FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the Quarter ended January 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to ___________________
Commission file number 2-98314-W
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MEDICAL ADVISORY SYSTEMS, INC.
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(Name of small business issuer in its charter)
Delaware 52-1233960
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8050 Southern Maryland Blvd., Owings, MD 20736
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(Address of principal executive offices) (Zip Code)
(301) 855-8070
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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-QSB or any
amendment of this Form 10-QSB [x]
Issuer's revenues for its most recent fiscal quarter: $908,903
The aggregate market value of the voting stock held by non-affiliates as of
March 8, 2002 was $33,586,995
Common Stock, $.005 par value, 5,167,230 Shares of Common Stock Outstanding as
of January 31, 2002
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
October 31, JANUARY 31,
2001 2002
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ASSETS
CURRENT
Cash and cash equivalents $1,388,826 $ 763,693
Accounts receivable, less allowance for doubtful
accounts of $137,620 and $105,000 429,105 268,961
Inventories 52,778 62,604
Prepaid expenses and other (Note 5) 263,118 382,250
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TOTAL CURRENT ASSETS 2,133,827 1,477,508
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation and amortization 1,573,006 1,483,689
INVESTMENT IN AFFILIATES (Note 2) 953,750 953,750
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$4,660,583 $3,914,947
================================================================================
See accompanying summary of accounting policies and notes to
consolidated financial statements.
2
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
===========================================================================================
October 31, JANUARY 31,
2001 2002
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Current maturities of long-term debt $ 4,103 $ 125,350
Current maturities of capital lease obligations 32,241 33,330
Accounts payable and accrued expenses 668,854 238,441
Deferred income 21,051 26,991
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TOTAL CURRENT LIABILITIES 726,249 424,112
Long-term debt 122,234 --
Capital lease obligations 38,748 27,268
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TOTAL LIABILITIES 887,231 451,380
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Notes 4, 5 and 6)
Common stock; $.005 par value; 10,000,000 shares
authorized; 5,161,230 and 5,167,230 shares issued;
5,111,230 and 5,117,230 shares outstanding 25,805 25,835
Additional paid-in capital 14,654,032 14,657,002
Accumulated deficit (10,862,902) (11,175,687)
Treasury stock, at cost (50,000 shares) (43,583) (43,583)
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TOTAL STOCKHOLDERS' EQUITY 3,773,352 3,463,567
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$ 4,660,583 $ 3,914,947
===========================================================================================
See accompanying summary of accounting policies and notes to
consolidated financial statements.
3
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
====================================================================================
THREE MONTHS ENDED JANUARY 31, 2001 2002
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REVENUE:
24/7 medical response and assistance services $ 990,303 $ 668,708
ASP and WEB hosting services 252,235 14,836
Interactive medical information services 204,908 7,588
Pharmaceutical kits and equipment 162,723 169,666
Other services 14,374 48,105
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TOTAL REVENUE 1,624,543 908,903
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OPERATING EXPENSES:
24/7 medical response and assistance services 797,023 519,036
ASP and WEB hosting services 7,425 14,467
Interactive medical information services 185,741 6,194
Pharmaceutical kits and equipment 102,449 115,555
Other services 13,461 31,462
Salaries and wages 273,290 254,167
Other selling, general and administrative (Note 4) 362,998 193,706
Depreciation & amortization 204,098 57,636
Impairment of long-lived assets -- 31,681
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TOTAL OPERATING EXPENSES 1,946,485 1,223,904
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OPERATING LOSS (321,942) (315,001)
OTHER INCOME/(EXPENSE):
Other income 26 --
Interest income 31,774 3,975
Interest expense (15,151) (1,759)
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TOTAL OTHER INCOME/(EXPENSE) 16,649 2,216
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NET LOSS $ (305,293) $ (312,785)
====================================================================================
Basic and diluted loss per share $ (0.06) $ (0.06)
Weighted average shares outstanding 4,889,129 4,889,329
====================================================================================
See accompanying summary of accounting policies and notes to
consolidated financial statements.
