U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number 0-20356
MEDICAL INDUSTRIES OF AMERICA, INC.
(Name of small business issuer in its charter)
Florida 65-0158479
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1903 S. Congress Ave., Suite 400, Boynton Beach, Florida 33426
(Address of principal executive offices, including zip code)
(561) 737-2227
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes[X] No[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year. $14,731,326.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the last sales price on 3/31/99 was $9,469,741.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. At 3/31/99 there were
27,462,368 shares of common stock outstanding.
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-KSB
PART I
PAGE
------
Item 1 Description of Business 3
Item 2 Description of Properties 22
Item 3 Legal Proceedings 22
Item 4 Submission of Matters to a Vote of Security Holders 23
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 23
Item 6 Management's Discussion and Analysis 24
Item 7 Financial Statements 28
Item 8 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 28
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 29
Item 10 Executive Compensation 32
Item 11 Security Ownership of Certain Beneficial Owners and Management 35
Item 12 Certain Relationships and Related Transactions 37
Item 13 Exhibits and Reports on Form 8-K 40
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Medical Industries of America, Inc. was incorporated in September 1989 in
the State of Florida and has its principal executive offices at 1903 S. Congress
Ave., Suite 400, Boynton Beach, Florida 33426, telephone number (561) 737-2227.
Unless the context otherwise requires, all references to the "Company" include
Medical Industries of America, Inc., its wholly owned subsidiaries and its
majority-owned subsidiaries.
The Company's active subsidiaries include: Global Air Charter, Inc.,
Global Air Rescue, Inc., a 51% ownership in Clearwater Jet Center, Inc., Ivanhoe
Medical Systems, Inc., Tallahassee Sleep Disorders, Inc., Pharmacy Care
Specialists, Inc., Valley Pain Centers, Inc., Heart Labs of America, Inc., and
Your Good Health Network, Inc. and its wholly owned subsidiaries.
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
transport.
BUSINESS OPERATIONS
AIR AMBULANCE TRANSPORT
The Company is taking advantage of the growing air ambulance industry
through its subsidiaries, Global Air Charter, Inc. and Global Air Rescue, Inc.
(collectively "Global"), acquired December 31, 1997. Founded in 1992, Global
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.
Based in Clearwater, Florida, Global's aircraft fleet includes three
extended range Model 36 Learjets, one Model 35 Learjet, one Model 25 Learjet and
a Beechcraft Kingair C-90 Turboprop. Global 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.
Global's aircrafts are equipped with state-of-the-art medical equipment
including the lifeport stretcher system, oxygen,
3
<PAGE>
suction pumps, compressed air and a 1500 watt AC inverter. Additional equipment
includes the Siemens A G MiniMed III infusion pump, Propac 106 cardiac monitor,
pulse oximeter and blood pressure monitor. A comprehensive drug and medical
supply, including a full compliment of advanced cardiac life support drugs,
makes the aircraft a state-of-the-art airborne critical care unit.
Global is licensed and regulated by the State of Florida and the Federal
Aviation Administration to operate air ambulance services. To maintain
regulatory compliance, Global has engaged a medical director trained as a
licensed physician specializing in emergency medicine. The medical director
reviews each transport to ensure the patient received the best treatment
possible. Global's nurses and paramedics have advanced certifications and are
qualified to administer drugs. In the event a problem arises beyond the capacity
of the onboard medical team, the aircraft is diverted to the closest medical
facility capable of providing the level of care necessary to stabilize the
patient.
As part of the acquisition, 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 March 1, 1999, the Company acquired Air Response, Inc. ("ARI"),
an air ambulance transport company with eleven fixed-wing aircraft based in
Denver, Colorado, generating approximately $13,000,000 in annual revenues. ARI
also has locations in New York, Florida and Kentucky. The Company acquired 100%
of the issued and outstanding stock for 3,866,667 shares of the Company's common
stock ($.75 a share). The Company will also issue up to $2,900,000 in
convertible debentures (convertible into the Company's common shares at $1.00 a
share) bearing interest at 9.5% a year based on future earnings over the next
three years. The entire
4
<PAGE>
purchase price is represented by the fixed assets of ARI consisting of
fixed-wing aircraft and medical equipment with a fair market value of
$3,200,000.
PAIN AND REHABILITATION
Your Good Health Network, Inc. ("YGHN") was acquired by the Company
effective October 16, 1998. YGHN 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
YGHN is to provide pain rehabilitation and occupational, speech and physical
therapy services. YGHN 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.
YGHN currently owns and operates twenty-five (25) rehabilitation and
therapy clinics, operates physician sites in Boynton Beach and North Palm Beach,
Florida.
YGHN currently has a total of one hundred (100) people, including nine (9)
employees in its corporate office providing management and administrative
services through a staff leasing company. Each rehabilitation 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.
YGHN services include: specialty programs like hyperbaric medicine, pain
management and HIV primary care, coupled with traditional services such as
primary care, orthopedic and neurological physician services and comprehensive
rehabilitation. These services allow YGHN to be a unique health care provider.
The physicians' component is focused on specialized clinical programs that
complement the company's rehabilitation services. YGHN 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. YGHN is focused to be
minimally reliant upon managed care payors.
YGHN intends to integrate physician services through coordinated
healthcare delivery programs and services. The number of physician practices
that YGHN will own will be limited, in that only practices that complement
overall strategy will be acquired. YGHN provides its administrative and
managerial services on a contract basis to its own healthcare provider
locations, with the main focus on positive cash flows from operations. The
company also provides services to outside providers, on a fee-for-service or
percentage-of-collection basis.
PHARMACY
The Company acquired Pharmacy Care Specialists, Inc. ("PCS") in April of
1998. PCS is a closed network pharmacy. Located in Lakeland, Florida, PCS
5
<PAGE>
provides unit-dosed medications to over 2,000 residents in assisted-living
facilities across Florida. PCS delivers medications to the facilities, provides
training workshops and does third-party billing. The future of the pharmacy
industry is in a transitional phase. The Company believes the area with
potential for growth is in mail order 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, PCS has
targeted its marketing efforts in this direction. 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.
SLEEP CENTERS
Through its March 1998 acquisition of Ivanhoe Medical Systems, Inc., and
its wholly owned subsidiary, Tallahassee Sleep Disorders, Inc. (collectively,
hereinafter called "Ivanhoe"), the Company offers sleep and disordered breathing
diagnostic programs to physicians and hospitals. Each Ivanhoe system uses 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
("OSA") and snoring. It has been estimated that 40 million people suffer from
OSA 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.
INTERVENTIONAL PAIN
Effective September 1, 1998, the Company acquired Valley Pain Centers,
Inc. ("Valley Pain Centers"). Valley Pain Centers is one of the largest
outpatient pain diagnostic and treatment centers in the United States with
offices in Staunton, Harrisburg, Charlottesville and Roanoke, Virginia.
CARDIOLOGY ANCILLARY SERVICES
The Company, through its wholly owned subsidiary Heart Labs of America,
Inc. ("HLOA"), currently operates three mobile cardiac catheterization
laboratories which perform outpatient cardiology procedures and diagnostic
tests. HLOA 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.
HLOA is accredited by the Joint Commission on Accreditation of Healthcare
Organizations. During 1996 and 1997, HLOA went through an extensive standard
6
<PAGE>
review of the medical procedures and operations of the mobile labs to become
reaccredited. HLOA was granted recertification effective through September 1999.
DISCONTINUED OPERATIONS
During the third quarter of 1998, the Company decided to discontinue its
management and ownership of its cardiac physician practice. Accordingly, the
Company disposed of this physician practice in Kissimmee, Florida. The Company
has also restructured the PRN business. The financial statements reflect the
discontinuance and disposal of these operations.
With respect to the discontinuation of its physician practice in
Kissimmee, Florida, the Company entered into a Settlement Agreement with Dr. A.
Razzak Tai effective December 31, 1998. In settlement of all matters between the
parties including, without limitation, all issues with respect to the
acquisition of Florida Physicians Internet, Inc. ("FPII") by the Company and the
employment of Dr. Tai, the Company agreed to provide Dr. Tai or his assigns with
the following: (i) 400,000 shares of the Company's common stock, which was
previously provided at the initial closing; (ii) approximately $140,000 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 has 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.
In January 1999, the Board of Directors approved the sale of the mobile
cath lab business which had an operating loss of $665,617 through December 31,
1998. The Company is in the process of selling the business.
SALE OF SUBSIDIARY
During the third quarter of 1998, the Company repurchased substantially
all of the Company's common stock and cancelled the related note payable by
returning to the former shareholders of Care America Integrated Health Services,
Inc. ("Care America") the common stock in Care America.
PENDING ACQUISITIONS
AESI. The Company and American Enterprise Solutions, Inc. ("AESI") have
entered into a Stock Exchange Agreement whereby upon the closing, AESI will
become a wholly-owned subsidiary of MIOA. The Exchange Agreement provides that
each shareholder of AESI will receive four (4) shares of MIOA's common stock for
each share of AESI stock they own. It is anticipated, based upon the number of
shares presently outstanding and pending acquisitions, that the shareholders of
AESI will own approximately 50 percent of MIOA.
