Form 10-QSB
U.S. Securities and Exchange Commission
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO 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.
(Exact name of small business issuer as specified in its charter)
FLORIDA
(State or other jurisdiction 65-0158479
of incorporation or organization) (IRS Employer Identification No.)
1903 S. CONGRESS AVENUE, SUITE 400, BOYNTON BEACH, FLORIDA 33426
(Address of principal executive offices)
(561) 737-2227
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 24,105,645 shares of common
stock, $.0025 par value, were outstanding as of June 30, 1999.
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
10-QSB - QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
FORM 10-QSB FORM 10-QSB FORM 10-QSB
PART NO. ITEM NO. DESCRIPTION PAGE NO.
<S> <C> <C>
I. FINANCIAL INFORMATION
1. Financial Statements
- Condensed Consolidated Balance
Sheet as of June 30, 1999 3
- Condensed Consolidated Statements of Income
and Accumulated Deficit for the Three and Six
Months Ended June 30, 1999 and 1998 5
- Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1999 and 1998 6
- Notes to Condensed Consolidated Financial
Statements 8
2. Management's Discussion and Analysis
or Plan of Operations 12
II. OTHER INFORMATION
1. Legal Proceedings 16
2. Changes in Securities and Use of Proceeds 16
3. Defaults Upon Senior Securities 16
4. Submission of Matters to a Vote Security Holders 17
5. Other Information 17
6. Exhibits and Reports on Form 8-K 17
Signatures
</TABLE>
2
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 709,630
Accounts receivable - trade, net of allowance for
doubtful accounts of $1,296,339 ........................ 4,239,431
Current portion of mortgage and notes receivable .......... 86,810
Inventories of medical supplies ........................... 188,542
Medical equipment held for sale ........................... 92,540
Prepaid expenses and other current assets ................. 1,119,782
------------
Total current assets .................................... 6,436,735
------------
PROPERTY AND EQUIPMENT:
Mobile cardiac catheterization laboratory
and medical equipment .................................... 1,781,372
Transportation equipment .................................. 133,286
Furniture and office equipment ............................ 942,871
Aircraft and related equipment ............................ 20,648,817
Buildings and building improvements ....................... 355,054
------------
23,861,400
Less: accumulated depreciation and amortization ........... (2,528,351)
------------
Net property and equipment .............................. 21,333,049
------------
OTHER ASSETS:
Mortgage and notes receivable, less current portion ....... 95,188
Goodwill, net of accumulated amortization of $239,760 ..... 7,932,279
Investment in equity securities ........................... 2,954,140
Other assets .............................................. 2,411,124
------------
Total other assets ...................................... 13,392,731
============
TOTAL ASSETS ............................................ $ 41,162,515
============
The Accompanying Notes Are an Integral Part of the
Condensed Consolidated Financial Statements
3
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Line of credit ................................................ $ 2,184,938
Current maturities of long-term debt and notes payable ........ 2,080,750
Current maturities of capital lease obligations ............... 170,982
Current maturities of convertible subordinated debentures ..... 442,500
Accounts payable .............................................. 3,758,550
Accrued liabilities ........................................... 1,467,660
------------
Total current liabilities ............................. 10,105,380
------------
LONG-TERM LIABILITIES:
Long-term debt and notes payable, less current maturities ..... 12,636,363
Capital lease obligations, less current maturities ............ 595,648
Convertible subordinated debentures, less current maturities .. 4,897,123
------------
Total long-term liabilities ........................... 18,129,134
------------
Total Liabilities ..................................... 28,234,514
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares, authorized 20,000,000 shares:
issued and outstanding:
Series B convertible shares, 27,250 issued, $10 stated value 215,913
Common shares, $.0025 par value, authorized 100,000,000;
24,105,645 issued and outstanding .......................... 60,264
Additional paid-in capital .................................... 39,671,839
Accumulated deficit ........................................... (27,020,015)
------------
Total shareholders' equity .......................... 12,928,001
============
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................... $ 41,162,515
============
</TABLE>
The Accompanying Notes Are an Integral Part of the
Condensed Consolidated Financial Statements
4
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Revenue from operations ........................... $ 8,836,981 $ 5,049,242 $ 16,747,975 $ 7,347,174
Equity in net income of investee .................. 29,562 31,064 90,300 57,423
Gain on sale of subsidiary ........................ 1,255,959 -- 1,255,959 --