4
MEDICAL ADVISORY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED JANUARY 31, 2001 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (305,293) $ (312,785)
Adjustment to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 204,098 57,636
Provision for doubtful accounts (33,014) (32,620)
Compensation expense for options and warrants 34,042 16,625
Impairment of long lived assets -- 31,681
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 55,491 192,764
Inventory (2,192) (9,826)
Prepaid expenses and other 22,630 (135,757)
Accounts payable and accrued expenses 159,325 (430,413)
Deferred income (2,416) 5,940
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 132,671 (616,755)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equity affiliate (159,000) --
Purchase of property and equipment (313,119) --
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NET CASH USED IN INVESTING ACTIVITIES (472,119) --
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loans to banks and related parties (7,984) (11,378)
Exercise of stock options -- 3,000
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NET CASH USED IN FINANCING ACTIVITIES (7,984) (8,378)
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Net decrease in cash (347,432) (625,133)
Cash at beginning of period 2,615,842 1,388,826
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Cash at end of the period $ 2,268,410 $ 763,693
==============================================================================================
See accompanying summary of accounting policies and notes to
consolidated financial statements.
5
MEDICAL ADVISORY SYSTEMS, INC.
SUMMARY OF ACCOUNTING POLICIES
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BASIS OF PRESENTATION The consolidated financial statements include the
accounts of Medical Advisory Systems, Inc. (MAS or
the Company) and its wholly-owned subsidiaries,
Travelers Angel Assistance, Inc., MAS Laboratories,
Inc., Doc-Talk, LLC, and TLC., Inc. Significant
intercompany accounts and transactions have been
eliminated in consolidation.
The Company has a 2.3% ownership interest in
AmericasDoctor.com. The Company accounts for this
investment using the cost method (See Note 2).
In May 2000, the Company purchased a 12% ownership
interest in CICP, the holding company for CORIS Group
International ("CORIS"). The Company accounts for
this investment using the cost method (See Note 2).
In December 2000, the Company purchased a 15%
ownership interest in Jaspin Interactive, Inc. The
Company accounts for this investment using the cost
method (See Note 2).
BUSINESS OPERATIONS The Company provides interactive medical information
services via "chats" over the internet and telephone,
provides telemedicine services, training, and
pharmaceuticals to the worldwide maritime industry
and other individuals or entities located in remote
locations worldwide, operates as an Application
Service Provider (ASP), provides WEB hosting
services, and operates an out-patient medical clinic.
MAS Laboratories is currently inactive. The Company
provides these various services through four
operating segments as described more fully in Note 7.
RISKS AND UNCERTAINTIES The Company provides medical information and
assistance services and related products and services
through various methods of distribution. In 2001, the
majority of the Company's revenues resulted from
providing 24/7 medical response and assistance
services. In October 2001, the Company announced a
new travel insurance product directed toward American
tourists traveling outside the United States. While
the profitability of delivering medical response and
assistance services increased in 2001, the Company is
unsure what the impact will ultimately be on the
future profitability of travel assistance services
given the significant decline in travel after the
attacks on the United States in September 2001.
6
MEDICAL ADVISORY SYSTEMS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In September 2001, AmericasDoctor.com cancelled its
contract with the Company to provide internet "chats"
with doctors located in its call center which is
staffed 24 hours-a-day (see Note 2). The Company has
the ability to provide the internet "chat" for new
customers.
As discussed in Note 8, in November 2001 the Board of
Directors approved an agreement and plan of merger
pursuant to which the Company would acquire the
Advanced Wireless Group of Applied Digital Solutions,
Inc. ("ADS"). As a result of this transaction, ADS
will own 82.1% of the Company's outstanding common
stock and will be able to control the board of
directors. If the merger is ultimately completed, a
new senior management team has been identified by ADS
to direct the Company. The Company cannot predict
what changes, if any, the new management team will
make in the existing business plan.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
particularly regarding valuation of accounts
receivable, recognition of liabilities and disclosure
of contingent assets and liabilities at the date of
the financial statements. Actual results could differ
from those estimates.
CONCENTRATIONS OF Financial instruments and related items that
CREDIT RISK potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash
equivalents and trade receivables. The Company places
its cash and temporary cash investments with high
credit quality institutions. At times, such
investments may be in excess of the FDIC insurance
limit. The Company's customers are not concentrated
geographically and it periodically reviews its trade
receive les in determining its allowance for doubtful
accounts
CASH EQUIVALENTS For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments
purchased with a maturity date of three months or
less to be cash equivalents. The Company had
temporary investments of $162,659 on January 31,
2002.
INVENTORIES Inventories are stated at the lower of cost or market
determined by the first-in, first-out (FIFO) method.
Inventories consist of pharmaceuticals available for
sale.
7
MEDICAL ADVISORY SYSTEMS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation is computed over their estimated useful
lives by the straight-line method (see Note 1).