7
<PAGE>
AESI is a Florida corporation that designs, develops, implements and is in
the process of operating internet multi-media healthcare networks called
"Community Health Information Utilities" ("CHIUs"). These internet-base
utilities will allow for the electronic connecting of all healthcare-trading
partners. The healthcare trading partners include doctors, hospitals, consumers,
patients, employers, governments, managed-care companies, insurance companies
and all other providers and organizations. AESI also develops, manages and owns
community healthcare delivery systems, called "Community Health Enterprises"
("CHEs"). The CHEs are healthcare enterprises that create a single-source
delivery system by incorporating and integrating all healthcare delivery
services into single-source delivery system. At the core of each enterprise is a
CHIU.
The CHIU is designed to provide, over the internet, clinical pathways and
quality assurance applications and systems to maximize the flow of patient data
and increase the ability of the physician, hospital, ancillary service and
diagnostic center to service the patient. It is believed that the integration of
the entire healthcare delivery system, through the use of these technologies,
will create substantial reductions in healthcare costs and provide improved
profits over existing healthcare models.
Management believes, although no assurance can be given, the acquisition
of AESI will catapult the Company into the healthcare internet business allowing
the Company to utilize the benefits of advanced internet technologies to improve
the quality of healthcare services while increasing profitability. It is
anticipated that the internet will provide the Company and its clients the
opportunity to reduce costs and provide additional profit centers. The Company's
strategic plan in respect to the use of the internet along with its new
proprietary technologies is to re-empower patients and doctors in the management
of their healthcare.
The closing of the contemplated transaction is conditioned upon completion
of satisfactory due diligence and unqualified audits and SEC and shareholder
approval. Accordingly, no assurance can be given that the acquisition will be
completed or, if completed, that the combined companies will be successful.
MED VENTURES. On December 21, 1998 and modified in April 1999, the Company
entered into a formal letter of intent to acquire privately held Med Ventures,
Inc. ("Med Ventures") headquartered in Columbia, South Carolina. Med Ventures
was organized in 1996 and currently owns, operates and manages pulmonary
clinics, multi-specialty clinics, a medical management company, and a
Telemedicine center. Med Ventures has represented to the Company that its
current annual revenues run rate is approximately $12,000,000 with estimated
income before taxes of approximately $1,500,000.
It is anticipated that upon closing Ronald Mills, Sr., current CEO and
President of Med Ventures, will be appointed to the board of the Company. Prior
to founding Med Ventures in 1995, Mr. Mills was founder and CEO of Extracare
Medical Services, a regional pediatric high-tech homecare company which was
8
<PAGE>
acquired in 1994 by American Home Patient Centers. Mr. Mills is a former
Chairman of the Health Industry Distributors Association, a Washington, DC-based
association which represents medical distributors and providers throughout the
world. The Company believes that, aside from bringing to the Company a well run
organization with significant profit potential, the Company will gain the proven
leadership and experience in healthcare management of Mr. Mills and the Med
Ventures management team. Management believes that the formulation of the new
management team, along with the technology and systems approach to medical
technology management which is being acquired through this acquisition, will
position the Company as an emerging leader in the medical ancillary service
business.
The amended letter of intent provides that the Company will acquire all of
the issued and outstanding stock of Med Ventures in accordance with the tax-free
reorganization rules and regulations. The purchase price for the stock shall
equal: the consolidated net taxable income of Med Ventures for its fiscal year,
as defined, utilizing generally accepted accounting principles ("Income")
multiplied by four (4); and the resulting product shall be reduced by the
Company's consolidated liabilities (excluding trade payables). The Company shall
pay 50 percent of the purchase price at closing and 25 percent per year for each
of the first two (2) years following the closing, provided Med Ventures meets
certain earnings targets. In the event the Income amount is not realized, the
payments will be adjusted downward. The Purchase Price shall be paid in
restricted common stock of the Company which shall be valued for these purposes
at $.75 per share.
The acquisition of Med Ventures is conditioned upon: (i) the parties
entering into a mutually agreeable purchase agreement, and (ii) completion of
satisfactory due diligence and unqualified audits, as necessary. Accordingly, no
assurance can be given that this acquisition will be completed or, if completed,
that Med Ventures will be profitable.
CYBERCARE
On March 31, 1999, the Company and CyberCare, Inc. ("CyberCare") entered
into a letter of intent whereby the Company will acquire all the issues and
outstanding common stock of CyberCare. The terms of the letter of intent provide
that the CyberCare shareholders will receive one (1) share of the Company's
common stock for each share of stock they own in CyberCare. There are presently
approximately 6,700,000 shares of capital stock of CyberCare issued and
outstanding. The Company's common stock was valued for purposes of this
acquisition at $1.50 per share. Additional shares will be issued if such market
value is not maintained at certain times.
CyberCare is 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 patented
routing technology,
9
<PAGE>
product and business strategy create the opportunity to capture a significant
share of the growing market for remote interactive healthcare delivery.
CyberCare's product offering includes two major components: (i) a
portable, computer-based system, assembled from off-the-shelf components and
interfaced through the Company's proprietary software, called the Personal Care
Management System (PCMS); and (ii) network services that operate in a routed
TCP/IP environment (the Internet protocol), delivering audio and video two-way
interaction between patients and providers. In addition, the system offers
automatic collection, transmission and storage of vital sign data (e.g., blood
pressure, heart rate, blood-oxygen level, lung function, weight and blood
glucose levels, etc.) and patient records. An operating prototype of the system
has been successfully clinically tested for over six months.
CyberCare will receive revenues from the sale of its PCMS device and
monthly recurring network access fees. Other potential sources of revenues,
which are not forecasted in the Company's financial projections, are clinical
drug studies, advertising, and database management services to support direct
marketing activities.
CyberCare's initial product system has been targeted specifically for the
high-cost, chronically ill patient (e.g., congestive heart failure, chronic
obstructive pulmonary disease, diabetes, asthma, etc.) population. These
patients represent less than 1% of the U.S. population (approximately 2.2
million people out of the total population of 270 million) but cost the U.S.
healthcare system approximately 30% of total healthcare costs. Preventive
services for this patient population represent an untapped market segment
estimated to be greater than $4 billion in the U.S. alone.
The most important issues facing the providers and payers responsible for
the care management of these chronically ill patients today are reducing costs,
increasing provider productivity and improving the quality of care. The average
targeted chronically ill patient costs the payers (insurance companies, HMOs,
Medicare and Medicaid) $70,000 to $100,000 annually. These costs are due to
patients cycling repeatedly through the health care system and consuming a
disproportionate share of medical resources (emergency room visits, hospital
rooms, lab tests, medications, convalescent homes, and frequent doctor visits).
This cycle is due to four primary causes: (i) undetected clinical deterioration;
(ii) improper use of prescribed medications; (iii) inadequate patient education;
and (iv) social isolation.
Independent studies now show that increasing patient and provider
interaction using telecommunication-based products and services to support
remote delivery of care, patient monitoring and education can reduce overall
per-member/per-month medical costs for the chronically ill patient population by
30%.(1) This represents a potential net cost savings to payers of $37 billion to
$57 billion annually. CyberCare has created an internet-based healthcare
delivery system for
______________________
(1) The Remington Report, "Tele-home care in a managed care setting," Barry K.
Baines, MD
10
<PAGE>
these high-cost, chronically ill patients that will dramatically improve patient
health while significantly reducing per-patient costs.
CyberCare has two patented routing applications filed covering key aspects
of the systems, including the Internet application for delivery of care
management services. Five additional claims are being prepared for an additional
patent application. In addition, copyright applications are also being filed to
protect CyberCare's proprietary software.
Other electronic distribution systems have been developed and sold to
segments of this market. However, all the current competition is made up of
small companies with technologies that do not utilize the Internet TCP/IP
protocol. The competition's products can support only point-to-point
transmissions between a patient and a provider; they do not support the
following functions offered as part of CyberCare's system: intelligent routing,
mixed protocol access, multi-point audio and video, automated collection and
logging of vital sign data, and data storage.
CyberCare plans to modularize and adapt its product offering to include
components and proprietary software which can be used with off-the-shelf IBM
compatible PCs. This approach will allow the Company to offer access to its
remote interactive health care delivery network at a reduced cost. The reduction
in cost will allow other secondary markets to open (i.e., approximately 5
million additional U.S. patients with acute illness, long-term health
conditions, permanent disability, or terminal illness). CyberCare plans to offer
these "modular" systems during the third calendar quarter of 2000.
CyberCare's CEO, John Haines, has over twenty years of senior-level
experience in the telecommunications and healthcare industries. Experienced
senior executives in computer science and engineering, sales and marketing,
regulatory and quality assurance, and finance are working with CyberCare.
The closing of the CyberCare transaction is conditioned upon: (i) the
parties entering into a mutually agreeable acquisition agreement; (ii)
completion of satisfactory due diligence and audits; and (iii) Board of
Directors approval.
RISK FACTORS
GENERAL
The health care 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 the
Company believes that its current operations comply with applicable regulations,
the Company believes that the health care industry will continue to change,
requiring it to modify its agreements and operations from time to time. While
the Company believes it will be able to structure its agreements and operations
in accordance with applicable law, there can
11
<PAGE>
be no assurance that the subsequent adoption of laws or interpretations of
existing laws will not regulate, restrict or otherwise adversely affect the
Company's business.
POTENTIAL ACQUISITIONS:
The Company has signed letters of intent and a definitive merger agreement
with companies that will bring technology and the Internet to our platform
healthcare businesses. Management is changing the direction of our Company.
These companies have losses in prior years. There can be no assurance that these
businesses will be profitable in the future.
