investor (the "Investment
Agreement") the Company may sell Common Stock to Investor upon an exercise of a
Put during the thirty six (36) months following date of the Investment
Agreement;
WHEREAS, the Company and Investor desire to establish an escrow account
(the "Escrow Account") with the Escrow Agent into which certain monies and
Common Stock will be deposited and held in escrow in connection with a proposed
offering of the Common Stock; and
WHEREAS, the Escrow Agent has agreed to act as escrow agent on behalf of
the Company and Investor on the terms and conditions set forth in this
Agreement.
TERMS:
NOW, THEREFORE, in consideration of the premises the parties agree as
follows:
1. DEFINED TERMS. Unless otherwise indicated herein, capitalized terms shall
have the meanings ascribed to them in the Investment Agreement.
2. INVESTMENT AGREEMENT. Pursuant to the terms of the Investment Agreement, in
order to initiate a Put, the Company delivers a Put Notice to the Investor.
During the 20 Business Day Purchase Period following each Put Notice, the
Investor delivers one or more Purchase Notices to the Company indicating the
number of Put Shares that are being purchased that day. The Put Shares set forth
in each Put Notice are priced at the Put Share Price in effect on the date of
the Purchase Notice.
3. APPOINTMENT OF ESCROW AGENT. The Company and Investor each appoint the Escrow
Agent to act as the escrow agent for the sale and purchase of the Common Stock
contemplated by the Investment Agreement, on the terms and conditions
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of this Agreement. Escrow Agent agrees to act as escrow agent and perform the
functions set forth in this Agreement, subject to all its terms.
4. ESCROW AGREEMENT. The Company hereby agrees to pay the Escrow Agent for the
opening and administration of the Escrow Account plus incidental expenses for
all ordinary services rendered hereunder (the "Escrow Fee") according to the fee
schedule attached hereto as SCHEDULE A. The Escrow Agent shall be entitled to
withhold the Escrow Fee from any funds paid to the Company pursuant to this
Escrow Agreement, or Escrow Agent may demand payment of the Escrow Fee from the
Company.
5. DEPOSITS.
5.1 COMPANY DEPOSITS. Prior to each Put Date, at the times and amounts
specified in the Investment Agreement, the Company shall deposit unlegended and
freely tradable shares of Common Stock, in electronic form and in the name of
the Investor (or in such street name as the Escrow Agent directs), under the
Escrow Agent's DTC participation number, representing the Put Shares for that
Put with the Escrow Agent. The Put Shares shall be delivered to the Escrow Agent
in electronic form through the DTC system. The Company shall notify the Escrow
Agent of the number of Put Shares being delivered, by facsimile, not later than
5:00 PM, New York City time, on the day that such shares are delivered.
5.2 INVESTOR DEPOSITS. Under the terms of the Investment Agreement, from
time to time, the Company will deliver Put Notices to the Investor to effect the
sale of a number of Put Shares. The Company shall deliver a copy of each Put
Notice to the Escrow Agent by facsimile or as soon as practicable after it
delivers such Put Notice to the Investor. Under the terms of the Investment
Agreement, the Investor shall deliver the Put Share Price for each Put Share to
the Escrow Agent within four (4) Business Days of the end of the applicable
Pricing Period.
6. DISBURSEMENT OF FUNDS.
Each Put Closing shall occur as set forth below.
(a) INSTRUCTIONS FOR EXCHANGE OF MONEY AND COMMON STOCK. Escrow
Agent shall hold each of the Put Shares deposited by the Company against
delivery of the corresponding Put Share Price by the Investor and shall hold the
corresponding Put Share Price by such Investors against delivery of the Put
Shares, all in compliance with Section 6(b) below.
(b) CONDITIONS FOR RELEASE OF MONEY AND COMMON STOCK. During the
term of this Escrow Agreement and upon the occurrence of both:
(i) receipt by the Escrow Agent of a Put Notice, and
(ii) either
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(a) receipt by the Escrow Agent of the Put Share Price, by certified
or bank check, or wire transfer, for all or any portion of the Put
Shares specified in the Put Notice (each a "Payment") from the
Investor, or
(b) upon a tender (a "DVP Tender") by a broker or other
representative of the Investor of the Put Share Price of all or any
portion of the Put Shares specified in the Purchase Notice in a
Delivery Versus Payment ("DVP") cross-exchange conditioned upon
delivery of the Put Shares,
the Escrow Agent shall promptly execute a DVP cross-exchange (if applicable) and
release the applicable Put Shares to the Investor by placing such shares in the
DVP electronic delivery system under the Investor's name or such other street
name as the Investor so directs, in exchange for the funds representing the Put
Share Price for such Put Shares. Payment for Put Shares shall be deemed to have
been timely made if a DVP Tender as described above is made on or prior to the
Payment Due Date.
At or prior to the close of business of each day that the Escrow Agent receives
any Payment, DVP Tender or Put Shares, the Escrow Agent shall notify the Company
and the Investor of such receipt.
(c) RELEASE OF PAYMENTS TO THE COMPANY. Each time that Put Shares
are delivered to the Investor, the Escrow Agent shall release the corresponding
Payments, less any Escrow Fees then due, as soon as practicable but no later
than the close of business on the same Business Day. No Put Shares shall be
released until Payment or a DVP Tender is made for such Put Shares (in an amount
per share equal to the applicable Put Share Price), and no funds shall be
released to the Company until all of the corresponding Put Shares have been
delivered to Investor.
At the end of each business day in which any shares or Payment are
received, Escrow Agent shall provide to the Company and each Investor a
spreadsheet or similar schedule reflecting the Payments, Common Stock received,
and a schedule listing any moneys wired out by Escrow Agent, if applicable.
Wiring instructions for wiring funds to the Company will be provided to the
Escrow Agent by the Company. Escrow Agent shall call Paul C. Pershes or other
Company designee to confirm receipt of Company's wiring instructions at the
telephone numbers set forth in Section 14.3 below.
(d) RELEASE OF FUNDS TO THE INVESTOR. The Escrow Agent shall release
any excess amounts received from or on account of the Investor in a DVP
cross-exchange or otherwise, net of the amount of any Payments to which the
Company is entitled, to the Investor by wire transfer of immediately available
funds or as otherwise directed by the Investor as soon as possible but no later
than the close of business on the business day following the day that the
corresponding Payments are due to the Company.
The Escrow Agent shall calculate the interest accrued on the total amount of
Payments made by the Investor. The Escrow Agent shall release the interest that
has accrued on each of the Payments to the Investor by wire transfer of
immediately available funds as provided above in the normal course of business,
but no later than five (5) days after the last day of the month in which the
Payment was received.
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(e) TERMINATION OF CALL CLOSING. If the Escrow Agent has not
received Payments totaling the Put Share Price for all Put Shares held by the
Escrow Agent by the close of business on the date that is five (5) Business Days
after the applicable Payment Due Date, then the Escrow Agent shall, upon written
instructions from the Company, return all Put Shares for which payment pursuant
to Section 6(b) has not been received by the Escrow Agent to the Company.
7. INVESTMENT OF FUNDS. All funds received before 2:00 p.m., Atlanta, Georgia
time, on a given day and not disbursed on the same day received shall be
deposited by Escrow Agent into a separate First Union National Bank Money Market
account established for the purpose of this escrow and shall upon clearance earn
per diem interest at a rate provided by the Escrow Agent for such account.
8. OFFERING DATE, ESCROW TERM AND EARLY TERMINATION DATE. For the purpose of
this Escrow Agreement, the Escrow Account's term (the "Escrow Term") shall
commence on the date hereof and shall end on the Termination Date of the
Investment Agreement, or such earlier date that the Company and the Investor
both agree, subject to the resignation of the Escrow Agent pursuant to Section
13 hereof.