DEFERRED INVESTMENT Deferred investment advisory and public relations
ADVISORY COSTS costs consist of the estimated fair value of warrants
issued to certain third parties for public and
investor relations services to be rendered over one
and two year periods. These amounts are being
amortized on a straight line basis over the lives of
the service agreements.
IMPAIRMENT OF LONG-LIVED Long-lived assets and certain identifiable
ASSETS intangibles held and used by the Company are reviewed
for impairment whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable. In addition, assets to
be disposed of are reported at the lower of the
carrying amount or the fair value less costs to sell.
REVENUE RECOGNITION Revenues from contracts that provide unlimited
services are recognized ratably over the term of the
contract. Revenues from contracts based on usage are
recognized when the services are rendered. Other
revenues are recognized at the time services or goods
are provided.
INCOME TAXES The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No.
109. Accounting for Income Taxes ("SFAS 109"). Under
SFAS 109, deferred taxes are determined using the
liability method which requires the recognition of
deferred tax assets and liabilities based on
differences between financial statement and income
tax bases using presently enacted tax rates.
STOCK BASED COMPENSATION The Company accounts for stock based compensation
using the intrinsic value method prescribed in
Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The
Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" with
respect to options and warrants granted to employees.
8
MEDICAL ADVISORY SYSTEMS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
EARNINGS PER SHARE The Company follows Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," specifying
the computation, presentation and disclosure
requirements of earnings per share information. Basic
earnings per share have been calculated based upon
the weighted, average number of common shares
outstanding. Stock options and warrants have been
excluded as common stock equivalents in the
calculation of diluted earnings per share because
they are anti-dilutive.
COMPREHENSIVE Statement of Financial Accounting Standards No. 130,
INCOME "Reporting Comprehensive Income" ("SFAS 130"),
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include
all changes in equity except those resulting from
investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under
current accounting standards as components of
comprehensive income be reported in a financial
statement that is displayed with the same prominence
as other financial statements. The Company previously
adopted SFAS 130 and has no items of comprehensive
income to report.
RECENT ACCOUNTING In June 2001, the FASB issued Statement of Financial
PRONOUNCEMENTS Accounting Standards No. 141, "Business Combinations"
(SFAS No. 141). SFAS No. 141 changed the accounting
for business combinations, requiring that all
business combinations be accounted for using the
purchase method and that intangible assets be
recognized as assets apart from goodwill if they
arise from contractual or other legal rights, or if
they are separable or capable of being separated from
the acquired entity and sold, transferred, licensed,
rented or exchanged. SFAS No. 141 is effective for
all business combinations initiated after June 30,
2001.
9
MEDICAL ADVISORY SYSTEMS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In June 2001, the FASB issued Statement of Financial
Standards No. 142, "Accounting for Goodwill" ("SFAS
142"). SFAS 142 establishes accounting standards for
existing goodwill related to purchase business
combinations. Under the Statement, the Company would
discontinue the periodic amortization of goodwill
effective with adoption of the new Statement. Also,
the Company would have to test any remaining goodwill
for possible impairment within six months of adopting
the Statement, and periodically thereafter, based on
new valuation criteria set forth in the Statement.
Further, the Statement has new criteria for purchase
price allocation. The Statement becomes effective
January 1, 2002. If the proposed merger is completed,
the transaction would be subject to the requirements
of SFAS 141 and 142.
In August 2001, the FASB approved Statement of
Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). SFAS 144 supersedes SFAS 121
"Accounting for Impairment of Long-Lived Assets and
for Long Lived Assets to be Disposed Of" and the
accounting and reporting provisions of the Accounting
Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 established a
single accounting model, based on the framework
established in SFAS 121. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment
loss only if the carrying amount of a long-lived
asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the
difference between the carrying amount and fair value
of the asset. SFAS 144 excludes goodwill from its
scope, describes a probability weighted cash flow
estimation approach, and established a "primary
asset" approach to determine the cash flow estimation
period for groups of assets and liabilities. SFAS 144
is effective for fiscal years beginning after
December 15, 2001 and interim periods within those
fiscal years, with early application encouraged. The
Company believes that adoption of SFAS 144 will not
have a material impact on its financial position or
results of operations.
RECLASSIFICATIONS Certain prior year balances have been reclassified to
conform with the current year presentation.