------------ ------------ ------------ ------------
Total income ............................. 10,122,502 5,080,306 18,094,234 7,404,597
------------ ------------ ------------ ------------
Expenses:
Cost of revenues .................................. 5,436,033 2,597,060 9,103,617 3,914,769
General and administrative expenses ............... 2,116,817 1,328,461 5,122,063 2,058,455
Depreciation and amortization ..................... 758,586 289,991 1,314,216 405,435
Interest expense, net ............................. 619,605 236,152 1,178,876 346,874
Interest - beneficial conversion feature .......... 515,665 -- 752,133 --
------------ ------------ ------------ ------------
Total expenses ........................... 9,446,706 4,451,664 17,470,905 6,725,533
------------ ------------ ------------ ------------
Income from continuing operations ...................... 675,796 628,642 623,329 679,064
Loss from discontinued operations ...................... -- (216,331) -- (126,615)
------------ ------------ ------------ ------------
Net income ............................................. 675,796 412,311 623,329 552,449
Accumulated deficit-beginning of periods ............... (27,695,811) (19,627,227) (27,643,344) (19,767,365)
------------ ------------ ------------ ------------
Accumulated deficit-end of periods ..................... $(27,020,015) $(19,214,916) $(27,020,015) $(19,214,916)
============ ============ ============ ============
Earnings (loss) per share of common stock:
Basic earnings per share:
Income from continuing operations ........... $ .03 $ .03 $ .03 $ .04
Discontinued operations ..................... $ -- $ (.01) $ -- $ (.01)
------------ ------------ ------------ ------------
Net income .................................. $ .03 $ .02 $ .03 $ .03
============ ============ ============ ============
Diluted earnings per share ...................... $ .02 $ .02 $ .02 $ .03
============ ============ ============ ============
Weighted average shares outstanding:
Basic ........................................... 24,000,501 18,441,592 22,611,968 17,272,812
============ ============ ============ ============
Diluted ......................................... 35,676,102 19,994,311 33,463,222 18,785,690
============ ============ ============ ============
</TABLE>
The Accompanying Notes Are an Integral Part of the
Condensed Consolidated Financial Statements
5
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(Unaudited)
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Income from continuing operations ..................... $ 623,329 $ 679,064
Loss from discontinued operations ..................... -- (126,615)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ................. 1,314,216 405,435
Beneficial conversion feature ................. 752,133 --
Common stock issued for services rendered ..... 40,000 --
Equity in loss from unconsolidated company .... (90,300) (57,423)
Gain on sale of subsidiary .................... (1,255,959) --
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable ................ (781,278) (3,193,786)
Inventories of medical supplies .......... (63,017) (11,130)
Prepaid expenses and other current assets (726,450) (303,476)
Other assets ............................. (515,992) (301,418)
Accounts payable ......................... (223,290) 902,971
Accrued liabilities ...................... 199,080 27,674
Due to related parties ................... -- (426)
----------- -----------
Net cash used in operating activities .......... (727,528) (1,979,130)
----------- -----------
Investing activities:
Issuance of notes receivable .......................... -- (410,000)
Payment of notes receivable ........................... 41,514 498,254
Purchase of property and equipment .................... (1,366,964) (204,915)
----------- -----------
Net cash used in investing activities ........... (1,325,450) (116,661)
----------- -----------
Financing activities:
Proceeds from long term debt .......................... -- 2,050,107
Proceeds from convertible subordinated debentures ..... 1,950,000 367,500
Advances on line of credit ............................ 894,989 --
Payments of capital lease obligations ................. (78,300) (88,753)
Payments of long term debt ............................ (702,655) (349,881)
----------- -----------
Net cash provided by financing activities ....... 2,064,034 1,978,973
----------- -----------
Net increase (decrease) in cash ....................... 11,056 (116,818)
Cash at the beginning of period ....................... 698,574 996,250
=========== ===========
Cash at the end of period ............................. $ 709,630 $ 879,432
=========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of the
Condensed Consolidated Financial Statements
6
<PAGE>
Supplemental disclosure of cash flow information:
Interest paid $ 1,190,733 $ 356,339
============ ===========
Supplemental disclosure of non-cash investing and
financing activities:
On April 1, 1998, the Company exchanged 680,000 common shares of the
Company valued at approximately $1.50 per share and a note payable in the amount
of $90,000 to acquire 100% of the outstanding common stock of Pharmacy Care
Specialists, Inc. ("PCS").