9. LIABILITY OF ESCROW AGENT.
(a) Escrow Agent shall have no liability or obligation with respect
to the Escrow Funds except for Escrow Agent's willful or wanton misconduct or
gross negligence. Escrow Agent's sole responsibility shall be for the
safekeeping, investment, and disbursement of the Escrow Funds in accordance with
the terms of this Escrow Agreement. Escrow Agent shall have no implied duties or
obligations and shall not be charged with knowledge or notice of any fact or
circumstance not specifically set forth herein. Escrow Agent may rely upon any
instrument, not only as to its due execution, validity and effectiveness, but
also as to the truth and accuracy of any information contained therein, which
Escrow Agent shall in good faith believe to be genuine, to have been signed or
presented by the person or parties purporting to sign the same and to conform to
the provisions of this Escrow Agreement. In no event shall Escrow Agent be
liable for incidental, indirect, special, consequential or punitive damages.
Escrow Agent shall not be obligated to take any legal action or commence any
proceeding in connection with the Escrow Funds, any account in which Escrow
Funds are deposited, this Escrow Agreement or the Underlying Agreement, or to
appear in, prosecute or defend any such legal action or proceeding. Escrow Agent
may consult legal counsel selected by it in the event of any dispute or question
as to the construction of any of the provisions hereof or of any other agreement
or of its duties hereunder, or relating to any dispute involving any party
hereto, and shall incur no liability and shall be fully indemnified from any
liability whatsoever in acting in accordance with the opinion or instruction of
such counsel. Company and Investor, jointly and severally, shall promptly pay,
upon demand, the reasonable fees and expenses of any such counsel.
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(b) The Escrow Agent is authorized, in its sole discretion, to
comply with orders issued or process entered by any court with respect to the
Escrow Funds, without determination by the Escrow Agent of such court's
jurisdiction in the matter. If any portion of the Escrow Funds is at any time
attached, garnished or levied upon under any court order, or in case the
payment, assignment, transfer, conveyance or delivery of any such property shall
be stayed or enjoined by any court order, or in case any order, judgment or
decree shall be made or entered by any court affecting such property or any part
thereof, then and in any such event, the Escrow Agent is authorized, in its sole
discretion, to rely upon and comply with any such order, writ, judgment or
decree which it is advised by legal counsel selected by it is binding upon it
without the need for appeal or other action; and if the Escrow Agent complies
with any such order, writ, judgment or decree, it shall not be liable to any of
the parties hereto or to any other person or entity by reason of such compliance
even though such order, writ, judgment or decree may be subsequently reversed,
modified, annulled, set aside or vacated.
10. FEES AND EXPENSES. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not properly fulfilled by a party other than
the Escrow Agent, or if the Company requests a substantial modification of its
terms, or if any controversy arises, or if the Escrow Agent is made a party to,
or intervenes in, any litigation pertaining to this Agreement or its subject
matter, the Escrow Agent shall be reasonably compensated for such extraordinary
services and reimbursed for all reasonable costs, attorneys' fees, including
allocating costs of in-house counsel, and expenses occasioned by such default,
delay, controversy or litigation. The Company promises to pay these sums upon
demand.
11. INDEMNIFICATION OF ESCROW AGENT. From and at all times after the date of
this Escrow Agreement, the Company and the Investor, jointly and severally (the
"Indemnifying Parties") shall, to the fullest extent permitted by law and to the
extent provided herein, indemnify and hold harmless Escrow Agent and each
director, officer, employee, attorney, agent and affiliate of Escrow Agent
(collectively, the "Indemnified Parties") against any and all actions, claims
(whether or not valid), losses, damages, liabilities, costs and expenses of any
kind or nature whatsoever (including without limitation reasonable attorneys'
fees, costs and expenses) incurred by or asserted against any of the Indemnified
Parties from and after the date hereof, whether direct, indirect or
consequential, as a result of or arising from or in any way relating to any
claim, demand, suit, action or proceeding (including any inquiry or
investigation) by any person, including without limitation the Company or the
Investor, whether threatened or initiated, asserting a claim for any legal or
equitable remedy against any person under any statute or regulation, including,
but not limited to, any federal or state securities laws, or under any common
law or equitable cause or otherwise, arising from or in connection with the
negotiation, preparation, execution, performance or failure of performance of
this Escrow Agreement or any transactions contemplated herein, whether or not
any such Indemnified Party is a party to any such action, proceeding, suit or
the target of any such inquiry or investigation; PROVIDED, HOWEVER, that no
Indemnified Party shall have the right to be indemnified hereunder for any
liability finally determined by a court of competent jurisdiction, subject to no
further appeal, to have resulted solely from the gross negligence
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or willful misconduct of such Indemnified Party. If any such action or claim
shall be brought or asserted against any Indemnified Party, such Indemnified
Party shall promptly notify the Indemnifying Parties, in writing, and the
Indemnifying Parties shall assume the defense thereof, including the employment
of counsel and the payment of all expenses. Such Indemnified Party shall, in its
sole discretion, have the right to employ separate counsel (who may be selected
by such Indemnified Party in its sole discretion) in any such action and to
participate in the defense thereof, and the fees and expenses of such counsel
shall be paid by such Indemnified Party, except that the Indemnifying Parties
shall be required to pay such fees and expenses if (a) the Indemnifying Parties
agrees to pay such fees and expenses, or (b) the Indemnifying Parties shall fail
to assume the defense of such action or proceeding or shall fail, in the sole
discretion of such Indemnified Party, to employ counsel satisfactory to the
Indemnified Party in any such action or proceeding, (c) the Indemnifying Parties
are the plaintiff in any such action or proceeding or (d) the named or potential
parties to any such action or proceeding (including any potentially impleaded
parties) include both Indemnified Party and the Indemnifying Parties, and
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to it which are different from or additional to
those available to the Indemnifying Parties. The Indemnifying Parties shall be
liable to pay fees and expenses of counsel pursuant to the preceding sentence,
except that any obligation to pay under clause (a) shall apply only to the party
so agreeing. All such fees and expenses payable by the Indemnifying Parties
pursuant to the foregoing sentence shall be paid from time to time as incurred,
both in advance of and after the final disposition of such action or claim. All
of the foregoing losses, damages, costs and expenses of the Indemnified Parties
shall be payable by the Indemnifying Parties, to the extent of the Escrow Funds
upon demand by such Indemnified Party. Upon exhaustion of the Escrow Funds, the
indemnification obligations of Indemnifying Parties hereunder shall be by the
Indemnifying Parties, jointly and severally. The obligations of the Indemnifying
Parties under this SECTION 11 shall survive any termination of this Escrow
Agreement, and the resignation or removal of Escrow Agent shall be independent
of any obligation of the Escrow Agent.
The parties agree that neither the payment by the Indemnifying
Parties of any claim by Escrow Agent for indemnification hereunder nor the
disbursement of any amounts to Escrow Agent from the Escrow Funds in respect of
a claim by Escrow Agent for indemnification shall impair, limit, modify, or
affect, as between the Company and the Investor, the respective rights and
obligations of Company, on the one hand, and the Investor, on the other hand,
under the Investment Agreement.
12. TERMINATION. This Agreement shall terminate upon the expiration of the
Escrow Term, without any notices to any person, unless earlier terminated
pursuant to terms hereof.
13. RESIGNATION OF ESCROW AGENT. The Escrow Agent may resign at any time upon
giving at least ten (10) days prior written notice to the parties provided,
however, that no such resignation shall become effective until the appointment
of a successor escrow agent that agrees to the terms of this Agreement which
shall be accomplished as follows: the parties shall use their best effort to
obtain a successor
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escrow agent within ten (10) days after receiving such notice. The successor
escrow agent shall execute and deliver an instrument accepting such appointment
and it shall without further acts, be vested with all the estates, properties,
rights, powers, and duties of the predecessor escrow agent as if originally
named as escrow agent. The Escrow Agent shall thereupon be discharged from any
further duties and liability under this Agreement.