HISTORY OF LOSSES; ACCUMULATED DEFICIT. To date the Company has been
unable to generate revenue sufficient to be profitable. Consequently, the
Company has sustained substantial losses. Net losses for the years ended
December 31, 1997 and 1998, were $1,152,694 and $6,359,990, respectively. There
can be no assurance that the Company will ever achieve the level of revenues
needed to be profitable in the future or, if profitability is achieved, that it
will be sustained.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. 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 offering 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. To the extent that the Company undertakes
such financings or uses capital stock as consideration, the Company's
shareholders will experience future ownership dilution.
RISKS OF GROWTH AND EXPANSION. The Company's aggressive growth strategy
will result in significant additional demands on its infrastructure, and will
place a significant strain on the Company's management, administrative,
operational, financial and technical resources, and increased demands on its
systems and controls. There can be no assurance that the Company's resources
will be adequate to support future operations and growth. The inability to
continue to upgrade the operating and financial control systems, the emergence
of unexpected expansion difficulties or failure to manage the Company's proposed
expansion properly could have a material adverse effect on the Company's
business, financial condition and results of operations.
The laws and regulations applicable to financial arrangements in the
health care industry are complex and may be subject to varying interpretations.
This section summarizes the principal federal and state statutes and regulations
which are applicable to the Company's business.
AIR AMBULANCE OPERATIONS. The Company's air ambulance business subjects it
to significant federal and international government regulations relating to
airline
12
<PAGE>
safety, capital requirements, maintenance, scheduling, etc. Due to the nature of
aircraft operations, applicable regulations and Company policy, the Company
incurs substantial expenses associated with the maintenance of its aircraft
fleet. Although the Company believes that its current operations comply with
applicable regulations, there can be no assurance that the subsequent adoption
of laws or interpretations of existing laws will not regulate, restrict or
otherwise adversely affect the Company's business.
DEPENDENCE UPON MANAGEMENT. The Company will be dependent to a significant
extent on the continued efforts and abilities of its Chairman, Michael F.
Morrell. Notwithstanding its ownership of a one million dollar key-man life
insurance policy on Mr. Morrell, if the Company were to lose the services of Mr.
Morrell before a qualified replacement could be obtained, its business could be
adversely affected.
POTENTIAL LIABILITY AND INSURANCE. The Company, because it operates in the
healthcare industry, is subject to substantial potential liability resulting
from a variety of possible causes, including breach of numerous healthcare laws,
malpractice, and product liability. While the Company currently is not a party
to any regulatory action or material litigation, if any actions or lawsuits in
the future are brought against the Company, such actions or lawsuits may have a
materially adverse effect on the Company even if such lawsuits are without
merit. The Company attempts to minimize its potential liability through
effective case supervision and personnel recruitment procedures. The Company
also carries a variety of insurance policies including policies insuring against
certain negligent acts, although there can be no assurance that such insurance
policies will adequately cover the Company's losses resulting from liability, or
that the Company will continue to qualify for, or be able to afford or obtain,
insurance in the future.
THIRD-PARTY REIMBURSEMENT. The Company's services are purchased by
patients and medical institutions which provide healthcare services to their
patients. Such institutions 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. The Company believes that its market success will
ultimately depend largely upon obtaining favorable coverage and reimbursement
policies from such programs and carriers.
GOVERNMENT REGULATION. The healthcare industry is subject to extensive
federal and state government regulation. In addition to the referral and
reimbursement regulations, regulations include certificate of need, licensure of
healthcare facilities, services and equipment and restrictions on physician
investments in healthcare entities to which they refer patients. Although the
Company believes that its current operations comply with applicable regulations,
there can be no assurance that the subsequent adoption of laws or
interpretations of existing laws will not regulate, restrict or otherwise
adversely affect the Company's business.
13
<PAGE>
DEPENDENCE ON RELATIONSHIPS WITH PHYSICIAN PARTNERS; RISKS OF CONFLICTS OF
INTEREST AND DISPUTES. The Company's business depends upon, among other things,
the efforts and success of the physicians who refer patients and provide
services to the Company's businesses and the strength of the Company's
relationships with such physicians. The Company's business, financial condition
and results of operations could be adversely affected by the failure of these
physicians to refer patients, maintain the quality of medical care or otherwise
adhere to required professional guidelines.
DEPENDENCE ON PHYSICIAN REFERRALS. The Company's rehabilitation, sleep and
pain businesses are dependent upon revenues received as a result of referrals
made by physicians. There can be no guarantee that any physician will choose to
refer patients to the Company. In addition, physicians affiliated with the
Company are not required to refer patients. In the event that, for any reason,
physicians do not use the ancillary medical service businesses operated by the
Company, such loss of patients could have a material adverse effect on the
business, financial condition and results of operation of the Company.
Furthermore, it is possible that third-party payors may refuse to approve
referrals to ancillary medical care facilities owned by the Company, but rather
require that such referrals be made to other facilities. Such a requirement
could have a material adverse effect on the business, financial condition and
results of the operations of the Company.
Further, the Company's 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 the Company 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.
MEDICARE AND MEDICARE FRAUD AND ABUSE. Federal law prohibits the offer,
payment, solicitation or receipt of any form of remuneration in return for, or
in order to induce: (i) the referral of a person in connection with the
provisions if medical services; (ii) the furnishing or arranging for the
furnishing of items or services reimbursable under Medicare and Medicaid
programs; and (iii) the purchase, lease, order, arranging or recommending of any
items or service reimbursable under Medicare or Medicaid (the "Anti-Kickback
Law"). Pursuant to the Anti-Kickback Law, the federal government has announced a
policy of increased scrutiny of joint ventures and other transactions among
health care providers in an effort to reduce potential fraud and abuse relating
to Medicare costs. The applicability of this provisions to many business
transactions in the health care industry will be subject to continuing judicial
and regulatory interpretation. Although the Company believes operations and
structure do not violate the Anti-Kickback Law, there can be no assurance that
its activities will not be challenged by regulatory authorities. If such
challenge were successful, it could have a material adverse effect on the
business, financial condition and results of operations of the Company.
14
<PAGE>
Noncompliance with the Anti-Kickback Law can result in exclusion from Medicare
and Medicaid programs and civil and criminal penalties.
LEGISLATIVE DEVELOPMENTS. In addition, proposed legislation regarding
health care 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 expected. No predictions can be made as to whether future health care
reform legislation, similar legislation or rule-making will be enacted or, if
enacted, its effect on the Company. Any federal or state legislation prohibiting
investment interests in, or contracting with, the Company by physicians or
health care providers for which there is not statutory exception or safe harbor
would have a material adverse effect on the Company business, financial
condition and results of operations.
MANAGED CARE. There can be no assurance that the Company will be able to
obtain managed care contracts. The future inability of the Company to obtain
managed care contracts in its markets could have a material adverse effect on
its business, financial condition or results of operation. 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. The Company will derive a substantial portion of its
revenue from Medicare and Medicaid. In the event such proposals are adopted,
there can be no assurance that the Company will be able 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 the
business, financial condition and results of operations of the Company.
LICENSES. Although the Company's cardiac catheterization services
generally are not subject to health care licensing requirements (it contracts
directly with hospitals), the Company must adhere to the same standards as the
hospitals it contracts with, including standards for sanitation, safety and
personnel qualifications. The Company is also required to register its X-ray
equipment and pay annual registration fees to state radiation control agencies.
The Company believes that its cardiac catheterization operations are in
compliance with applicable registration and hospital license requirements.
RISK WITH RESPECT TO COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE. The
Company is 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. The Company is assessing the extent of the necessary
modifications to its computer software and anticipates that the cost of such
modifications will not be material to the Company. Because of the many
uncertainties associated with the year 2000 compliance issues, and because the
Company's assessments are necessarily based on information from third-party
vendors, payors and suppliers, there can be no
15
<PAGE>
assurance that the Company's assessment is correct as to either the materiality
or the effect of such compliance.
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
On August 10, 1993, President Clinton signed into law the Omnibus Budget
Reconciliation Act of 1993 ("OBRA `93") which contained numerous provisions that
significantly affect health care providers who participate in the Medicare and
Medicaid programs. The principal impact of OBRA `93 in the health care area is
(i) to expand the existing prohibition against the referral of patients to
entities with which the referring physician has a financial relationship
(self-referral), and (ii) to curtail the cost of the Medicare program by
limiting reimbursement.
MEDICARE AND MEDICAID FRAUD AND ABUSE
The Anti-Kickback Law prohibits the offer, payment, solicitation or
receipt of any form of remuneration in return for, or in order to induce: (i)
the referral of a person; (ii) the furnishing or arranging for the furnishing of
items or services reimbursable under Medicare or Medicaid programs; or (iii) the
purchase, lease or order or arranging or recommending purchasing, leasing or
ordering of any item or service reimbursable under Medicare or Medicaid.
Pursuant to the Anti-Kickback Law, the federal government has announced a policy
of increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
costs. The applicability of these provisions to many business transactions in
the health care industry has not yet been subject to judicial and regulatory
interpretation. Noncompliance with the Anti-Kickback Law can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties. Several of
the Company's subsidiaries currently derive a significant portion of their
revenues from Medicare or Medicaid payments.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II" amended prior
physician self-referral legislation known as "Stark I" by substantially
enlarging the field of physician-owned or physician-interested entities to which
the referral prohibitions apply. Stark II prohibits a physician from referring
Medicare or Medicaid patients to an entity providing "designated health
services" in which the physician has an ownership or investment interest, or
with which the physician has entered into a compensation arrangement, unless a
statutory exemption applies. The designated health services include, for
example, prosthetic devices, clinical laboratory services, radiology (such as
ultrasound, MRI and CT), home health, physical and occupational therapy,
prescription drugs and inpatient and outpatient hospital services. The penalties
for violating Stark II include a prohibition on payment by these government
programs and civil penalties of as much as $15,000 for each referral violation
and $100,000 for participation in a "circumvention scheme." To the extent that
the Company or any subsidiary is deemed to be subject to the prohibitions
contained in Stark II, the Company believes its activities fall within the
permissible activities defined in Stark II.