On April 1, 1998, the Company exchanged 607,500 common shares of the
Company valued at approximately $1.50 per share for an 81% interest in Ivanhoe
Medical Systems, Inc. ("Ivanhoe").
On March 1, 1999, the Company exchanged 3,866,667 common shares of the
Company, valued at $2,900,000 for 100% of the outstanding common stock of Air
Response, Inc.
During the first quarter of 1999, the Company issued 75,000 shares of the
Company's common stock in lieu of services rendered by two former employees.
During the first quarter of 1999, the Company issued 40,000 shares as part
of a 1998 settlement to a former employee.
In January 1999, certain debenture holders exercised their option to
convert $102,077 of subordinated debentures and accrued interest into common
stock which the Company issued 102,077 shares of common stock.
On May 3, 1999, the Company sold Valley Pain Centers, Inc. ("Valley") to
two former officers of the Company for 1,544,036 shares of the Company's common
stock with a market value of $2,702,000 ($1.75 a share), cash and other
consideration of $352,000, and the repayment of approximately $300,000 of
liabilities owed by Valley, resulting in a gain of $1,255,959. The Company
retired 1,544,036 shares of the Company's common stock from this transaction.
During the six months ended June 30, 1999, the Company issued 298,579
common shares in lieu of cash payments of penalties and interest owed on the
subordinated debentures valued at $292,503. Penalties were caused by delay in
filing a registration statement.
During the quarter ended June 30, 1999, the Company issued 45,000 common
shares in lieu of cash payment of accounts payable in the amount of $31,532.
During the quarter ended June 30, 1999, the Company issued 23,540 common
shares as partial consideration for the purchase of operating assets.
The shares were valued at $25,000.
During the quarter ended June 30, 1999, the Company repurchased 54,806
common shares of the Company at $1.75 from a former officer and director. In
payment of all obligations due the former officer and director, the Company
issued a note in the amount of $100,000.
The value of the above shares was determined using the quoted market
prices on the dates the transactions took place.
The Accompanying Notes Are an Integral Part of the
Condensed Consolidated Financial Statements
7
<PAGE>
MEDICAL INDUSTRIES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
Medical Industries of America, Inc. ("Medical Industries" or the
"Company") was 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
occupational rehabilitation, speech therapy, sleep apnea, diagnostic and
treatment services, pharmaceutical services, diagnostic services and
international air ambulance services.
The Company currently has approximately 5,000 shareholders.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements are
unaudited. These statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the consolidated financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary to state
fairly the consolidated financial position and consolidated results of
operations as of and for the periods indicated. These consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31, 1998,
included in the Company's Form 10-KSB/A as filed with the Securities and
Exchange Commission.
The Company's consolidated financial statements include the activity of
the Company and its wholly owned subsidiaries. The consolidated financial
statements include, from the date of acquisition, the results of operations of
Air Response, Inc.
Earnings Per Common Share
Basic earnings per common share are calculated by dividing earnings by the
weighted average common shares outstanding. Diluted earnings per share have been
computed based on the assumption that all of the convertible preferred stock and
convertible subordinated debentures are converted into common shares, and that
all stock options where the exercise price is less than the market value have
been considered exercised under the treasury stock method. Under this
assumption, the weighted average number of common shares outstanding has been
increased accordingly.
Goodwill
Goodwill was recorded at cost and is amortized using the straight-line
method over twenty-five years.
8
<PAGE>
The Company periodically evaluates the recovery of the carrying amount of
intangibles by determining if any impairment indicators are present. These
indicators include management's plans for the division, income derived from
business acquired and other factors. If this review indicates that intangibles
will not be recoverable, as principally determined based on the estimated
undiscounted cash flows of the entity over the remaining amortization period,
the Company's carrying value of the intangibles is reduced by the amount the
carrying value exceeds its fair value.