14. MISCELLANEOUS.
14.1 GOVERNING LAWS. This Agreement is created by and shall be construed
under the applicable laws of the State of Georgia except for matters arising
under the United States Securities Act of 1933, as amended (the "Act"), which
matters shall be construed and interpreted in accordance with such laws.
14.2 COUNTERPARTS. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.3 NOTICES.
As to the Company:
Attention: Paul C. Pershes, President
1903 South Congress Ave., Suite 400
Boynton Beach, FL 33426
Phone: (561) 737-2227
Fax: (561) 265-2869
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As to the Escrow Agent:
Attn: Sabrina Fuller/Brian Justice
First Union National Bank, Corporate Trust Dept.
999 Peachtree Street N.E., Suite 1100
Atlanta, GA 30309
Telephone: (404) 827-7335
Facsimile: (404) 827-7305
As to the Investor:
Attn: Eric Swartz
200 Roswell Summit, Suite 285
1080 Holcomb Bridge Road
Roswell, GA 30076
Telephone: 770-640-8130
Facsimile: 770-640-7150
14.4 ENTIRE AGREEMENT. This Agreement represents the entire agreement of
the parties with respect to the Escrow Account with Escrow Agent and Escrow
Agent is not bound by any other agreements that may exist between each Investor
and the Company.
14.5 AUTHORIZATION FOR AMENDMENTS. This Agreement shall not be amended
except pursuant to instructions in writing signed by all parties hereto. Escrow
Agent shall be authorized to act on instructions or amendments to this Agreement
that are signed by the individual indicated below on the signature page in the
case of the Investor and Paul C. Pershes, President, in the case of the Company,
or (b) signed by a representative of Company or Investor who has been duly
authorized and notice of such authorization has been provided to Escrow Agent,
signed by the signatories specified in (a) above, as applicable. Such written
authorization and notice, signed by the appropriate officer, shall constitute
sufficient authorization and notice for Escrow Agent to act upon, and Escrow
Agent shall be authorized to honor instructions or amendments signed by such
authorized representatives.
IN WITNESS WHEREOF, the undersigned have executed this Escrow
Agreement as of the date first written above.
COMPANY:
MEDICAL INDUSTRIES OF AMERICA, INC.
By:_____________________________
Paul C. Pershes, President
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ESCROW AGENT:
FIRST UNION NATIONAL BANK
By:___________________________
Print Name:___________________
Title:________________________
INVESTOR: SWARTZ PRIVATE EQUITY, LLC
By: _________________________________
Eric S. Swartz, Manager
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SCHEDULE A
FEES PAYABLE TO ESCROW AGENT
Acceptance Fee: $ 500.00
Annual Escrow Agent Fee: $2,500.00
Attorney's Escrow Fee: $ 500.00 (approximate)
Transaction charges:
PUTS $100
Disbursement of funds $25 per outgoing wire transfer
Acceptance of the Appointment is subject to terms of the transaction and
document provisions being satisfactory to First Union National Bank.
The Acceptance Fee is payable upon execution of the escrow documents. The first
Annual Escrow Fee is payable upon effectiveness of a Registration Statement, as
defined in the Registration Rights Agreement. In the event the escrow is not
funded, the Acceptance Fee and all related expenses will not be refunded. Annual
fees cover a full year in advance, or any part thereof, and thus are not
pro-rated in the year of termination.
All out-of-pocket expenses, including, but not limited to, attorney fees and
expenses, accountant fees and expenses, legal notice publication, environmental
surveys, travel expenses, postage, registered mail and insurance costs, courier
charges, will be billed separately.
The fees quoted in this schedule apply to services ordinarily rendered in the
administration of an Escrow Account and are subject to reasonable adjustment
based on final review of documents, or when the Agent is called upon to
undertake unusual duties or responsibilities, or as changes in law, procedures,
or the cost of doing business demand. Services in addition to and not
contemplated in this Agreement, including, but not limited to, document
amendments and revisions, non-standard cash and/or investment transactions,
calculations, notices and reports, and legal fees, will be billed as
extraordinary expenses.
Unless otherwise indicated, the above fees provide for the establishment of one
account. Additional sub-accounts governed by the same Escrow Agreement may incur
an additional charge.
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EXHIBIT 4.4
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED. SEE THE RISK FACTORS SET FORTH UNDER THAT CERTAIN INVESTMENT AGREEMENT
BY AND BETWEEN THE COMPANY AND HOLDER REFERENCED THEREIN AS EXHIBIT J.
Warrant to Purchase
"N" shares Warrant Number ______
WARRANT TO PURCHASE COMMON STOCK
OF
MEDICAL INDUSTRIES OF AMERICA, INC.
THIS CERTIFIES that SWARTZ PRIVATE EQUITY, LLC or any subsequent holder
hereof ("Holder"), has the right to purchase from Medical Industries of America,
a Florida corporation (the "Company"), up to "N" fully paid and nonassessable
shares, wherein "N" is defined below, of the Company's common stock, $.0025 par
value per share ("Common Stock"), subject to adjustment as provided herein, at a
price equal to the Exercise Price as defined in Section 3 below, at any time
beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New
York, New York time the date that is five (5) years after the Date of Issuance
(the "Exercise Period"); provided, that, with respect to each "Put," as that
term is defined in that certain Investment Agreement (the "Investment
Agreement") by and between the initial Holder and Company, dated on or about
July 21, 1999, "N" shall equal ten percent (10%) of the number of shares of
Common Stock purchased by the Holder in that Put.
Holder agrees with the Company that this Warrant to Purchase Common Stock
of the Company (this "Warrant") is issued and all rights hereunder shall be held
subject to all of the conditions, limitations and provisions set forth herein.
1. DATE OF ISSUANCE AND TERM.
This Warrant shall be deemed to be issued on _____________, ______ ("Date
of Issuance"). The term of this Warrant is five (5) years from the Date of
Issuance.
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In the event that the Investment Agreement is terminated for non-payment
in accordance with the terms of Section 2.7.4 of the Investment Agreement, this
Warrant, to the extent that it has not yet been exercised, shall become null and
void, and the Holder shall promptly return the unexercised portion of this
Warrant to the Company upon written notice of a termination under Section 2.7.4
of the Investment Agreement.
EXHIBIT D
2. EXERCISE.
(A) MANNER OF EXERCISE. During the Exercise Period, this Warrant may be
exercised as to all or any lesser number of full shares of Common Stock covered
hereby (the "Warrant Shares") upon surrender of this Warrant, with the Exercise
Form attached hereto as EXHIBIT A (the "Exercise Form") duly completed and
executed, together with the full Exercise Price (as defined below) for each
share of Common Stock as to which this Warrant is exercised, at the office of
the Company, Attention: Paul C. Pershes, President, 1903 South Congress Ave.,
Suite 400, Boynton Beach, FL 33426; Phone: (561) 737-2227 Fax: (561) 265-2869,
or at such other office or agency as the Company may designate in writing, by
overnight mail, with an advance copy of the Exercise Form sent to the Company
and its Transfer Agent by facsimile (such surrender and payment of the Exercise
Price hereinafter called the "Exercise of this Warrant").
(B) DATE OF EXERCISE. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile. The Company shall not be required to deliver the shares of Common
Stock to the Holder until the requirements of Section 2(a) above are satisfied.
(C) CANCELLATION OF WARRANT. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
(D) HOLDER OF RECORD. Each person in whose name any Warrant for shares of
Common Stock is issued shall, for all purposes, be deemed to be the Holder of
record of such shares on the Date of Exercise of this Warrant, irrespective of
the date of delivery of the Common Stock purchased upon the Exercise of this
Warrant. Nothing in this Warrant shall be construed as conferring upon Holder
any rights as a stockholder of the Company.