10
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. PROPERTY AND Property and equipment consists of the following:
EQUIPMENT
October 31, JANUARY 31, Estimated
2001 2002 Useful lives
--------------------------------------------------------------------------------
Land $ 65,078 $ 65,078
Buildings and improvement 1,660,703 1,660,703 10-20 years
Furniture, fixtures and equipment 1,036,028 989,454 3-5 years
--------------------------------------------------------------------------------
2,761,809 2,715,235
Less: Accumulated depreciation
and amortization 1,188,803 1,231,546
--------------------------------------------------------------------------------
$1,573,006 $1,483,689
================================================================================
2. INVESTMENT IN Investment in affiliates consists of the following:
AFFILIATES
October 31, JANUARY 31,
2001 2002
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AmericasDoctor.com $131,000 $131,000
CORIS 513,750 513,750
Jaspin Interactive 309,000 309,000
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$953,750 $953,750
===============================================================================
The Company initially recorded its investment in
AmericasDoctor.com using the equity method and the
excess of the investment over the Company's share of
AmericasDoctor.com's net assets was recorded as
goodwill, which the Company periodically reviews for
impairment, and was assigned a five-year life. The
investment balance at January 31, 2002 represented
the remaining balance of goodwill. On October 31,
1999, the Company's ownership interest was reduced to
5.3% and further reduced to 2.3% on January 6, 2000
which it remains at January 31, 2002. Effective
November 1, 1999, the Company began to account for
its investment using the cost method.
In the fourth quarter of 2001, Americasdoctor.com
notified the Company that it was terminating its
contract for services. This notification caused the
Company to review the carrying value of this
investment. The Company analyzed current financial
information, discussed liquidity concerns with senior
11
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
management and ultimately determined that the
carrying value of the investment was impaired.
Accordingly, the Company recorded a write-down of the
investment of $508,171. The Company continues to
review the carrying value of this investment as
current financial information becomes available.
In May 2000, the Company purchased 12% of the
outstanding common stock of CORIS of Paris, France
for $400,000 in cash and 10,000 shares of its common
stock with a fair value of $113,750 for a total
investment of $513,750. CORIS provides medical and
non-medical travel assistance and insurance claims
services to the travel industry and insurance clients
through an independent network of 24-hour call
centers in 37 countries. The investment agreement
with CORIS calls for the development of international
internet medical "chat" services and foreign language
chat services in the U.S, using CORIS 24-hour call
centers to provide infrastructure and personnel. It
also calls for CORIS to serve as the international
arm of MAS' application service provider ("ASP")
operations. This investment has been accounted for
using the cost method.
In December 2000, the Company purchased a 15%
ownership interest in Jaspin Interactive, Inc.,
("Jaspin") a privately held company in Dulles,
Virginia. The Company paid $159,000 and issued 40,000
shares of the Company's common stock in exchange for
shares of Jaspin. Jaspin is an Internet and Online
business solutions provider and software development
company. Under the investment agreement, the Company
will have the right to use Jaspin's proprietary
software and will provide ASP and WEB hosting
services to Jaspin. This investment has been
accounted for using the cost method.
3. RELATED PARTY Hall & Associates, P.A., Hall & AmDoc Associates,
TRANSACTIONS P.A., and Hall & DocTalk, Associates, P.A., which are
owned by the Company's Chief Executive Officer,
Thomas M. Hall, M.D., provide medical professional
services to MAS. Amounts paid to these companies
represent fees for professional services rendered and
premiums on professiona1 liability insurance. During
the three months ended January 31, 2001 and 2002, the
Company paid Hall & Associates, P.A., Hall & AmDoc,
Associates, P. A, and Hall & DocTalk, Associates,
P.A., a combined total of $655,567 and $71,912,
respectively, in fees and professional liability
insurance premiums. At January 31, 2002, total
payments due to these affiliates were $225. There
were no amounts payable to these affiliates at
January 31, 2001.
12
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. STOCK WARRANTS In March 2001, the Company issued 35,000 options to
purchase its common stock to an outside consulting
firm as consideration for providing marketing
services for one year. The holder of the warrants may
purchase 35,000 common shares at $3.90 per share.
These options vest ratably over a three-year period.
The Company determined the estimated aggregate fair
value of the options on the date of grant to be
$66,500 based on the Black-Scholes valuation model.
The Company recorded the $66,500 as prepaid marketing
cost and is amortizing this cost to expense over 12
months, the term of the agreement.
There were 240,000 warrants outstanding at January
31, 2001 and 2002.
5. STOCK OPTIONS The Company has a nonqualified stock option plan to
provide key employees and non-employees the
opportunity to participate in equity ownership.
Options may be granted at or below the fair market
value of the stock and have a five-year life
(increased to ten years in December 1999). Options
granted to certain individuals vest ratably over
three years. The Company has reserved 1,000,000
common shares for exercise of these stock options.