Estimates
The preparation of financial statements in conformity with general
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2 - Business Acquired
Effective March 1, 1999, the Company acquired 100% of the outstanding
common stock of Air Response, Inc. ("Air Response") in exchange for $2,900,000
in common stock valued at $.75 per share plus an earn up arrangement payable
over three years. The maximum additional payout on the earnout over the
three-year period is $2,900,000 which will take the form of a convertible
interest-bearing debenture. The acquisition has been accounted for using the
purchase method of accounting. The net assets and revenue and expenses of Air
Response have been included in the Company's consolidated financial statements
from the date of acquisition.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition had occurred on January 1, 1998,
after giving effect of certain adjustments, including amortization of goodwill
and related income tax effects. The pro forma financial information does not
purport to be indicative of the results of operations that would have occurred
had the transactions taken place at the beginning of the periods presented or of
future results of operations.
1999 1998
------------ -----------
Revenue ............................... $ 18,845,635 $13,584,202
============ ===========
Income from continuing operations ..... 380,119 1,047,934
============ ===========
Net income ............................ 380,119 1,073,794
============ ===========
Basic earnings per share .............. $ .01 $ .05
============ ===========
Note 3 - Private Placement
During the six months ended June 30, 1999, the Company, pursuant to a
private placement, sold $2,000,000 of 12% convertible debentures together with
2,000,000 three-year detachable warrants. The warrants may be exercised at any
time through April, 2002 for $.50 per share. The debentures are due through
April 2002 with interest payable semi-annually. The debentures are convertible
at any time into common stock at $.50 per share. The market price of the
Company's common stock was between $.656 and $1.125 per share on the dates the
debentures were issued. The majority of the debentures were issued when the
Company's stock price was approximately $.656 per share. The proceeds are to be
used for general working capital.
9
<PAGE>
In accordance with EITF D-60, the Company is required to amortize as
additional interest expense the difference between the market price of the
Company's common stock and the conversion rate of the subordinated debentures at
the commitment date (i.e., Beneficial Conversion Feature or "BCF"). The term of
the amortization is for the period from the date of closing through the date the
debenture can be first converted.
EITF D-60 requires a beneficial conversion feature (BCF) to be recorded (a
non-recurring item) when convertible debt is issued. The Company recorded a BCF
on the issuance of subordinated debentures totaling $699,830, of which $231,830
has been recorded in the first quarter of 1999 and $468,000 was recorded in the
second quarter of 1999. In accordance with SFAS 123 "Accounting for Stock Based
Compensation," the detachable warrants issued in conjunction with the sale of
the debentures have a fair market value of $571,950, which is being amortized
over the life of the debentures in accordance with APB 14, paragraph 16. The
Company amortized $47,665 and $52,303 during the three and six month periods
ended June 30, 1999, respectively, as additional interest expense relative to
the fair market value of the warrants.
Note 4 - 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 plaintiff is seeking approximately $100,000 in damages. The
Company intends to vigorously defend the lawsuit.
Note 5 - Segment and Related Information
The Company's reportable segments are International Air Ambulance,
Physical and Occupational Rehabilitation and Pharmacy Services.
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 the Company's transport services include the relocation
of patients requiring specialized medical procedures such as organ transplants,
cancer treatment, specialized cardiac surgery, burn care, stroke care and
advanced brain and spinal cord surgery, as well as transportation to hospitals
and medical facilities recognized nationally for excellence in their respective
fields. The flights are generally long distance in nature.
PHYSICAL AND OCCUPATIONAL REHABILITATION offers sleep and disordered
breathing diagnostic programs to physicians and hospitals, and provides physical
rehabilitation and occupational and speech therapy services.
PHARMACY SERVICES is a closed network pharmacy located in Lakeland,
Florida which provides unit-dosed medications to over 2,000 residents in
assisted-living facilities across Florida. Pharmacy Services delivers
medications to the facilities, provides training workshops, and does third-party
billing.
The accounting policies of the reportable segments are the same as those
described in Note 1 to the Company's Condensed Consolidated Financial
Statements. The Company evaluates the performance of its operating segments
based upon income before taxes and nonrecurring charges such as
interest-beneficial conversion feature and extraordinary items.