(E) LIMITATION ON EXERCISE. The Holder agrees not to exercise this Warrant
if and to the extent that both (i) the Company has not obtained the Stockholder
20% Approval as specified in Section 6.12 of the Investment Agreement, and (ii)
the Aggregate Issued Shares after the issuance of the Common Stock issuable upon
such exercise would exceed
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the Cap Amount, where Aggregate Issued Shares and Cap Amount shall have the
meanings set forth in the Investment Agreement.
3. PAYMENT OF WARRANT EXERCISE PRICE.
The Exercise Price ("Exercise Price"), shall initially equal $Y per share
("Initial Exercise Price"), where "Y" shall equal 115% of average of the Closing
Bid Prices of the Company's Common Stock for the five (5) trading days
immediately preceding the Put Date (as both are defined in the Investment
Agreement) for the applicable Put or, if the Date of Exercise is more than six
(6) months after the Date of Issuance, the lesser of (i) the Initial Exercise
Price or (ii) the "Lowest Reset Price," as that term is defined below. The
Company shall calculate a "Reset Price" on each six-month anniversary date of
the Date of Issuance which shall equal one hundred and fifteen percent (115%) of
the average of the Closing Bid Prices of the Company's Common Stock for the five
(5) trading days ending on such six-month anniversary date of the Date of
Issuance. The "Lowest Reset Price" shall equal the lowest Reset Price determined
on any six-month anniversary date of the Date of Issuance preceding the Date of
Exercise, taking into account, as appropriate, any adjustments made pursuant to
Section 5 hereof.
Notwithstanding the above, the Company shall not be required to
calculate any additional Reset Prices after the date that is one (1) year after
the Date of Issuance if, and only if, all of the following have been satisfied
or have occurred: (i) the Company has filed a Registration Statement
("Registration Statement") not later than the time required by the Letter of
Intent for a Private Equity Line of Common Stock Pursuant to Regulation D
entered into between the Company and Swartz Private Equity, LLC on or about May
19, 1999 (ii) the Company has used its best efforts to have the Registration
Statement declared effective as soon as possible thereafter, and (iii) the
Company has responded in good faith to all comments or requests from the
Securities Exchange Commission relating to the Registration Statement within
thirty (30) days of the date such comments or requests were received.
Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:
(i) CASH EXERCISE: cash, bank or cashiers check or wire transfer; or
(ii) CASHLESS EXERCISE: subject to the last sentence of this Section 3,
surrender of this Warrant at the principal office of the Company together with
notice of cashless election, in which event the Company shall issue Holder a
number of shares of Common Stock computed using the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is being
exercised.
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A = the Market Price of one (1) share of Common Stock (for purposes
of this Section 3(ii), the "Market Price" shall be defined as the
average Closing Bid Price of the Common Stock for the five (5)
trading days prior to the Date of Exercise of this Warrant (the
"Average Closing Price"), as reported by the O.T.C. Bulletin Board,
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") Small Cap Market, or if the Common Stock is not
traded on the Nasdaq Small Cap Market, the Average Closing Price in
any other over-the-counter market; provided, however, that if the
Common Stock is listed on a stock exchange, the Market Price shall
be the Average Closing Price on such exchange for the five (5)
trading days prior to the date of exercise of the Warrants. If the
Common Stock is/was not traded during the five (5) trading days
prior to the Date of Exercise, then the closing price for the last
publicly traded day shall be deemed to be the closing price for any
and all (if applicable) days during such five (5) trading day
period.
B = the Exercise Price.
For purposes hereof, the term "Closing Bid Price" shall mean the closing
bid price on the O.T.C. Bulletin Board, the National Market System ("NMS"), the
New York Stock Exchange, the Nasdaq Small Cap Market, or if no longer traded on
the O.T.C. Bulletin Board, the NMS, the New York Stock Exchange, the Nasdaq
Small Cap Market, the "Closing Bid Price" shall equal the closing price on the
principal national securities exchange or the over-the-counter system on which
the Common Stock is so traded and, if not available, the mean of the high and
low prices on the principal national securities exchange on which the Common
Stock is so traded.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant in a cashless exercise transaction shall be deemed to
have been acquired at the time this Warrant was issued. Moreover, it is
intended, understood and acknowledged, based upon current interpretations of
existing federal securities rules and regulations, that the holding period for
the Common Stock issuable upon exercise of this Warrant in a cashless exercise
transaction shall be deemed to have commenced on the date this Warrant was
issued.
Notwithstanding anything to the contrary contained herein, this Warrant
may not be exercised in a cashless exercise transaction if, on the Date of
Exercise, the shares of Common Stock to be issued upon exercise of this Warrant
would upon such issuance be then registered pursuant to an effective and current
registration statement filed pursuant to that certain Registration Rights
Agreement dated on or about July 21, 1999 by and among the Company and certain
investors, or otherwise be registered under the Securities Act of 1933, as
amended.
4. TRANSFER AND REGISTRATION.
(a) TRANSFER RIGHTS. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
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<PAGE>
(b) REGISTRABLE SECURITIES. The Common Stock issuable upon the exercise of
this Warrant constitutes "Registrable Securities" under that certain
Registration Rights Agreement dated on or about July 21, 1999 between the
Company and certain investors and, accordingly, has the benefit of the
registration rights pursuant to that agreement.
5. ANTI-DILUTION ADJUSTMENTS.
(a) STOCK DIVIDEND. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then Holder, upon Exercise of this Warrant
after the record date for the determination of holders of Common Stock entitled
to receive such dividend, shall be entitled to receive upon Exercise of this
Warrant, in addition to the number of shares of Common Stock as to which this
Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) RECAPITALIZATION OR RECLASSIFICATION. If the Company shall at any time
effect a recapitalization, reclassification or other similar transaction of such
character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which Holder shall be
entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).
(c) DISTRIBUTIONS. If the Company shall at any time distribute for no
consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding years) then,
in any such case, the Company shall deliver to Holder thirty (30) days advance
written notice of the record date for such distribution. Holder shall be
entitled to receive, upon Exercise of this Warrant prior to the record dateof
such distribution, with respect to each share of Common Stock issuable upon such
exercise and held by Holder on such record date, the amount of cash or evidences
of indebtedness or other securities or assets to which the other common
shareholders of the Company on the record date are entitled to receive as a
result of the happening of such event.
(d) NOTICE OF CONSOLIDATION OR MERGER. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the Company or another entity or there
is a sale of all or substantially all the Company's assets (a "Corporate
Change"), then this Warrant shall be exerciseable into such class and type of
securities or other assets as Holder would have received had Holder exercised
this Warrant immediately prior to such Corporate Change; provided, however, that
Company may not affect any Corporate Change unless it first shall have given ten
(10) days notice to Holder hereof of any Corporate Change.
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(e) EXERCISE PRICE ADJUSTED. As used in this Warrant, the term "Exercise
Price" shall mean the purchase price per share specified in Section 3 of this
Warrant, until the occurrence of an event stated in subsection (a), (b) or (c)
of this Section 5, and thereafter shall mean said price as adjusted from time to
time in accordance with the provisions of said subsection. No such adjustment
under this Section 5 shall be made unless such adjustment would change the
Exercise Price at the time by $.01 or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate thereof
would change the Exercise Price at the time by $.01 or more.
(f) ADJUSTMENTS: ADDITIONAL SHARES, SECURITIES OR ASSETS. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
Holder shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. FRACTIONAL INTERESTS.
No fractional shares or scrip representing fractional shares shall
be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.
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7. RESERVATION OF SHARES.
The Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for the Exercise of
this Warrant and payment of the Exercise Price. The Company covenants and agrees
that upon the Exercise of this Warrant, all shares of Common Stock issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to preemptive rights, rights of first refusal or similar rights of
any person or entity.
8. RESTRICTIONS ON TRANSFER.
(a) REGISTRATION OR EXEMPTION REQUIRED. This Warrant has been issued
in a transaction exempt from the registration requirements of the Act by virtue
of Regulation D and exempt from state registration under applicable state laws.