16
<PAGE>
While several of the Company's subsidiaries receive referrals with respect
to certain of these designated healthcare services, the Company does not provide
any compensation or financial incentive for such referrals and further believes
that it is in full compliance with Stark as well as state law requirements. Any
fees paid are intended by the Company to be consistent with fair market value in
arm's-length transactions for the nature and amount of services rendered and
therefore, would not constitute unlawful remuneration under Anti-Kickback Law
and regulations. For these reasons, among others, the Company does not believe
that fees payable would be viewed as remuneration for referring and influencing
referrals of patients or services covered by such programs as prohibited by
statute. If the Company is deemed to be in a position to make, influence or
receive referrals from or to physicians, the operations of the Company could be
subject to scrutiny under federal and state anti-kickback and anti-referral
laws.
In Florida, which does not prohibit the corporate practice of medicine,
the Company through a wholly-owned subsidiary, owns practices and employs
physicians. Thus, with respect to such practices, the Company is a provider of
services and would be capable of receiving referrals from other physicians
affiliated with the Company in those markets. In these circumstances, the
Company either will not accept referrals involving designated health services
from other physicians affiliated with the Company, or will form group practices
comprised of Company practices in that market.
In addition, the Company also believes that the methods used to acquire
the assets of existing practices and ancillary services do not violate
anti-kickback and anti-referral laws and regulations. Specifically, the Company
believes the consideration paid by the Company to physicians to acquire such
assets is consistent with fair market value in arm's-length transactions and not
intended to induce the referral of patients. Should this or any other Company
practice be deemed to constitute an arrangement designed to induce the referral
of Medicare or Medicaid patients, then such could be viewed as possibly
violating anti-kickback and anti-referral laws and regulations. A determination
of liability under any such laws could have a material adverse effect on the
Company's business, financial condition or results of operations.
FEE-SPLITTING; CORPORATE PRACTICE OF MEDICINE
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. Although the Company
believes its operations are in material compliance with existing applicable
laws, the Company's business operations have not been the subject of judicial or
regulatory interpretation; thus, there can be no assurance that review of the
Company's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of the Company or that
the health care regulatory environment will
17
<PAGE>
not change so as to restrict the Company's existing operations or their
expansion. In addition, the regulatory framework of certain jurisdictions may
limit the Company's expansion into such jurisdictions if the Company is unable
to modify its operational structure to conform with such regulatory framework.
A determination in any state that the Company is engaged in the corporate
practice of medicine or any unlawful fee-splitting arrangement could render any
management agreement between the Company and a practice located in such state
unenforceable or subject to modification, which could have a material adverse
effect on the Company. There can be no assurance that regulatory authorities or
other parties will not assert that the Company or a practice is engaged in the
corporate practice of medicine in such states or that the management fees paid
to the Company by the managed practices constitute unlawful fee-splitting or the
corporate practice of medicine. If such a claim were asserted successfully, the
Company could be subject to civil and criminal penalties, managed physicians
could have restrictions imposed upon their licenses to practice medicine, and
the Company or the managed practices could be required to restructure their
contractual arrangements. Such results or the inability of the Company or the
managed practices to restructure their relationships to comply with such
prohibitions could have a material adverse effect on the Company's financial
condition and results of operations.
CHANGES IN PAYMENT FOR MEDICAL SERVICES
The Company believes that trends in cost containment in the health care
industry will continue to result in a reduction in per-patient revenue for
Company practices. The 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 Company physicians. There can be no
assurance that any reduced operating margins could be recouped by the Company
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 Company practices as
well as the medical practices under Company 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 the Company's
business, financial condition or results of operations.
18
<PAGE>
FLORIDA PATIENT SELF-REFERRAL ACT OF 1992
During its 1992 session, the Florida Legislature passed into law the
Patient Self-Referral Act of 1992 ("Self-Referral Act"). The Self-Referral Act
is far broader than OBRA since it is applicable to all types of health care
services and to all patients (not just Medicare and Medicaid beneficiaries).
Under the Self-Referral Act, "designated health services" are defined as
clinical laboratory, physical therapy, comprehensive rehabilitative, diagnostic-
imaging and radiation therapy services. The Company plans to purchase and
operate facilities that provide some or all of these designated health services.
All health care products and services not enumerated above, are classified as
"other health services."
Under the Self-Referral Act, a physician is prohibited from referring a
patient for designated health services to an entity in which the physician is an
investor.
The Self-Referral Act also prohibits the referral by a physician of a
patient for other health services to an entity in which that physician is an
investor, unless the ownership of the entity meets one of two tests:
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
For entities that do not qualify under the first test, no more than 50% of
the value of the investment interests in the entity may be held by investors who
are in a position to make referrals to the entity, and the terms under which an
investment interest is offered must be the same for referring investors and
non-referring investors. In addition, the terms under which an investment
interest is offered may not be related to the investor's volume of referrals to
the entity. Finally, the investor must not be required to make referrals or be
in the position to make referrals to the entity as a condition for becoming or
remaining an investor.
Entities that meet either test must also meet two additional tests. First,
the entity may not lend to or guarantee a loan to an investor who is in a
position to make referrals if the investor uses any part of that loan to obtain
the investment interest. Second, distributions of profits and losses to
investors must be directly proportional to their capital investment.
The Self-Referral Act also imposes certain disclosure obligations on the
Company and referring physicians. Under the Self-Referral Act, a physician may
not refer a patient to an entity in which he or she is an investor unless,
before doing so, the patient is given a written statement disclosing, among
other things, the physician's investment interest in the entity to which the
referral is made. The Self-Referral Act also imposes disclosure obligations on
the entities to which physicians refer patients.
19
<PAGE>
Since the Company plans to purchase and operate facilities that provide
some or all of the "designated health services" and intends to network its
medical services, the Self Referral Act, and OBRA will have a significant
adverse impact on the Company's proposed plan of operations and may necessitate
(i) a change in the way the Company acquires its clinical care facilities (ii) a
change in the corporate structure (i.e., a spin-off of the clinical care
companies coupled with an initial public offering in order to qualify for the
federal and state "Safe Harbor Standards"), (iii) a secondary offering for the
Company (in order to qualify for the federal and state "Safe Harbor Standards"
or (iv) a merger with a company with substantially more assets than the Company
(in order to qualify for the "Safe Harbor" standards).
CERTIFICATE OF NEED
Some states, including Florida, require a "certificate of need" ("CON")
prior to the acquisition of medical equipment or provision of cardiac
catheterization services by hospitals. In Florida, a certificate of need is
required for cardiac catheterization services only if the hospital wishes to
provide such services to inpatients. Typically, obtaining a CON approval is a
costly and lengthy process, and may involve adversarial proceedings brought by
competing facilities. The hospital or health care provider, rather than the
Company, must apply for and obtain the CON, where required. As a result, the
Company is unable to control or accurately predict whether and how many
potential customers will obtain CONs. The Company's ability to provide cardiac
catheterization services to hospitals and health care providers is dependent
upon those entities obtaining a CON for such services.
PROFESSIONAL LIABILITY INSURANCE
The Company currently maintains general and professional liability
insurance for its operations in the single limit amount and aggregate annual
limit amount of $5,000,000. There is no assurance that any potential claims will
or will not exceed this limit. While the Company's Mobile Labs are at a
customer's facility, they operate only under the direction of licensed
physicians on the customer's staff who direct the procedures, supervise the
Company's nurses and technologists, and interpret the results of the
examinations. The Company requires the users of the Mobile Labs to carry medical
malpractice insurance to cover the physicians using the Company's Mobile Labs.
COMPETITION
The health care industry in general, and the market for medical ancillary
services is highly competitive.
The Company competes with companies that are larger in size than the
Company and have access to considerably greater financial resources than the
20
<PAGE>
Company. The Company competes by providing more personalized care to the
patients they serve as well as providing patient transportation and
pharmaceutical delivery.
In the interventional pain business segment, there are thousands of small
pain treatment centers, clinics and facilities. Only a portion of these
locations is accredited and follows standards for multi-disciplinary procedures.
In the 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.
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.
In the pain rehabilitation business segment, there are numerous
competitors larger in size than the Company and which have access to
considerably greater financial resources than the Company.
Pharmacy Care Specialists Inc. competes directly in the sale and delivery
of prescription drugs to individuals living in adult living facilities ("ALFs").
There are numerous competitors larger in size than the Company which have access
to considerably greater financial resources. The Company relies on reputation
and service to market its services.
MARKETING
The Company markets each of the services in various methods, including
customer and physician referrals, reputation in the community and third parties.
YGHN relies upon community reputation, customer referral, physician and
other medical resource referrals.
Ivanhoe relies upon physician referrals for its customer base. In
addition, the Company has in place a three-tier service system that enters local
communities and utilizes a screening program and an in-home lab program.
Global relies upon independent brokers, personal contacts and physician
referrals to approach new customers. The Company also staffs exhibit booths at
major industry-specific conventions to attract hospital groups, insurance
companies, assistance companies and managed care organizations.