Segment information for the six months ended June 30, 1999 and 1998 is as
follows:
10
<PAGE>
For the six months ended June 30, 1999:
<TABLE>
<CAPTION>
PHYSICAL &
INTERNATIONAL OCCUPATIONAL
AIR AMBULANCE REHABILITATION PHARMACY OTHER SERVICES TOTAL
--------------- ---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues ...................... $ 9,452,194 $ 4,441,526 $ 2,215,287 $ 563,676 $16,672,683
Operating earnings ............ 674,879 630,212 270,132 (79,424) 1,495,799
Depreciation and
amortization ................ 913,693 162,181 45,528 99,996 1,221,398
Total assets .................. $26,111,178 $ 7,474,249 $ 2,114,463 $ 894,175 $36,594,065
For the six months ended June 30, 1998:
PHYSICAL &
INTERNATIONAL OCCUPATIONAL
AIR AMBULANCE REHABILITATION PHARMACY OTHER SERVICES TOTAL
--------------- ---------------- ------------- ---------------- -------------
Revenues ...................... $ 3,094,387 $ 597,679 $ 772,655 $ 2,580,591 $ 7,045,312
Operating earnings ............ 26,840 376,299 19,522 998,694 1,421,355
Depreciation and
amortization loss ........... 261,165 32,780 24,990 37,391 356,326
Total assets .................. $13,045,185 $ 2,349,596 $ 1,671,188 $ 2,151,084 $19,217,053
</TABLE>
Reconciliation to consolidated amounts:
FOR THE SIX MONTHS ENDED
---------------------------
1999 1998
----------- -----------
Revenues
Total revenues for reportable segments ..... $16,672,683 $ 7,045,312
Other revenues ............................. 75,292 301,862
=========== ===========
Total consolidated revenues ............ $16,747,975 $ 7,347,174
=========== ===========
Operating earnings
Total earnings for reportable segments ..... $ 1,495,799 $ 1,421,355
Unallocated amounts
Corporate headquarters expense ......... 872,470 742,291
Loss from discontinued operations ...... -- 126,615
=========== ===========
Consolidated profit ............................ $ 623,329 $ 552,449
=========== ===========
Note 6 - Investment in Westmark Group Holdings, Inc. ("Westmark")
As of June 30, 1999 the Company held 683,457 of Westmark's common stock,
or an ownership of 20.6% and 333,333 shares, or an ownership of 13.0%, as of
June 30, 1998. As a result of the Company's increase in ownership in Westmark,
the Company, in 1998, changed its method of accounting for its investment in
Westmark from the cost method to the equity method and has restated the
financial statements for the six months ended June 30, 1998 to reflect this
change. The equity method requires the Company to include in its statement of
income its proportionate ownership percentage of Westmark's quarterly profit.
Note 7 - Sale of Valley Pain Center Subsidiary
On May 3, 1999, the Company sold Valley Pain Centers, Inc. ("Valley") to
two former officers of the Company for 1,544,036 shares of the Company's common
stock with a market value of $2,702,000 ($1.75 a share), cash and other
consideration of $352,000, and the repayment of approximately $300,000 of
liabilities owed by Valley, which resulted in a gain on the sale of $1,255,959.
The Company retired 1,544,036 shares of the Company's common stock from this
transaction.
11
<PAGE>
Note 8 - Line of Credit
During the six months ended June 30, 1999, the Company increased its
availability under its line of credit from $1,500,000 to $3,500,000.
Note 9 - Subsequent Events
On July 21, 1999, the Company entered into a commitment with a financial
institution for the sale of up to $25,000,000 of the Company's common stock in
amounts that could exceed 20% or more of the Company's issued and outstanding
common stock as of a certain date subject to shareholder approval at the
Company's annual meeting. This is a line of credit using underwritten stock that
may or may not be used to finance various activities of the Company.
In July and August 1999, certain debenture holders exercised their options
to convert $2,760,000 of subordinated debentures at various conversion prices
for which the Company issued 4,128,001 shares of common stock.
Effective July 1, 1999, the Company, pursuant to a private placement,
offered up to $5,000,000 of 10% convertible debentures. As of August 10, 1999,
the Company received $466,694 on the sale of these debentures after deducting
certain costs. The debentures mature September 30, 2002 and are convertible into
common shares at 80% of the closing bid price for the Company's common stock on
the date of receipt of the debenture holders cleared subscription funds, but in
no event less than $1.00. BCF, a non-recurring expense, of approximately
$143,000 has been incurred by the Company as a result of the sale of these
debentures and warrants as of August 10, 1999.