The Warrant and the Common Stock issuable upon the Exercise of this Warrant may
not be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.
(b) ASSIGNMENT. If Holder can provide the Company with reasonably
satisfactory evidence that the conditions of (a) above regarding registration or
exemption have been satisfied, Holder may sell, transfer, assign, pledge or
otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a
written notice to Company, substantially in the form of the Assignment attached
hereto as EXHIBIT B, indicating the person or persons to whom the Warrant shall
be assigned and the respective number of warrants to be assigned to each
assignee. The Company shall effect the assignment within ten (10) days, and
shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of
like tenor and terms for the appropriate number of shares.
9. BENEFITS OF THIS WARRANT.
Nothing in this Warrant shall be construed to confer upon any person
other than the Company and Holder any legal or equitable right, remedy or claim
under this Warrant and this Warrant shall be for the sole and exclusive benefit
of the Company and Holder.
10. APPLICABLE LAW.
This Warrant is issued under and shall for all purposes be governed
by and construed in accordance with the laws of the state of Florida, without
giving effect to conflict of law provisions thereof.
11. LOSS OF WARRANT.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
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<PAGE>
12. NOTICE OR DEMANDS.
Notices or demands pursuant to this Warrant to be given or made by Holder to or
on the Company shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed, until
another address is designated in writing by the Company, to the Attention: Paul
C. Pershes, President, 1903 South Congress Ave., Suite 400, Boynton Beach, FL
33426; Phone: (561) 737-2227 Fax: (561) 265-2869. Notices or demands pursuant to
this Warrant to be given or made by the Company to or on Holder shall be
sufficiently given or made if sent by certified or registered mail, return
receipt requested, postage prepaid, and addressed, to the address of Holder set
forth in the Company's records, until another address is designated in writing
by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
______ day of ________________, _______.
MEDICAL INDUSTRIES OF AMERICA, INC.
By: ________________________________
Paul C. Pershes, President
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<PAGE>
EXHIBIT A
EXERCISE FORM FOR WARRANT
TO: MEDICAL INDUSTRIES OF AMERICA, INC.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock (the "Common Stock") of MEDICAL
INDUSTRIES OF AMERICA, INC., a Florida corporation (the "Company"), evidenced by
the attached warrant (the "Warrant"), and herewith makes payment of the exercise
price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated:
________________________________________________________________________________
Signature
________________________________________________________________________________
Print Name
________________________________________________________________________________
Address
________________________________________________________________________________
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
________________________________________________________________________________
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<PAGE>
EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of MEDICAL
INDUSTRIES OF AMERICA, INC., evidenced by the attached Warrant and does hereby
irrevocably constitute and appoint _______________________ attorney to transfer
the said Warrant on the books of the Company, with full power of substitution in
the premises.
Dated: ______________________________
Signature
Fill in for new registration of Warrant:
_________________________________________
Name
_________________________________________
Address
_________________________________________
Please print name and address of assignee
(including zip code number)
________________________________________________________________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
________________________________________________________________________________
10
EXHIBIT 4.5
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS
MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED.
Warrant to Purchase
425,000 shares
WARRANT TO PURCHASE COMMON STOCK
OF
MEDICAL INDUSTRIES OF AMERICA, INC.
THIS CERTIFIES that SWARTZ PRIVATE EQUITY, LLC or any subsequent holder
hereof ("Holder"), has the right to purchase from MEDICAL INDUSTRIES OF AMERICA,
INC., a corporation organized under the laws of the state of Florida (the
"Company"), up to 425,000 fully paid and nonassessable shares of the Company's
common stock ("Common Stock"), subject to adjustment as provided herein, at a
price equal to the Exercise Price as defined in Section 3 below, at any time
beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New
York, New York time the date that is five (5) years after the Date of Issuance
(the "Exercise Period").
Holder agrees with the Company that this Warrant to Purchase Common Stock
of the Company (this "Warrant") is issued and all rights hereunder shall be held
subject to all of the conditions, limitations and provisions set forth herein.
1. DATE OF ISSUANCE AND TERM.
This Warrant shall be deemed to be issued on May 26, 1999 ("Date of
Issuance"). The term of this Warrant is five (5) years from the Date of
Issuance.
In the event that the Investment Agreement (the "Investment
Agreement") by and between the initial Holder and Company, dated on or about
July 21, 1999 is terminated for non-payment in accordance with the terms of
Section 2.7.4 of the Investment Agreement, this Warrant, to the extent that it
has not yet been exercised, shall become null and void, and the Holder shall
promptly return the unexercised portion of the Warrant to the Company upon
written notice of a termination under Section 2.7.4 of the Investment Agreement.
<PAGE>
2. EXERCISE.
(A) MANNER OF EXERCISE. During the Exercise Period, this Warrant may be
exercised as to all or any lesser number of full shares of Common Stock covered
hereby (the "Warrant Shares") upon surrender of this Warrant, with the Exercise
Form attached hereto as EXHIBIT A (the "Exercise Form") duly completed and
executed, together with the full Exercise Price (as defined below) for each
share of Common Stock as to which this Warrant is exercised, at the office of
the Company, Attention: Paul C. Pershes, President, 1903 South Congress Ave.,
Suite 400, Boynton Beach, FL 33426; Phone: (561) 737-2227 Fax: (561) 265-2869,
or at such other office or agency as the Company may designate in writing, by
overnight mail, with an advance copy of the Exercise Form sent to the Company
and its Transfer Agent by facsimile (such surrender and payment of the Exercise
Price hereinafter called the "Exercise of this Warrant").
(B) DATE OF EXERCISE. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter, but
in no event later than five (5) business days thereafter. Alternatively, the
Date of Exercise shall be defined as the date the original Exercise Form is
received by the Company, if Holder has not sent advance notice by facsimile.
(C) CANCELLATION OF WARRANT. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
(D) HOLDER OF RECORD. Each person in whose name any Warrant for shares of
Common Stock is issued shall, for all purposes, be deemed to be the Holder of
record of such shares on the Date of Exercise of this Warrant, irrespective of
the date of delivery of the Common Stock purchased upon the Exercise of this
Warrant. Nothing in this Warrant shall be construed as conferring upon Holder
any rights as a stockholder of the Company.
3. PAYMENT OF WARRANT EXERCISE PRICE.
The Exercise Price shall initially equal $1.9334 per share ("Exercise
Price") or, if the Date of Exercise is more than six (6) months after the Date
of Issuance, the lesser of (i) the Initial Exercise Price or (ii) the "Lowest
Reset Price," as that term is defined below. The Company shall calculate a
"Reset Price" on each six-month anniversary date of the Date of Issuance, up
through the date that is three (3) years after the Date of Issuance, which shall
equal one hundred fifteen percent (115%) of the average of the Closing Bid
Prices of the Company's Common Stock for the five (5) trading days ending on
such six-month anniversary date of the Date of Issuance. The "Lowest Reset
Price" shall equal the lowest Reset Price determined on any six-month
anniversary date of the Date of Issuance preceding the Date of Exercise, taking
into account, as appropriate, any adjustments made pursuant to Section 5 hereof.
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<PAGE>
Notwithstanding the above, the Company shall not be required to
calculate any additional Reset Prices after the date that is one (1) year after
the Date of Issuance if, and only if, all of the following have been satisfied
or have occurred: (i) the Company has filed a Registration Statement
("Registration Statement") not later than the time required by the Letter of
Intent for a Private Equity Line of Common Stock Pursuant to Regulation D
entered into between the Company and Swartz Private Equity, LLC on or about May
19, 1999 (ii) the Company has used its best efforts to have the Registration
Statement declared effective as soon as possible thereafter, and (iii) the
Company has responded in good faith to all comments or requests from the
Securities Exchange Commission relating to the Registration Statement within
thirty (30) days of the date such comments or requests were received.
Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:
(i) CASH EXERCISE: cash, bank or cashiers check or wire transfer; or
(ii) CASHLESS EXERCISE: subject to the last sentence of this Section 3,
surrender of this Warrant at the principal office of the Company together with
notice of cashless election, in which event the Company shall issue Holder a
number of shares of Common Stock computed using the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is being
exercised.
A = the Market Price of one (1) share of Common Stock (for purposes
of this Section 3(ii), the "Market Price" shall be defined as the
average Closing Bid Price of the Common Stock for the five (5)
trading days prior to the Date of Exercise of this Warrant (the
"Average Closing Price"), as reported by the O.T.C. Bulletin Board,
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") Small Cap Market, or if the Common Stock is not
traded on the Nasdaq Small Cap Market, the Average Closing Price in
any other over-the-counter market; provided, however, that if the
Common Stock is listed on a stock exchange, the Market Price shall
be the Average Closing Price on such exchange for the five (5)
trading days prior to the date of exercise of the Warrants. If the
Common Stock is/was not traded during the five (5) trading days
prior to the Date of Exercise, then the closing price for the last
publicly traded day shall be deemed to be the closing price for any
and all (if applicable) days during such five (5) trading day
period.
B = the Exercise Price.
For purposes hereof, the term "Closing Bid Price" shall mean the closing
bid price on the O.T.C. Bulletin Board, the National Market System ("NMS"), the
New York Stock
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<PAGE>
Exchange, the Nasdaq Small Cap Market, or if no longer traded on the O.T.C.
Bulletin Board, the NMS, the New York Stock Exchange, the Nasdaq Small Cap
Market, the "Closing Bid Price" shall equal the closing price on the principal
national securities exchange or the over-the-counter system on which the Common
Stock is so traded and, if not available, the mean of the high and low prices on
the principal national securities exchange on which the Common Stock is so
traded.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant in a cashless exercise transaction shall be deemed to
have been acquired at the time this Warrant was issued. Moreover, it is
intended, understood and acknowledged, based upon current interpretations of
existing federal securities rules and regulations, that the holding period for
the Common Stock issuable upon exercise of this Warrant in a cashless exercise
transaction shall be deemed to have commenced on the date this Warrant was
issued.
Notwithstanding anything to the contrary contained herein, this Warrant
may not be exercised in a cashless exercise transaction if, on the Date of
Exercise, the shares of Common Stock to be issued upon exercise of this Warrant
would upon such issuance be then registered pursuant to an effective and current
registration statement.
4. TRANSFER AND REGISTRATION.
(a) TRANSFER RIGHTS. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
(b) REGISTRABLE SECURITIES. If the Company proposes to register (including
for this purpose a registration effected by the Company for stockholders other
than the Holders) any of its Common Stock under the Act in connection with the
public offering of such securities solely for cash (other than a registration
relating solely for the sale of securities to participants in a Company benefit
plan or a registration on Form S-4 promulgated under the Act or any successor or
similar form registering stock issuable upon a reclassification, upon a business
combination involving an exchange of securities or upon an exchange offer for
securities of the issuer or another entity)(a "Piggyback Registration
Statement"), the Company shall cause to be included in such Piggyback
Registration Statement all of the Common Stock issuable upon the exercise of
this Warrant ("Registrable Securities") ("Piggyback Registration") to the extent
such inclusion does not violate the registration rights of any other
securityholder of the Company granted prior to the date hereof. Nothing herein
shall prevent the Company from withdrawing or abandoning the Piggyback
Registration Statement prior to its effectiveness; provided, however, that if,
in the written opinion of the Company's managing underwriter, if any, for such
offering, the inclusion of the Shares, when added to the securities being
registered by the Company or the selling security holders, would exceed the
maximum amount of the Company's securities that could be marketed without
otherwise materially
4
<PAGE>
and adversely affecting the entire offering, then the Company may exclude all
of, or a portion or the Shares, from such offering required to be so registered
so that the total number of securities to be registered is within the maximum
number of shares that, in the opinion of the managing underwriter, may be
marketed without otherwise materially and adversely affecting the entire
offering, so long as the exclusion of Holder's shares, on a pro rata basis, is
no greater than the amount excluded with respect to any other selling security
holder.
5. ANTI-DILUTION ADJUSTMENTS.
(a) STOCK DIVIDEND. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then Holder, upon Exercise of this Warrant
after the record date for the determination of holders of Common Stock entitled
to receive such dividend, shall be entitled to receive upon Exercise of this
Warrant, in addition to the number of shares of Common Stock as to which this
Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) RECAPITALIZATION OR RECLASSIFICATION. If the Company shall at any time
effect a recapitalization, reclassification or other similar transaction of such
character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which Holder shall be
entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).
(c) DISTRIBUTIONS. If the Company shall at any time distribute for no
consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding years) then,
in any such case, the Company shall deliver to Holder thirty (30) days advance
written notice of the record date for such distribution. Holder shall be
entitled to receive, upon Exercise of this Warrant prior to the record date of
such distribution, with respect to each share of Common Stock issuable upon such
exercise and held by Holder on such record date, the amount of cash or evidences
of indebtedness or other securities or assets to which the other common
shareholders of the Company on the record date are entitled to receive as a
result of the happening of such event.
(d) NOTICE OF CONSOLIDATION OR MERGER. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the Company or another entity or there
is a sale of all or substantially all the Company's assets (a "Corporate
Change"), then this Warrant shall be exerciseable into such class and type of
securities or other assets as Holder would have received had Holder exercised
this Warrant immediately prior to such Corporate Change; provided, however, that
Company may not affect any Corporate Change unless it first shall have given ten
(10) days notice to Holder hereof of any Corporate Change.
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<PAGE>
(e) EXERCISE PRICE ADJUSTED. As used in this Warrant, the term "Exercise
Price" shall mean the purchase price per share specified in Section 3 of this
Warrant, until the occurrence of an event stated in subsection (a), (b) or (c)
of this Section 5, and thereafter shall mean said price as adjusted from time to
time in accordance with the provisions of said subsection. No such adjustment
under this Section 5 shall be made unless such adjustment would change the
Exercise Price at the time by $.01 or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate thereof
would change the Exercise Price at the time by $.01 or more.
(f) ADJUSTMENTS: ADDITIONAL SHARES, SECURITIES OR ASSETS. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
Holder shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. FRACTIONAL INTERESTS.
No fractional shares or scrip representing fractional shares shall
be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.
7. RESERVATION OF SHARES.
The Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for the Exercise of
this Warrant and payment of the Exercise Price. The Company covenants and agrees
that upon the Exercise of this Warrant, all shares of Common Stock issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to preemptive rights, rights of first refusal or similar rights of
any person or entity.
8. RESTRICTIONS ON TRANSFER.
(a) REGISTRATION OR EXEMPTION REQUIRED. This Warrant has been issued
in a transaction exempt from the registration requirements of the Act by virtue
of Regulation D and exempt from state registration under applicable state laws.
The Warrant and the Common Stock issuable upon the Exercise of this Warrant may
not be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.
6
<PAGE>
(b) ASSIGNMENT. If Holder can provide the Company with reasonably
satisfactory evidence that the conditions of (a) above regarding registration or
exemption have been satisfied, Holder may sell, transfer, assign, pledge or
otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a
written notice to Company, substantially in the form of the Assignment attached
hereto as EXHIBIT B, indicating the person or persons to whom the Warrant shall
be assigned and the respective number of warrants to be assigned to each
assignee. The Company shall effect the assignment within ten (10) days, and
shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of
like tenor and terms for the appropriate number of shares.
9. BENEFITS OF THIS WARRANT.
Nothing in this Warrant shall be construed to confer upon any person
other than the Company and Holder any legal or equitable right, remedy or claim
under this Warrant and this Warrant shall be for the sole and exclusive benefit
of the Company and Holder.