21
<PAGE>
Heart Labs relies heavily on referrals to perform high-tech procedures.
Most of the marketing for its Mobile Labs is based on the Company's reputation
in the medical community.
EMPLOYEES
As of March 12, 1999, the Company employed 300 persons, of which 195 are
full time. The Company's ability to provide its services is dependent upon the
Company recruiting, hiring and retaining qualified technical personnel. To date,
the Company has been able to recruit and retain sufficient qualified personnel.
None of the Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers its relations with its
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases approximately 6,000 square feet of office space in
Boynton Beach, Florida for its corporate offices at an average monthly net
rental of $6,111 over the term of the lease. The lease expires in April 2001.
Global Air Charter/Rescue, leases office and hangar space in Clearwater,
Florida for at an average monthly net rental of $4,350 on a month-to-month
basis.
YGHN 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 $47,950. The lease expires through August 31, 2003.
Ivanhoe leases approximately 800 sq. ft. of office space in Ocoee, Florida
for a total net monthly rental of $777. The lease expires September 30, 1999.
Ivanhoe through its subsidiary 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.
Valley Pain leases approximately 5,851 sq. ft of space for its three pain
clinics located in Virginia for a total net monthly rental of $5,084. The leases
expire through March 2003.
Air Response 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.
ITEM 3. LEGAL PROCEEDINGS
Other than the matter discussed below, the Company is presently not a
party to any material litigation outside the ordinary course of business. The
Company undertook a debenture offering in July of 1998. With respect to such
offering, the
22
<PAGE>
Company was required to register the underlying securities within a specified
time period. Due to factors beyond the Company's control, it was unable to
effectuate the registration and as a result is subject to certain penalties. The
Company has entered into a letter agreement with the debenture holders to pay
the penalties and to file a registration statement in April 1999. If the Company
is unable to amicably settle this matter, pay the necessary penalties and/or
complete the registration of the securities, litigation may ensue and the
outcome of such litigation is presently indeterminable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the last annual shareholders' meeting that took place on November 18,
1998, the shareholders approved an increase in the number of authorized common
and preferred shares to 100,000,000 and 20,000,000, respectively. The
shareholders also elected the Board of Directors
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Common Stock of the Company trades on the NASDAQ Small Cap Market
under the symbol "MIOA." The following table sets forth the high and low closing
bid prices (post-reverse) of the Company's Common Stock as reported by NASDAQ:
1998 HIGH LOW
-------- ------ -----
First Quarter 2 1/8 1 7/32
Second Quarter 1 5/32 1 3/8
Third Quarter 1 7/8 13/32
Fourth Quarter 1 9/32
1997 HIGH LOW
-------- ------ -----
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 1/8
(b) Holders
As of February 28, 1998, there were approximately 285 holders of record of
the common stock, not including beneficial owners, which approximates an
additional 3,300 shareholders.
23
<PAGE>
(c) Dividends on the Company's Common Stock
No cash dividends have ever been paid, and the Company does not intend to
pay cash dividends in the foreseeable future.
SALE OF UNREGISTERED SECURITIES
Effective October 15, 1998, the Company issued 3,333,333 shares of
restricted common stock valued at $2,500,000 ($.75 a share) for 100% of the
outstanding stock of Your Good Health Network, Group.
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.
In 1999, the Company, pursuant to a private placement, offered up to
$2,000,000 of 12% convertible debentures. The debentures can be sold in $10,000
amounts. The debentures are convertible into common stock at $.50 per share.
In 1999, the Company issued 92,877 shares of restricted common stock in
partial payment of interest and penalties on the subordinated debentures.
In 1999, two subordinated debenture holders converted $100,000 of their
principal for 100,000 shares of restricted common shares at $1.00 per share.
There are also warrants to purchase common stock at $.50 per share for each
dollar invested. The Company can force conversion when the share price equals or
exceeds $1.50 a share.
In 1999, the Company issued 50,000 shares of restricted common stock from
warrants exercised at $.50 per share. This was issued in lieu of payment for
services rendered of $25,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following should be read in conjunction with the Financial Statements
and Notes thereto contained herein.
The complete management team of the Company has been in place now for less
than two years. We decided that it was in the best interest of the Company and
our shareholders to re-evaluate the Company's direction, and, accordingly,
discontinue certain operations in 1998 and focus our attention on the
subsidiaries we felt could grow with profitable margins. These included the
pharmacy business, the pain and rehabilitation business, the sleep business, and
the air ambulance business.
During 1998 it became very clear to us that, in order for the Company 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 healthcare activities. There are over 30
billion
24
<PAGE>
transactions annually in healthcare and only 10% are electronic. Accordingly, we
identified and entered into a Definitive Agreement with American Enterprise
Solutions, Inc. and signed letters of intent with Med Ventures, Inc. and
CyberCare, Inc. These acquisitions will significantly expand our ability to
address the healthcare issues facing society. The combination of these
companies, together with MIOA's existing operations, will generate revenue in
excess of $100,000,000 and give us a significant advantage in healthcare e
commerce by increasing shareholder value, profitability, and position us to
expand our operations in future years.
The Company intends to change the name of the Company to more closely
reflect our refocused company - 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.
The Company is 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.
During the last twelve months, we made three strategic acquisitions. They
were Your Good Health Network, Inc.; Pharmacy Care Specialists, Inc.; and Air
Response, Inc. (effective March 1, 1999). We believe these acquisitions will
allow us to realize its growth potential with acceptable profitability.
The Company made some significant strides during 1998 but incurred
significant losses. The loss from continuing operations in the amount of
$3,577,449 resulted from significant costs incurred to grow the Company,
repositioning us for the year 2000 and losses from the mobile catheterization
lab operations. We discontinued and disposed of certain operations to allow us
to focus on our new direction.
The Company settled the dispute with Westmark Group Holdings, Inc.
("WGHI") which resulted in an investment which represents over 20% in WGHI.
Westmark is currently profitable and is projecting to substantially increase its
profitability in 1999. The current market value of our 683,457 Westmark shares
is $1,537,778 ($2.25 a share) at April 13, 1999.
NASDAQ requires that a common stock traded in its exchange be equal to or
exceed $1. The Company's stock has traded below $1. Our common stock must trade
at or above $1 for ten days to be in compliance. At April 14, 1999, our shares
are currently selling in excess of $1 and management believes it will continue
to do so to be in compliance with NASDAQ. However, there is no assurance that
the Company's common stock will trade in excess of $1.00 over a 10-day period.
25
<PAGE>
OVERVIEW:
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 had revenues of $7,146,457 in 1998 which
was the first complete year of operations since acquisition. YGHN had revenues
of $1,143,625 from October 16, 1998 to December 31, 1998. Pharmacy Care
Specialists 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.
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 were 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. 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.
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
WGHI.
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 a result of the sale
of Care America. 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, PRN, and FPII 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.
26
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
In 1998 and 1997, the Company financed operating activities through a
combination of cash flow from operations in 1997, 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, the Company has 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. The Company in March 1998 commenced
negotiations to refinance the long-term debt on the airplanes and is negotiating
to expand its accounts receivable line of credit. In addition, the Company is in
negotiations to raise at least $25 million through equity offerings with
investment bankers.
During 1999, we raised $540,000 through a private placement of 12%
convertible debentures.
The Company will continue to raise working capital from proceeds from
private placement, long-term debt operations and warrants and believes we will
refinance our long-term debt. We believe that, if the Company's working capital
is insufficient to fund its 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 the Company.
YEAR 2000 ISSUES
The Company uses a significant number of computer software programs and
operating systems across its entire organization, including applications used in
financial business systems and administrative functions. A complete evaluation
has been performed to identify whether any of the Company's software
applications contain source code that is unable to interpret the upcoming year
2000 and beyond. The appropriate modifications have been made and the Company
now believes that its critical systems are Year 2000 compliant, except the
mobile cardiac catheterization labs which the Company is taking steps to bring
into compliance. The cost of implementing required system changes is not
material to the Company's consolidated financial systems, except for the mobile
labs. No assurance can be given, however, that all of the Company's systems, the
systems of acquired
27
<PAGE>
businesses, and those of significant customers and suppliers will not experience
Year 2000 compliance difficulties. Difficulties that arise may result in
unfavorable business consequences including delays in receipt of payment for
services rendered.
ITEM 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements and the report of
independent accountants thereon appear beginning on Page F-2. See index to
consolidated financial statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
executive officers and directors of the Company as of March 31, 1999:
NAME AGE POSITION WITH COMPANY
------ ----- -----------------------
Michael F. Morrell 57 Chairman of the Board, Chief Executive
Officer, and Director
Paul C. Pershes 55 President and Director
Linda Moore 46 Senior Vice President and Secretary
Arthur Kobrin 37 Chief Financial Officer
Theodore J. Orlando 59 Director
Glen Barber 49 Director
Terry Lazar 55 Director
David Klein 44 Senior Vice President
Dana Pusateri 46 Director
Louis R. Capece, Jr. 51 Director
E. Nicholas Davis, III 47 Senior Vice President
Michael F. Morrell, Chairman of the Board and Chief Executive Officer. Mr.
Morrell has served as 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 a
director since August 1996 and as President and Chief Operating Officer since
May 1997.
29
<PAGE>
Prior to joining the Company, 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.