On July 5, 1999, the Company entered into a stock exchange agreement with
CyberCare, Inc., whereby the Company will issue 7,500,000 of the Company's
common stock in exchange for 100% of the outstanding stock of CyberCare, Inc.
The closing of this transaction is subject to shareholder approval which is
expected to take place at the Company's annual meeting on August 26, 1999.
On August 11, 1999, the United States Patent Office provided a Notice of
Allowance for 19 claims for the fundamental health-Internet technologies
developed by Georgia Tech University and held under exclusive license by
CyberCare, Inc.
In August 1999, a debenture holder exercised 10,000 warrants at $.50 with
the Company receiving the proceeds in the amount of $5,000.
On August 11, 1999, the Company terminated the definitive agreement,
originally entered into in March 1999, to merge with American Enterprise
Solutions, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENT
This Quarterly Report on Form 10-QSB contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, changes in the regulation of the
healthcare industry at either the federal and state levels, changes in
reimbursement for services by government or private payors, competitive
pressures in the healthcare industry and the Company's response thereto, the
Company's ability to obtain and retain favorable arrangements with third-party
payors, the
12
<PAGE>
Company's ability to obtain capital in favorable terms and conditions, and
general conditions in this economy.
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the Company's condensed
consolidated unaudited Financial Statements listed in Part I, Item I and the
Notes thereto appearing elsewhere in this Form 10-QSB, and the Company's audited
Financial Statements and the Notes thereto appearing in the Company's 1998
Annual Report on Form 10-KSB/A.
COMPARISON OF THE RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1999
AND 1998
Revenues from operations increased to $16,747,975 for the six months ended
June 30, 1999 compared to $7,347,174 for the six months ended June 30, 1998,
principally due to the revenue from the Company's acquisitions, Your Good Health
Network, Inc. ("YGHN"), PCS, and Air Response.
Cost of revenues, which included medical supplies, technical salaries and
benefits and other expenses directly associated with the Company's services,
increased to $9,103,617 from $3,914,769 for the six months ended June 30, 1999
and 1998, respectively. This increase is primarily due to the cost of revenue of
the acquisitions, YGHN, PCS and Air Response. Cost of revenue for 1999,
excluding acquisitions, in comparison to 1998 increased primarily due to the
increase in costs associated with the air ambulance transport services which
increased in direct proportion to the increase in revenue.
General and administrative expenses increased to $5,122,063 for the six
months ended June 30, 1999 compared to $2,058,455 for the six months ended June
30, 1998. This increase is primarily due to the additional general and
administrative costs related to the acquired companies.
Interest expense (including BCF) increased to $1,931,009 for the six
months ended June 30, 1999 as compared to $346,874 for the six months ended June
30, 1998. This increase is primarily attributable to interest on the airplane
loans assumed as part of the acquisition of Air Response, issuance of
subordinated debentures and associated costs and interest on the lines of
credit, which were increased to finance the increase in working capital needs
related to the increase in revenues and accounts receivable.
The BCF is equal to the difference between the fair market value of the
Company's common stock and the conversion rate of the subordinated debentures at
the commitment date. BCF is amortized as additional interest expense over the
period from the date of closing through the date the debenture can be first
converted.
EITF D-60 requires a beneficial conversion feature (BCF) to be recorded
when convertible debt is issued. The Company recorded a BCF on the issuance of
subordinated debentures totaling $699,830, of which $231,830 has been recorded
in the first quarter of 1999 and $468,000 was recorded in the second quarter of
1999. In accordance with SFAS 123, the detachable warrants issued in conjunction
with the sale of the debentures have a fair market value of $571,950 which is
being amortized over the life of the debentures in accordance with APB 14,
paragraph 16. The Company amortized $47,665 and $52,303 during the three and
six-month period ended June 30, 1999, respectively, as additional interest
expense relative to the fair market value of the warrants.
Depreciation and amortization increased to $1,314,216 for the six months
ended June 30, 1999 as compared to $405,435 for the six months ended June 30,
1998. This increase is primarily due to the depreciation of Air Response's
aircraft and amortization of goodwill and various costs associated with the
aforementioned acquisitions and financing arrangements.
During the three months ended June 30, 1999, the Company sold 100% of its
interest in Valley and recorded a gain in the amount of $1,255,959.