10. APPLICABLE LAW.
This Warrant is issued under and shall for all purposes be governed
by and construed in accordance with the laws of the state of Florida, without
giving effect to conflict of law provisions thereof.
11. LOSS OF WARRANT.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. NOTICE OR DEMANDS.
Notices or demands pursuant to this Warrant to be given or made by Holder to or
on the Company shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed, until
another address is designated in writing by the Company, Attention: Paul C.
Pershes, President, 1903 South Congress Ave., Suite 400, Boynton Beach, FL
33426; Phone: (561) 737-2227 Fax: (561) 265-2869. Notices or demands pursuant to
this Warrant to be given or made by the Company to or on Holder shall be
sufficiently given or made if sent by certified or registered mail, return
receipt requested, postage prepaid, and addressed, to the address of Holder set
forth in the Company's records, until another address is designated in writing
by Holder.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
26TH day of May, 1999.
MEDICAL INDUSTRIES OF AMERICA, INC.
By: ________________________________
Paul C. Pershes, President
8
<PAGE>
EXHIBIT A
EXERCISE FORM FOR WARRANT
TO: MEDICAL INDUSTRIES OF AMERICA, INC.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock (the "Common Stock") of MEDICAL
INDUSTRIES OF AMERICA, INC., a __________ corporation (the "Company"), evidenced
by the attached warrant (the "Warrant"), and herewith makes payment of the
exercise price with respect to such shares in full, all in accordance with the
conditions and provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated:
- ------------------------------------------------------------------------
Signature
- -----------------------------------------------------------------------
Print Name
- ------------------------------------------------------------------------
Address
- -----------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- ------------------------------------------------------------------------
9
<PAGE>
EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of MEDICAL
INDUSTRIES OF AMERICA, INC., evidenced by the attached Warrant and does hereby
irrevocably constitute and appoint _______________________ attorney to transfer
the said Warrant on the books of the Company, with full power of substitution in
the premises.
Dated: ______________________________
Signature
Fill in for new registration of Warrant:
-----------------------------------
Name
- -----------------------------------
Address
- -----------------------------------
Please print name and address of assignee
(including zip code number)
- -----------------------------------------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- ------------------------------------------------------------------------
10
EXHIBIT 4.6
JULY 21, 1999
Attn: Corporate Stock Transfer
Republic Plaza
370 17th Street, Suite 250
Denver, CO 80202-4614
Telephone: (303) 595-3300
Facsimile: (303) 592-8821
Re: Medical Industries of America, Inc.
Dear Sirs and Madams:
Reference is made to that certain Investment Agreement (the "Investment
Agreement"), dated on or about July 21, 1999, by and among Medical Industries of
America, Inc., a Florida corporation (the "Company"), and the other signatories
thereto (the "Holders") pursuant to which the Company, at times and amounts
chosen by the Company, as further described in the Investment Agreement, may
issue to the Holder up to Twenty Five Million Dollars ($25,000,000) in aggregate
principal amount of Common Stock of the Company (the "Put Shares"), and warrants
(the "Warrants") to purchase Common Stock (the "Warrant Shares") of the Company.
The Put Shares will be delivered to First Union National Bank (the "Escrow
Agent") pursuant to the terms of the Escrow Agreement and Instructions (the
"Escrow Agreement") by and among the Escrow Agent, the Company and Swartz
Private Equity, LLC
A. ISSUANCE OF PUT SHARES. This letter shall serve as our irrevocable
authorization and direction to you (provided that you are the transfer agent of
the Company at such time) to issue unlegended Put Shares (in electronic form,
unless otherwise specified) in the name of each Holder or its nominee, or in
such other name as the Escrow Agent, as custodian, shall direct, and, to deliver
such Put Shares to the Escrow Agent (in the case of electronic shares, the Put
Shares shall be delivered under the Escrow Agent's DTC participation number)
from time to time upon surrender to you of (i) a letter from the Company,
instructing you to issue a specified number of Put Shares to the Holder, (ii) a
properly completed and duly executed Put Notice, in the form attached hereto as
Exhibit 1, which has been properly agreed and acknowledged by the Company as
indicated by the signature of a duly authorized officer of the Company thereon,
(iii) Registration Confirmation (as defined below) and (iv) an opinion of
counsel ("Put Opinion of Counsel") in substantially the form of Exhibit 2.
B. ISSUANCE OF WARRANT SHARES. This letter shall serve as our irrevocable
authorization and direction to you (provided that you are the transfer agent of
the Company at such time) to issue unlegended Warrant Shares in the name of the
Holder (or in the name of its nominee, at the Holder's request) from time to
time upon surrender to you of (i) a letter from the Company, instructing you to
issue a specified number of Warrant Shares to the Holder, (ii) a properly
completed and duly executed Warrant Exercise Form, in the form attached hereto
as Exhibit 3, which has been properly agreed and acknowledged by the Company as
indicated by the signature of a duly authorized officer of the Company thereon,
(iii) Registration Confirmation (as defined below) and (iv) an opinion of
counsel ("Warrant Opinion of Counsel") in substantially the form of Exhibit 4.
1
EXHIBIT T
<PAGE>
C. LEGEND FREE CERTIFICATES. So long as you have previously received: (i)
written confirmation from counsel to the Company (which counsel may be in-house
legal counsel) that a registration statement covering resales of the Put Shares
and Warrant Shares has been declared effective by the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and (ii) a copy of such
registration statement, ((i) and (ii) above are collectively collectively
referred to as "Registration Confirmation"), certificates representing the Put
Shares and Warrant Shares shall not bear any legend restricting transfer of the
Put Shares or Warrant Shares and should not be subject to any stop-transfer
restriction.
If you have not previously received Registration Confirmation, then the
Put Shares shall not be issued, and the certificates representing the Warrant
Shares shall be issued, but shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE OF THE UNITED STATES, THE SECURITIES REPRESENTED HEREBY MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS
UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS."
provided, however, that the Company may from time to time notify you to place
stop-transfer restriction on the certificates for outstanding Put Shares and
Warrant Shares in the event a registration statement covering resales of the Put
Shares and the Warrant Shares is subject to amendment for events then current.
Please be advised that the Holders are relying upon this letter as an inducement
to enter into the Investment Agreement.
Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions. Should you have any questions
concerning this matter, please contact me at (561) 737-2227.
2
EXHIBIT T
<PAGE>
Very truly yours,
MEDICAL INDUSTRIES OF AMERICA, INC.
By:_____________________________
Paul C. Pershes, President
Agreed and Acknowledged:
TRANSFER AGENT HOLDER
CORPORATE STOCK TRANSFER SWARTZ PRIVATE EQUITY, LLC
By:_____________________ By:_______________________
Eric S. Swartz, Manager
Name:___________________
Title:__________________
Date:______________,1999 Date:________________,1999
Enclosures
3
EXIBIT T
<PAGE>
ATTACHED EXHIBITS 1 - 4
4
EXIBIT T
EXHIBIT 4.7
AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of June ___, 1999, by
and among Medical Industries of America, Inc., a corporation duly incorporated
and existing under the laws of the State of Florida (the "Company") and Swartz
Private Equity, LLC (hereinafter referred to as "Swartz").
RECITALS:
WHEREAS, pursuant to the Company's offering ("Equity Line ") of up to
Twenty Five Million Dollars ($25,000,000), excluding any funds paid upon
exercise of the Warrants, of Common Stock of the Company pursuant to that
certain Letter of Intent dated on or about May 19, 1999 (the "Letter of Intent")
between the Company and Swartz, the Company has agreed to sell and Swartz has
agreed to purchase, from time to time as provided in the Investment Agreement,
shares of the Company's Common Stock for a maximum aggregate offering amount of
Twenty Five Million Dollars ($25,000,000); and
WHEREAS, pursuant to the terms of the Letter of Intent, the Company has
agreed, among other things, to issue to the Subscriber Commitment Warrants, as
defined in the Letter of Intent, to purchase a number of shares of Common Stock,
exercisable for five (5) years from their respective dates of issuance.