Linda Moore, Senior Vice President, Secretary. Ms. Moore, the spouse of
Mr. Morrell, has served as Senior Vice President and Secretary since January
1996. From March 1994 through December 1995, she served as Senior Vice President
and Assistant 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, Chief Financial Officer. Mr. Kobrin joined the Company in
June 1997 as Chief Financial Officer. Prior to joining the Company, Mr. Kobrin,
a 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., and has extensive experience in management
consulting and public company reporting.
Theodore J. Orlando, Director. Mr. Orlando has served as an outside
director of the Company 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 an outside director of the
Company 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 an outside director of the
Company 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.
David S. Klein, M. D., Senior Vice President. Dr. Klein obtained a
doctorate of medicine from the University of Maryland in1980 and completed his
residency in anesthesiology at Duke University School of Medicine in 1983. From
May 1983 to January of 1990, Dr. Klein worked at King's Daughters Hospital in
Staunton, VA as a staff anesthesiologist. From January of 1990 to the present,
Dr. Klein served as a clinician with Rockingham Memorial Hospital in
Harrisonburg, VA. Dr. Klein, in October of 1983, co-founded the Shenandoah
Valley Pain Center in Staunton, VA which is the predecessor to Valley Pain
Centers, Inc., acquired by the Company in September 1998. Dr. Klein has served
and continues to serve as President and
30
<PAGE>
Medical Director of the Valley Pain Centers which now has offices in Roanoke,
Harrisonburg and Charlottesville, VA as well as Staunton, VA. In January of
1999, Dr. Klein was elected as a Senior Vice President of the Company.
Dana Pusateri, Director. Mr. Pusateri co-founded IntegraCare, Inc.
("IntegraCare") 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. 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., (IHS), 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 the Company, and currently
serves as its Chief Executive Officer. Mr. Pusateri was elected to the Board of
Directors of the Company in January 1999.
Louis "Rusty" Capece, Jr., Director. Mr. Capece has served as President of
Air Response since its inception in 1986. Mr. Capece has an extensive background
in the ground and air medical transport industry. From 1982 to 1997 was
President or Response Medical, a successful 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.
E. Nicholas Davis, III, Senior Vice President, Legal Affairs. Mr. Davis
holds the degrees of Masters of Laws Taxation (LL.M.), Juris Doctor (J.D.),
Masters in Business Administration (M.B.A.), and a Bachelor of Science in
Business Administration. Mr. Davis practiced law in the State of Florida from
1981 until 1993, specializing in healthcare, tax, securities, mergers,
reorganizations and acquisitions. From 1993 until 1996, Mr. Davis owned and
operated a consulting firm whereby he provided planning, design, management,
operation, accounting and capital funding systems and structures to companies
seeking public and private-sector funding. From 1996 until March 1998, Mr. Davis
served as Executive Vice President for PRN of North Carolina, Inc. Mr. Davis
joined the Company in March of 1998.
The Company's 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.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10
percent of the Company's Common Stock, to file with the SEC initial reports of
ownership and reports of changes in ownership, furnishing the Company with
copies of all Section 16(a) forms they file.
31
<PAGE>
To the best of the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company, all Section 16(a) filing
requirements applicable to its officers and directors were complied with during
the year ended December 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and other executive officers for
services rendered to the Company during 1998 and 1997. No other person, who,
during 1998 and 1997 served as an executive officer of the Company, had a total
annual salary and bonus in excess of $100,000.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Name & Principal Other Annual LTIP
Position Year Salary ($) Bonus($) Compensation Options Payouts ($)
- --------------------
<S> <C> <C> <C> <C>
Michael 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 $348,354 50,000
</TABLE>
(1) Chief Executive Officer from August 1996 to present.
(2) President and Chief Operating Officer from April 1997 to present.
(3) Senior Vice President of Legal Affairs from January 1998 to present.
(4) Director and Director of Medicine of Florida Physicians Internet,
Inc. from June 1997 and January 1997. Resigned in September 1998.
OPTION GRANTS DURING 1998 AND AGGREGATED FISCAL YEAR-END OPTION VALUE
PERCENT OF
NUMBER OF TOTAL OPTIONS EXERCISE
SECURITIES GRANTED TO OR BASE
UNDERLYING EMPLOYEES PRICE EXPIRATION
NAME OPTIONS IN FISCAL YEAR ($/SH) DATE
------ ---------- -------------- --------- ---------
Michael Morrell 600,000 27.3 1.25 2/10/08
Paul Pershes 500,000 22.7 1.25 2/10/08
E. Nicholas Davis III 200,000 9.1 1.25 2/11/05
32
<PAGE>
AGGREGATED OPTIONS EXERCISED IN 1998 AND 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN THE
UNEXERCISED OPTIONS AT 12/31/98 MONEY OPTIONS AT 12/31/98
SHARES ACQUIRED VALUE --------------------------------- -----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE 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 ($) FEES ($) FEES ($) SHARES (#) OPTIONS/SARS (#)
---- ------------------- ---------- ------------ ------------- -------------------------
<S> <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.
1996 STOCK OPTION PLAN FOR OFFICERS AND DIRECTORS
Under the Company's 1996 Stock Option Plan for officers and directors,
5,000,000 shares of the Company's common stock may be issued. The plan is
administered by the Company's compensation committee which has the authority to
determine to whom awards shall be granted. To date, all options have been
granted under the plan.
EMPLOYEE STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan for employees, 1,000,000 shares
of the Company's common stock may be issued. The Company's Compensation
Committee administers and interprets the Plan and is authorized to grant options
thereunder to all eligible employees of the Company. To date, all options have
been granted under the plan.
The Plans provide for the granting of both incentive and non-qualified
stock options. Options are granted under the Plan on such terms and at such
prices as determined by the Committee, except that the per share exercise price
of incentive stock options cannot be less than the fair market value of the
Common Stock on the date of grant and the per share price of non-qualified stock
options will not be less than 85% of the fair market value on the date of grant.
Options granted under the Plans are not transferable other than by will or
intestate distribution and no option can be exercised until six months after the
date of grant or after the expiration of 10 years from the date of grant.
33
<PAGE>
EMPLOYMENT AGREEMENTS
In January 1997, the Company 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 1,025,000-1,175,000 stock options to be
vested over a four-year period 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. Mr. Morrell agreed to a 20%
reduction in salary effective November 1, 1998, until such time as the Company
achieves sufficient profitability or cash flow.
In January 1997, the Company signed an employment agreement with Paul
Pershes. The term of the agreement is for four years and provides for annual
salary of $150,000, the granting of 1,025,000-1,175,000 stock options to be
vested over a four-year period 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. Mr. Pershes agreed to a 20%
reduction in salary effective November 1, 1998, until such time as the Company
achieves sufficient profitability or cash flow.
On June 16, 1997, the Company 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 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 received 75,000
stock options at $1.25 a share. Effective November 1, 1998, Mr. Kobrin agreed to
a 15% reduction in salary, until such time as the Company achieves sufficient
profitability or cash flow.
On November 6, 1996, the Company 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 to be vested
immediately, and the payment of normal business expenses. Effective February 8,
1998 the annual salary was increased to $100,000 and received 75,000 stock
options at $1.25 a share. Effective November 1, 1998, Mr. Kobrin agreed to a 20%
reduction in salary, until such time as the Company achieves sufficient
profitability or cash flow.
On March 15, 1998, the Company signed an employment agreement with E.
Nicholas Davis III. The initial term of the agreement was for three (3) years
and provides for annual salary of $125,000, the granting of 200,000 stock
options to be vested immediately. Effective November 1, 1998, Mr. Davis agreed
to a 20% reduction in salary, until such time as the Company achieves sufficient
profitability or cash flow. On February 5, 1999, the term of Mr. Davis' contract
was extended to December 31, 2003.
34
<PAGE>
Effective October 15, 1998, YGHN signed an employment agreement with Dana
Pusateri. The term of the agreement is for four years and provides for annual
salary of $120,000, and the granting of 100,000 stock options based on
performance.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Company maintains a $5,000,000 Director and Officer and Company
Reimbursement Insurance Policy ("the Policy") with a retention of $250,000. The
Policy will pay the judgments, damages, settlement and defense costs ("loss") of
each director or officer of the Company and reimburse the Company for any loss
due to any alleged breach of duty, neglect, erroneous misstatement, misleading
statement, omissions or act by the directors or officers of the Company except
losses arising out of or in connection with, among other things (i) gaining
personal profit or advantage; (ii) criminal or deliberate fraudulent acts; (iii)
self dealing; (iv) violations of Section 16 (b) of the Securities Exchange Act
of 1934 and amendments thereto or similar state laws; (vi) certain corporate
takeover transactions; (vii) failure to maintain insurance; (viii) pending or
prior litigation or actions derived from the same facts as the pending or prior
litigation; (ix) violations of the Environmental Protection Act or similar laws
and, (x) violations of the Employee Retirement Income Security Act of 1974 or
amendments thereto or any similar state or common law.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as of March 31, 1999 as to each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock of the Company and as to the beneficial ownership of the Company's
Common Stock by each director of the Company and by all directors and executive
officers of the Company as a group:
SHARES OF PERCENTAGE
NAME AND BUSINESS ADDRESS COMMON STOCK(1) OF CLASS (1)
- ------------------------- -------------- ------------
Michael F. Morrell (2)
1903 S. Congress Ave., Suite 400
Boynton Beach, FL 33426 1,925,000 7%
Paul C. Pershes (3)
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 1,783,333 6.4%
Linda Moore (4)
1903 S. Congress Ave., Suite 400
Boynton Beach, FL 33426 127,000 *
Arthur Kobrin (5)
1903 S. Congress Ave., Suite 400
Boynton Beach, FL 33426 125,000 *
E. Nicholas Davis III (6)
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 300,000 1%
35
<PAGE>
Theodore J. Orlando (7)
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 225,000 *
Terry Lazar (8)
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 225,000 *
Glen Barber (9)
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 225,000 *
Dana Pusateri (10)
1903 S. Congress Ave., Suite 400
Boynton Beach, Florida 33426 911,333 3.3%
All Directors and Officers as a
group (9 persons) 5,846,666 21.3%
- -------------------------
*less than 1%
(1) A person is deemed to be the beneficial owner of voting securities that
can be acquired by such person within 60 days from March 31, 1999 upon the
exercise of options, and that person's option's are assumed to have been
exercised in determining such person's percentage ownership.