13
<PAGE>
As a result of the above, the Company had net income of $623,329 for the
six months ended June 30, 1999 compared to $552,449 for the six months ended
June 30, 1998.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1998
Revenue from operations increased to $8,836,981 for the three months ended
June 30, 1999 as compared to $5,049,242 for the three months ended June 30,
1998, principally due to revenue from the acquisitions of Air Response and YGHN.
Cost of revenues which included medical supplies, technical salaries and
benefits and other expenses directly associated with the Company's services,
increased to $5,436,033 from $2,597,060 for the three months ended June 30, 1999
and 1998, respectively. This increase is primarily due to the cost of revenue of
the acquisitions.
General and administrative expenses increased to $2,116,817 for the three
months ended June 30, 1999 compared to $1,328,461 for the three months ended
June 30, 1998. The increase is due primarily to the increase in general and
administrative costs related to the acquired companies.
Interest expense (including BCF and penalties of $605,665) increased to
$1,135,270 for the three months ended June 30, 1999 as compared to $236,152 for
the three months ended June 30, 1998. This increase is primarily attributed to
interest on the airplane loans of Air Response, issuance of subordinated
debentures and associated costs, and interest on the lines of credit, which were
increased to finance the increase in working capital needs related to the
increase in revenues and accounts receivable.
Depreciation and amortization increased to $758,586 for the three months
ended June 30, 1999 as compared to $289,991 for the three months ended June 30,
1998. This increase is due primarily to the depreciation of Air Response'
aircraft and amortization of goodwill and various costs associated with the
acquisitions and financing arrangements.
During the three months ended June 30, 1999, the Company sold 100% of its
interest in Valley in which the Company recorded a gain of $1,255,959.
As a result of the above, the Company had a net income of $675,796 for the
three months ended June 30, 1999 compared to $412,311 for the three months ended
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities - The Company's net cash flow from
operating activities resulted in deficits of $727,528 and $1,979,130 for the six
months ended June 30, 1999 and 1998, respectively. The $1,251,602 decrease is
due primarily to the increase in profitability before non-cash items, such as
depreciation and amortization.
Cash used in investing activities - The Company's net cash used in
investing activities for the six months ended June 30, 1999 was $1,325,450 as
compared to net cash used in investing activities for the six months ended June
30, 1998 of $116,661. This is due primarily to an increase in equipment
purchases relating to aircraft and a decrease in payment of note receivable.
Cash flow from financing activities - The Company's net cash flows from
financing activities during the six months ended June 30, 1999 increased by
$85,061 to $2,064,034 from $1,978,973 during the six months ended June 30, 1998,
due primarily to an increase in private placement proceeds received during the
six months ended June 30, 1999.
14
<PAGE>
During the six months ended June 30, 1999, the Company, pursuant to a
private placement, sold $2,000,000 of 12% convertible debentures together with
2,000,000 three-year detachable warrants. The warrants may be exercised at any
time prior to June 30, 2002 for $.50 per share. The debentures are due in 2002
with interest payable semi-annually. The debentures are convertible at any time
into common stock at $.50 per share. The market price of the Company's common
stock was between $.656 and $1.125 per share on the dates the debentures were
issued. The majority of the debentures were issued when the Company's common
stock was approximately $.656. The proceeds are to be used for general working
capital purposes.
The Company had working capital deficiency of $3,668,645 at June 30, 1999
compared to working capital deficiency of $2,496,464 at December 31, 1998. This
is due primarily to the increases in the line of credit, accounts payable and
accrued expenses.
The Company's capital requirements in connection with its business plans
will be significant. The Company believes that net proceeds of future
anticipated securities offerings, and giving effect to revenues which are
projected to be realized from operations, should be sufficient to fund ongoing
operations and its business plan. Notwithstanding, there is no assurance that
such anticipated offerings will be undertaken, and if undertaken, will be
successful or that such proceeds derived therefrom, will in fact be sufficient
to fund operations and meet the needs of the Company's business plans.
Year 2000 Costs
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14 that costs associated with
modifying computer software for the year 2000 be expended as incurred. The
Company has made several acquisitions and is assessing the extent of the
necessary modification to their computer software but anticipates that it will
not have a material effect on the Company's financial statements.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 plaintiff is seeking approximately $100,000 in damages. The
Company intends to vigorously defend the lawsuit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first quarter of 1999, the Company issued 3,886,667 shares of
unregistered common stock in connection with the purchase of Air Response, Inc.
valued at $.75 per share. In connection therewith, the Company filed a Form 8-K
on April 23, 1999.