TERMS:
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in Agreement and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. ISSUANCE OF COMMITMENT WARRANTS. As compensation for entering into the Equity
Line, Swartz shall receive a warrant convertible into 425,000 shares of Medical
Industries Common Stock, in the form attached hereto as EXHIBIT A (the
"Commitment Warrants").
2. VESTING OF COMMITMENT WARRANTS. Upon receipt by Swartz of the Commitment
Warrant executed by Medical Industries, Swartz shall deliver Medical Industries
all legal documentation required to close the Equity Line transaction ("the
Closing Documents"). During the 10 business day period following receipt of the
Closing Documents by Medical Industries (the "Document Review Period"), Medical
Industries and its counsel shall review the Closing Documents and negotiate any
necessary modifications with Swartz's counsel. Should Medical Industries wish to
reject the Closing Documents (as modified by mutual agreement) it must do so on
or before the last day of the Document Review Period, by providing Swartz
written notice of such rejection (an "Unacceptable Document Notice"). Such
notice may be properly given by facsimile or by common courier. Swartz shall
return the Commitment Warrant within 2 business days of receipt of such
Unacceptable Document Notice and the Equity Line commitment by Swartz shall be
terminated. In the absence of a Due Diligence Notice (as defined below) by
Swartz or an Unacceptable Document Notice by Medical Industries being
transmitted by the appropriate party prior to the end of the "Document Review
Period," the Commitment Warrant shall irrevocably vest with Swartz, subject only
to a Partial Warrant Return, as defined below.
1
<PAGE>
3. CANCELLATION OF WARRANT BY HOLDER. During Medical Industries' 10 business day
Document Review Period, Swartz shall conduct its Due Diligence of Medical
Industries in order to finalize its commitment to the Equity Line transaction.
In the event that Swartz notifies Medical Industries in writing during such
period that, based upon its due diligence review, Swartz elects not to proceed
with the obligations under the Equity Line (a "Due Diligence Notice"), this
Agreement and the Commitment Warrants shall become null and void and Swartz
shall return the Commitment Warrants to Medical Industries.
4. PARTIAL WARRANT RETURN AND EQUITY LINE COMMITMENT CANCELLATION. In the event
that (i) the Company has filed a registration statement ( "Registration
Statement") covering the resale of the common shares issuable in conjunction
with the Equity Line and issuable upon exercise of the warrants by the date that
is 45 days after the date of execution by the Company of the Closing Documents,
(ii) the Company has used its reasonable best efforts to have the Registration
Statement declared effective and has responded to any comments from the
Securities and Exchange Commission within 30 days of receipt thereof, AND (iii)
a Registration Statement has not been declared effective by the date that is 6
months from the date that the registration statement was filed, then Swartz
shall return 40% of the Commitment Warrants (a "Partial Warrant Return") to
Medical Industries and Swartz's Equity Line Commitment shall be cancelled and
Swartz shall not be entitled to receive any Additional Warrants or Makeup
Warrants thereafter. The provisions in this section may be waived or suspended
by mutual agreement between both parties.
5. ISSUANCE OF ADDITIONAL WARRANTS. The Company agrees that on each 6-month
anniversary of the date of execution of the Closing Documents (the "Closing
Date"), for 1 year following the Closing Date, it shall issue additional
warrants (the "Additional Warrants"), also in the form of EXHIBIT A, to Swartz
under the following circumstances and in the following amounts:
(1) In the event that the Company issues shares of common stock in
conjunction with any acquisitions consummated on or after May 13, 1999,
Swartz shall receive Additional Warrants in an amount equal to .0264
multiplied by the number of shares of common stock (up to 30 million
shares) issued in conjunction with such acquisitions (excluding shares to
be issued for the acquisition of CyberCare, Inc., and excluding either (i)
shares to be issued for the acquisition of MedVentures, Inc., or, (ii) in
lieu thereof, excluding up to 6 million shares to be issued in a similarly
valued acquisition).
(2) In the event that Medical Industries conducts a reverse stock split on
or before the date that is one (1) year after the Closing Date for the
Equity Line, such that the total aggregate number of warrants issued to
Swartz to date (including the Commitment Warrants and any Additional
Warrants), as adjusted for the stock split(s), is less than the Minimum
Warrant Amount stated below, Swartz shall receive a number of additional
warrants ("Make Up Warrants") such that the aggregate number of warrants
issued to Swartz shall equal the Minimum Warrant Amount.
2
<PAGE>
NUMBER OF COMMON SHARES OUTSTANDING MINIMUM
IMMEDIATELY FOLLOWING THE REVERSE STOCK SPLIT WARRANT AMOUNT
--------------------------------------------- --------------
Greater than 8,000,000 300,000 shares
Less than 8,000,000 250,000 shares
The initial exercise price of the Additional Warrants and the Makeup
Warrants shall equal one hundred fifteen percent (115%) of the average of the
Closing Bid Prices of the Company's Common Stock for the five (5) trading days
immediately preceding the date of their Date of Issuance.
5. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida applicable to agreements made
in and wholly to be performed in that jurisdiction, except for matters arising
under the Act or the Securities Exchange Act of 1934, which matters shall be
construed and interpreted in accordance with such laws.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this ___day of June, 1999.
- --------------------------------------------------------------------------------
MEDICAL INDUSTRIES OF AMERICA, INC. SUBSCRIBER:
SWARTZ PRIVATE EQUITY, LLC.
By: __________________________ By: __________________________
Paul C. Pershes, President Eric S. Swartz, Manger
Address: Medical Industries of America, Inc. 1080 Holcomb Bridge Road
Attn: Paul C. Pershes, President Bldg. 200, Suite 285
1903 S. Congress Avenue, Suite 400 Roswell, GA 30076
Baynton Beach, FL 33426 Telephone: (770) 640-8130
Telephone (561) 737-2227 Facsimile: (770) 640-7150
Facsimile (561) 265-2869
3
EXHIBIT 4.8
ACKNOWLEDGEMENT
With respect to the Investment Agreement ("Investment Agreement") entered
into as of July 21, 1999, by and among Cyber-Care, Inc., f/k/a Medical
Industries of America, Inc., a corporation duly incorporated and existing under
the laws of the State of Florida (the "Company") and Swartz Private Equity, LLC
(hereinafter referred to as "Swartz"), the Company hereby agrees and
acknowledges the following:
The Company acknowledges that the Investor may sell the Put Shares
anytime, and from time to time, after the Put Date for such shares, in
accordance with the Investment Agreement and applicable law, and that such
sales may occur during a Pricing Period or Pricing Periods and may have
the effect of reducing the Purchase Price.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this ____ day of September, 1999.
Cyber-Care, Inc.,
f/k/a Medical Industries of
America, Inc.
By: ________________________________
Paul C. Pershes, President
Address: Cyber-Care, Inc.
1903 South Congress Ave., Suite 400
Boynton Beach, Fl 33426
Telephone (561) 737-2227
Facsimile (561) 265-2869
SWARTZ PRIVATE EQUITY, LLC
By: ________________________________
Eric S. Swartz, Manager
1
<PAGE>
Address: 1080 Holcomb Bridge Road
Bldg. 200, Suite 285
Roswell, GA 30076
Telephone: (770) 640-8130
Facsimile: (770) 640-7150
2
EXHIBIT 23.1
Templeton & Company, P.A.
Certified Public Accountants
540 Royal Palm Beach Boulevard
Royal Palm Beach, Florida 33411
(561) 798-9988
Fax (561) 798-4053
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of our
report dated June 16, 1999, on our audit the financial statements of CyberCare,
Inc. ( a development-stage company).
/s/ TEMPLETON & COMPANY, P.A.
Royal Palm Beach, Florida
November 30, 1999