(2) Includes 925,000 shares of Common Stock that are issuable upon exercise of
vested options. Does not include 200,000 unvested options. On February 11,
1998 Mr. Morrell exercised options to acquire 1,000,000 shares of Common
Stock at a collective exercise price of $500,000, issuing the Company a
promissory note in payment for the shares, which note contained the
following terms: (i) repayment of principal with interest at the prime
lending rate, (ii) pledge of the shares as collateral security for
repayment of the loan, and (iii) repayment of the principal and interest
upon the earlier to occur of the sale of the shares or February 11, 2002.
(3) Includes 783,333 shares of Common Stock that are issuable upon exercise of
vested options. Does not include 166,667 unvested options. 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 the Company a
promissory note in payment for the shares, which note contained the
following terms: (i) repayment of principal with interest at the prime
lending rate, (ii) pledge of the shares as collateral security for
repayment of the loan, and (iii) repayment of the principal and interest
upon the earlier to occur of the sale of the shares or February 11, 2002.
(4) Includes 127,000 shares of Common Stock that are issuable upon exercise of
vested options. Does not include 50,000 unvested options.
(5) Includes 125,000 shares of Common Stock that are issuable upon exercise of
vested options. Does not include 50,000 unvested options.
(6) Includes 200,000 shares of Common Stock that are issuable upon exercise of
vested options.
(7) Includes 225,000 shares of Common Stock that are issuable upon exercise of
vested options.
(8) Includes 225,000 shares of Common Stock that are issuable upon exercise of
vested options.
(9) Includes 225,000 shares of Common Stock that are issuable upon exercise of
vested options.
(10) Includes 100,000 shares of Common Stock that are issuable upon exercise of
vested options.
36
<PAGE>
On January 13, 1997, three shareholders filed a Schedule 13D with the
Securities and Exchange Commission for an aggregate of 2,303,253 common shares.
The shareholders had acquired preferred shares of the Company pursuant to
Regulation S. The Company's position is that these shareholders are grossly
overstating their post-conversion beneficial ownership. The error appears to be
the result of the misapplication on the parts of four investors of the
conversion formula applicable to the conversion of preferred stock to common
stock. The investors have received the correct number of common shares from the
Company's transfer agent.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
WEINBERG, PERSHES & COMPANY
During 1997, the Company engaged Weinberg, Pershes & Company ("Weinberg"),
an accounting services firm, for consulting services. Paul C. Pershes, a
director of the Company, was a director and shareholder of Weinberg. In April
1997, Weinberg received 5,000 ($30,000) shares of common stock from the Company
pursuant to a consulting contract dated October 1, 1996.
WESTMARK GROUP HOLDINGS, INC.
In November 1995, the Company acquired a 49% interest of Westmark Mortgage
Corporation, a NASDAQ listed company, in exchange for $1,210,000 in cash and
cash equivalents, a note payable in the amount of $315,000 and 10,000 shares of
the Company's Series B preferred stock, with a stated value of $10.
In the first and second quarters of 1996, the Company lent to Westmark
$2,427,568 to be used for Westmark's operations. The Company may convert the
loan to equity.
On June 26, 1997, Westmark executed a promissory note in the amount of
$1,953,000 with interest at 10% and minimum monthly payments of $25,000 through
June 30, 2000, at which time the unpaid principal and accrued interest shall be
paid in full. The Company is entitled to additional payments based on the
receipt by Westmark of additional capitalization. The Company is also entitled
to 15% of the net cash flow of Westmark for 1997 and 20% for 1998.
On September 30, 1998, the Company entered into an exchange agreement with
Westmark Group Holdings, Inc. ("WGHI") settling pending litigation regarding all
outstanding issues relating to the common and preferred shares of WGHI held by
the Company. The agreement provided for conversion $700,000 face amount Series C
Convertible Preferred Stock of WGHI at a conversion price of $2.00 per share.
WGHI also issued to the Company a two-year warrant to buy an additional 100,000
shares of WGHI common stock at $3.25 per share.
37
<PAGE>
The exchange agreement also called for WGHI to return to the Company
$1.725 million in the Company's Series B Preferred Stock with total cash
payments of $277,500 which satisfied in full the debt obligation of
approximately $1.85 million due the Company from WGHI.
The exchange agreement also calls for WGHI to repurchase, at the Company's
option, up to $1 million worth of WGHI common stock owned by the Company over a
two-year period based on WGHI's earnings not exceeding certain earnings per
share levels. The shares are to be repurchased at prices ranging from $4.82 to
$5.73 per share.
The Company holds 683,457 and 333,457 unrestricted shares of common stock
as of December 31, 1998 and 1997, respectively, and $700,000 of Westmark Series
C preferred stock as of December 31, 1997. (The market value at April 13, 1999
was $1,537,778.)
JEAN JOHNSTONE AND BRADLEY RAY AGREEMENTS
In August 1997, the Company issued 327,389 shares of the Company's common
stock for payment on subordinated debentures totaling $498,286. The subordinated
debentures originated from a 1996 agreement whereby the Company agreed to
repurchase common stock held by Jean Johnstone and Bradley Ray.
EXERCISE OF OPTIONS
On February 11, 1998 Mr. Morrell exercised options to acquire 1,000,000
shares of Common Stock at a collective exercise price of $500,000, issuing the
Company a promissory note in payment for the shares, which note contained the
following terms: (i) repayment of principal with interest at the prime lending
rate, (ii) pledge of the shares as collateral security for repayment of the
loan, and (iii) repayment of the principal and interest upon the earlier to
occur of the sale of the shares or February 11, 2001.
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 the
Company a promissory note in payment for the shares, which note contained the
following terms: (i) repayment of principal with interest at the prime lending
rate, (ii) pledge of the shares as collateral security for repayment of the
loan, and (iii) repayment of the principal and interest upon the earlier to
occur of the sale of the shares or February 11, 2001.
On February 11, 1998 Ms. Moore exercised options to acquire 100,000 shares
of Common Stock at a collective exercise price of $50,000, issuing the Company a
promissory note in payment for the shares, which note contained the following
terms: (i) repayment of principal with interest at the prime lending rate, (ii)
pledge of the shares as collateral security for repayment of the loan, and (iii)
repayment of the principal and interest upon the earlier to occur of the sale of
the shares or February 11, 2001.
38
<PAGE>
ESSENTIAL CARE MEDICAL CENTERS, INC.
As part of the acquisition of Essential Care Medical Centers, Inc., the
Company agreed to issue a total of 520,000 shares of the Company's common stock
to Morton Schnessel and Eve Kobrin, on behalf of the Estate of Harry Kobrin.
These shares were issued in 1999. Eve Kobrin is the mother of the Chief
Financial Officer of the Company and the wife of the former President.
39
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBITS DESCRIPTION
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Warrant Certificate (1)
4.3 Form of Underwriter's Warrant (1)
4.4 Form of Warrant Agreement (1)
10.1 Form of Indemnification Agreement between the Registrant (1) 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)
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)
21 Subsidiaries of Medical Industries of America, Inc.
- -------------------
(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.
40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL INDUSTRIES OF AMERICA, INC.
/s/ MICHAEL F. MORRELL
Michael F. Morrell
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
APRIL 13, 1999 /s/ MICHAEL F. MORRELL
Michael F. Morrell
Chief Executive Officer & Director
APRIL 13, 1999 /s/ PAUL C. PERSHES
Paul C. Pershes
Director
APRIL 13, 1999 /s/ THEODORE J. ORLANDO
Theodore J. Orlando
Director
APRIL 13, 1999 /s/ GLEN BARBER
Glen Barber
Director
APRIL 13, 1999 /s/ TERRY LAZAR
Terry Lazar
Director
APRIL 13, 1999 /s/ LINDA MOORE
Linda Moore
Senior Vice President
APRIL 16, 1999 /s/ ARTHUR KOBRIN
Arthur Kobrin
Chief Financial Officer
APRIL 15, 1999 /s/ DANA PUSATERI
Dana Pusateri
Director
APRIL 13, 1999 /s/ LOUIS R. CAPECE, JR.
Louis R. Capece, Jr.