During the four months ending April 30, 1999, the Company, pursuant to a
private placement, sold $2,000,000 of 12% convertible debentures. The debenture
holders received three-year warrants to purchase 2,000,000 shares of the
Company's common stock at an exercise price of $.50.
During the first quarter of 1999, the Company issued 75,000 shares of the
Company's common stock in lieu of services rendered by two former employees.
During the first quarter of 1999, the Company issued 40,000 shares as part
of a 1998 settlement with a former employee.
In January 1999, certain debenture holders exercised their option to
convert $102,077 of subordinated debentures and accrued interest into common
stock at $1.00 per share, which the Company issued 102,077 shares of common
stock.
During the six months ended June 30, 1999, the Company issued 298,579
common shares in lieu of cash payments of $292,503 in penalties caused by the
delay in filing a registration statement and interest owed on the subordinated
debentures.
During the quarter ended June 30, 1999, the Company issued 45,000 common
shares in lieu of cash payment of accounts payable in the amount of $31,532.
During the quarter ended June 30, 1999, the Company issued 23,540
common shares as partial consideration for purchase of operating assets. The
shares were valued at $25,000.
On May 3, 1999, the Company sold Valley to two former officers of the
Company for 1,544,036 shares of the Company's common stock with a market value
of $2,702,000 ($1.75 a share) and cash and other consideration of $352,000 and
the repayment of approximately $300,000 of liabilities owed by Valley, resulting
in a gain of $1,255,959. This gain was recognized in the Company's financial
statements during the quarter ending June 30, 1999. The Company retired
1,544,036 shares of the Company's common stock.
During the quarter ended June 30, 1999, the Company repurchased 54,806
common shares of the Company at $1.75 from former officer and director. In
payment of all obligations due the former officer and director, the Company
issued a note in the amount of $100,000.
16
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) reports on Form 8K
o 8-K filed on April 23, 1999 describing the acquisition of Air
Response, Inc.
o 8-K filed on June 1, 1999 describing the Company's change in
certifying accountant.
o 8-K/A filed on June 21, 1999 amending the description of the
acquisition of Air Response, Inc filed on April 23, 1999.
o 8-K/A filed on June 25, 1999 amending the description of the
Company's change in certifying accountant filed on June 1, 1999.
o 8-K filed on July 20, 1999 describing the acquisition of
CyberCare, Inc.
o 8-K filed on July 21, 1999 describing the $5,000,000 private
placement with Connecticut Capital Markets, LLC and the
$25,000,000 equity line with Swartz Private Equity, LLC.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MEDICAL INDUSTRIES OF AMERICA, INC.
(Registrant)
AUGUST 13, 1999 By: /s/ MICHAEL F. MORRELL
(Date) Michael F. Morrell, Chairman of the Board &
Chief Executive Officer
AUGUST 13, 1999 By: /s/ PAUL C. PERSHES
(Date) Paul C. Pershes, President & Director
AUGUST 13, 1999 By: /s/ LINDA MOORE
(Date) Linda Moore, Senior Vice President
AUGUST 13, 1999 By: /s/ ARTHUR KOBRIN
(Date) Arthur Kobrin, Chief Accounting Officer & Senior
Vice President
18
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 709,630
<SECURITIES> 0
<RECEIVABLES> 5,535,770
<ALLOWANCES> 1,296,339
<INVENTORY> 188,542
<CURRENT-ASSETS> 6,436,735
<PP&E> 23,861,400
<DEPRECIATION> 2,528,351
<TOTAL-ASSETS> 41,162,515
<CURRENT-LIABILITIES> 10,105,380
<BONDS> 0
0
215,913
<COMMON> 60,264
<OTHER-SE> 12,651,824
<TOTAL-LIABILITY-AND-EQUITY> 41,162,515
<SALES> 1,674,797
<TOTAL-REVENUES> 18,094,274
<CGS> 9,103,617
<TOTAL-COSTS> 15,539,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,931,009
<INCOME-PRETAX> 623,329
<INCOME-TAX> 0
<INCOME-CONTINUING> 623,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 623,329
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