Director
41
<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-12
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,
<TABLE>
<CAPTION>
ASSETS
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,
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
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 debentures, net of discount of $546,836 ............... 2,453,164 --
Convertible subordinated debentures ............................... 367,500 400,000
Capital lease obligations, less current maturities ................ 681,335 12,781
Payable to officers ............................................... 151,169 284,096
------------ ------------
Total liabilities ........................................ 17,289,048 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 ........................................ 37,396,999 30,297,862
Net proceeds from settlement of litigations ....................... 1,675,050 1,675,050
Accumulated deficit ............................................... (28,297,431) (21,937,441)
------------ ------------
Total shareholders' equity ............................... 11,043,662 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 ... 88,200 --
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 .............. 18,308,775 3,639,497
------------ ------------
Loss from continuing operations ............... (3,577,449) (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 ........... $ (6,529,556) $ (1,526,152)
Extraordinary item - gain from retirement
of debt ..................................... 169,566 --
------------ ------------
Net loss ...................................... $ (6,359,990) $ (1,526,152)
============ ============
Loss per common share - Basic:
Continuing operations ...................... $ (.19) $ (.20)
Discontinued operations .................... (.16) (.08)
Extraordinary items ........................ .01 --
------------ ------------
Net loss ................................... $ (.34) $ (.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
------------------------ -------------------------
ADDITIONAL
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL OTHER
--------- ---------- -------- ---------- ---------------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997
(as re-stated) ........ 425,221 $ 5,390,480 1,126,188 $ 2,815 $ 16,652,243 --
Conversion of
preferred stock ..... (225,221) (4,370,480) 7,065,530 17,664 4,352,816 --
Shares issued for
services ............ -- -- 638,100 1,595 1,215,076 --
Shares issued in
settlement of lawsuit -- -- 560,336 1,400 462,806 --
Sale of common stock .. -- -- 412,000 1,030 567,740 --
Shares issued from
exercise of warrants -- -- 144,384 361 216,217 --
Shares issued in
exchange in
subordinated
debentures .......... -- -- 409,889 1,025 490,060 --
Shares issued for
businesses acquired . 1,289,000 959,500 4,209,285 10,523 6,340,904 --
Adjustment for equity
investment .......... 3,600 720,000 -- -- -- --
Net proceeds from
settlement of
litigations ......... -- -- -- -- $ 1,675,050
Net loss .............. -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 1,492,600 $ 2,699,500 14,565,712 $ 36,413 $ 30,297,862 $ 1,675,050
Common stock issued for
business acquired ....... 5,871,208 14,678 5,710,608
Common shares returned .... (75,500) (188) 188
Exercise of stock options . 2,100,000 5,250 1,044,750
Notes receivable from
officers ................ (2,100,000) (5,250) (1,044,750)
Interest - beneficial
conversion feature ...... 635,036
Settlement of lawsuits .... 466,504 1,166 522,493
Reversal of acquisition
agreements .............. (1,289,000) (959,500) 425,000 1,062 230,812
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 $ 37,396,999 $ 1,675,050
============ ============ ============ ============ ============ ============
</TABLE>
ACCUMMULATED
DEFICIT TOTAL
-------------- ---------
Balance, January 1, 1997
(as re-stated) ........ $(20,411,289) $ 1,634,249
Conversion of
preferred stock ..... -- --
Shares issued for
services ............ -- 1,216,671
Shares issued in
settlement of lawsuit -- 464,206
Sale of common stock .. -- 568,770
Shares issued from
exercise of warrants -- 216,578
Shares issued in
exchange in
subordinated
debentures .......... -- 491,085
Shares issued for
businesses acquired . -- 7,310,927
Adjustment for equity
investment .......... -- 720,000
Net proceeds from
settlement of
litigations ......... -- 1,675,050
Net loss .............. (1,526,152) (1,526,152)
------------ ------------
Balance, December 31, 1997 $(21,937,441) $ 12,771,384
Common stock issued for
business acquired ....... 5,725,286
Common shares returned .... --
Exercise of stock options . 1,050,000
Notes receivable from
officers ................ (1,050,000)
Interest - beneficial
conversion feature ...... 635,036
Settlement of lawsuits .... 523,659
Reversal of acquisition
agreements .............. (727,626)
Adjustment for equity
investment .............. (56,587)
Return of preferred shares (1,467,500)
Net loss .................. (6,359,990) (6,359,990)
------------ ------------
Balance - December 31, 1998 $(28,297,431) $ 11,043,662
============ ============
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,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations ................ $(3,577,449) $(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 ...... 88,200 --
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
----------- -----------
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
=========== ===========
</TABLE>
The Accompanying Notes Are An Integral Part of the
Consolidated Financial Statements
F-8
<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
$1,582,000 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
F-9
<PAGE>
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.
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.
F-10
<PAGE>
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 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-11
<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.
F-12
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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.
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
=========== ===========
F-13
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 third-party fiscal intermediaries. In
F-14
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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
F-15
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 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.
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.
F-16
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 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) .......................... $ (7,144,005) $ (935,000)
============= ============
(Loss) per common share ............. $ (.31) $ (.06)
============= ============
F-17
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
3. NOTES RECEIVABLE
Notes receivable as of December 31, 1998 and 1997 consisted of the following:
1998 1997
------- --------
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
========== ==========
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
F-18
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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.
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.
F-19
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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%
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt as of December 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C>
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 --
</TABLE>
F-20
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, principal and interest
of prime plus 1.5%, adjusted annually (10% at
November 30, 1998), due in monthly install-ments 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 --
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
========== ==========
</TABLE>
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:
F-21
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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
========
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-
=========== ===========
F-22
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
BASIC EPS ------------- ------------- ----------
- ---------
Available to common stockholders .. $(6,359,990) 18,873,992 $ (.34)
=========== =========== ========
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
BASIC EPS ------------- ------------- ----------
- ---------
Available to common stockholders ... $ (1,526,152) 5,476,495 $ (.28)
=========== =========== ========
The warrants and stock options outstanding during 1998 and 1997 were
antidilutive therefore, no diluted earnings per share calculation is required.
F-23
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 $(6,359,990) $ (1,526,152)
Pro forma $(7,781,386) $ (2,781,916)
Net (loss)
As reported $ (.34) (.28)
Pro forma $ (.41) $ (.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:
F-24
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
WEIGHTED - AVERAGE WEIGHTED - 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 2,300,000 1.26 4,125,000 .79
Exercised (2,450,000) .50 -- --
Expired -- -- -- --
Forfeited -- (48,000) (1.50)
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 - WEIGHTED -
RANGE OF EXERCISE REMAINING AVERAGE AVERAGE
PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE 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
F-25
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 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.
F-26
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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-27
<PAGE>
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
F-28
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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.
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
F-29
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 twenty-two (22) day average closing bid
price of the Company's Common Stock just prior to conversion with a minimum
conversion price of $1.00.
The estimated fair value of the conversion feature of these debentures amounted
to $635,036 and has been reflected as a discount to the 6% convertible
debentures issued
F-30
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
and will be amortized as additional interest expense through July 29, 2001. The
estimated fair market value of the debenture conversion feature was calculated
by applying the maximum 17.5% discount rate over the maximum discount period of
36 months.
The Company has the right to redeem the debentures 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 as
follows:
REDEMPTION PERIOD REDEMPTION RATE
----------------- ------------------
7/29/98 - 1/29/99 = 107%
1/29/99 - 7/29/99 = 115%
7/29/99 - = 120%
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-31
<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.
F-32
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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
------------------ ---------------- -------------- ----------- ------------
1998
---------
<S> <C> <C> <C> <C> <C>
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>
Reconciliation to consolidated amounts:
1998 1997
----------- -----------
Revenues
Total revenues for reportable segments ....... 13,724,764 2,375,309
Other Revenues ............................... 1,006,562 541,994
----------- -----------
Total consolidated revenues ............... 14,731,326 2,917,303
----------- -----------
Operating Loss
Total earnings for reportable segments ....... (1,504,885) 647,806
Intercompany allocations ..................... 62,763
Unallocated amounts
Corporate headquarters expense ............ (1,863,402) (996,542)
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) (803,952)
----------- -----------
Consolidated operating loss ...................... (6,359,990) (1,152,688)
=========== ===========
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
=========== ===========
F-33
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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, $540,000 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-34
EXHIBIT 21
SUBSIDIARIES OF MEDICAL INDUSTRIES OF AMERICA, INC.
Heart Labs of America, Inc.
Medical Industries Acquisition Company I, Inc.
Medical Industries Acquisition Company II, Inc.
Medical Industries Acquisition Company IV, Inc.
Medical Industries Acquisition Company V, Inc.
Global Air Rescue, Inc.
Global Air Charter, Inc.
Clearwater Jet Center, Inc.
Ivanhoe Medical Systems, Inc.
Pharmacy Care Specialists, Inc.
Valley Pain Centers, Inc.
Tallahassee Sleep Centers, Inc.
Your Good Health Network, Inc.
Air Response, Inc.
Exhibit 21 - Page 1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 698,574
<SECURITIES> 0
<RECEIVABLES> 4,162,829
<ALLOWANCES> 753,804
<INVENTORY> 125,525
<CURRENT-ASSETS> 4,954,679
<PP&E> 12,126,121
<DEPRECIATION> 1,657,701
<TOTAL-ASSETS> 28,332,710
<CURRENT-LIABILITIES> 7,451,143
<BONDS> 0
0
215,913
<COMMON> 53,131
<OTHER-SE> 10,774,618
<TOTAL-LIABILITY-AND-EQUITY> 28,332,710
<SALES> 14,448,523
<TOTAL-REVENUES> 14,731,326
<CGS> 6,915,503
<TOTAL-COSTS> 17,188,669
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,120,106
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,577,449)
<DISCONTINUED> (2,952,107)
<EXTRAORDINARY> 169,566
<CHANGES> 0
<NET-INCOME> (6,359,990)
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