The following table summarizes the changes in options
outstanding and the related prices for the shares of
the Company's common stock issued to key employees of
the Company for the nine months ended January 31,
2002:
Exercise
Numbers of Price Per
Shares Share
--------------------------------------------------------------------
Options outstanding October 31,
2001 1,527,820 $0.50 to $10.00
Options exercised (6,000) $0.50
--------------------------------------------------------------------
Options outstanding
January 31, 2002 1,521,820 $0.50 to $10.00
--------------------------------------------------------------------
Weighted average price of
options outstanding $4.96
====================================================================
13
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
If the Company had elected to recognize compensation
based on the fair value at the grant dates for
options issued under the plan described above,
consistent with the method prescribed by SFAS No.
123, net income (loss) applicable to common
shareholders and earning (loss) per share would have
been changed to the pro forma amounts indicated
below:
THREE MONTHS ENDED JANUARY 31, 2001 2002
-------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders:
as reported $(305,293) $(312,785)
pro forma $(337,144) $(451,725)
Basic and diluted earnings (loss) per share:
as reported $ (0.06) $ (0.06)
as pro forma $ (0.07) $ (0.09)
6. INCOME TAXES The Company has estimated its annual effective tax
rate at 0% due to the uncertainty over the level of
earnings in 2002. Also, the Company has net operating
loss carry-forwards of approximately $1.0 million for
income tax reporting purposes for which no income tax
benefit has been recorded due to the uncertainty over
the generation of taxable income in 2002.
7. OPERATING SEGMENTS The Company has four operating segments: Interactive
medical information services, 24/7 medical response
and assistance services, Pharmaceutical kits and
equipment and ASP and WEB hosting services. The
Interactive medical information services segment
provides 24 hour a day medical information to the
public via the internet as well as via the telephone
to individuals, groups and associations. The 24/7
medical response and assistance services segment
provides medical advice to ocean-going vessels and
medical travel assistance services to multi- national
corporations, the international travel industry and
health maintenance organizations. The Pharmaceutical
kits and equipment segment provides customized
pharmaceutical and medical supply kits to the
maritime and aviation industries. In the ASP and WEB
hosting services segment, the Company functions as a
provider of software application services and WEB
hosting services. The Company evaluates performance
based on the operating results of the respective
segments. The accounting policies of the segments are
the same as those described in the summary of
accounting policies.
14
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Three months ended Segment Total
January 31, 2002 Revenues Profit (loss) Assets
-------------------------------------------------------------------------------
24/7 medical response &
assistance services $668,708 $ 132,959 $1,112,071
ASP & WEB 14,836 369 322,243
Interactive medical information
services 7,588 (54,495) 754,149
Pharmaceutical kits and
equipment 169,666 54,111 131,219
Other services 48,105 2,465 12,881
Unallocated corporate expenses - (450,410) -
Unallocated assets - - 1,582,384
-------------------------------------------------------------------------------
$908,903 $(315,001) $3,914,947
===============================================================================
Three months ended Segment Total
January 31, 2001 Revenues Profit (loss) Assets
-------------------------------------------------------------------------------
24/7 medical response &
assistance services $ 990,303 $ 193,280 $1,190,992
ASP & WEB 252,235 244,810 2,888,230
Interactive medical information
services 204,908 19,167 1,460,961
Pharmaceutical kits and
equipment 162,723 60,274 92,691
Other services 14,374 913 11,600
Unallocated corporate expenses - (840,386) -
Unallocated assets - - 2,963,186
-------------------------------------------------------------------------------
$1,624,543 $(321,942) $8,607,660
===============================================================================
15
MEDICAL ADVISORY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. PROPOSED MERGER In November 2001, the Board of Directors approved an
agreement and plan of merger pursuant to which the
Company would acquire the Advanced Wireless Group of
ADS, an affiliate and beneficial owner of 16.6% of
the Company's common stock. As consideration for the
merger, the Company will issue 18,750,000 shares of
common stock to ADS. As a result, ADS will own 82.1%
of the Company's outstanding shares of common stock
and will be able to control the Company's board of
directors. The merger will be accounted for using the
purchase method of accounting. Given ADS's ownership
of the Company at the completion of the merger, ADS
will be considered to be the acquirer for accounting
purposes. Accordingly, this transaction will be
accounted for as a reverse acquisition of the Company
by ADS. The agreement is subject to the approval of
IBM Credit Corporation, a secured lender of ADS and
the Company's stockholders and other closing
conditions.
16
MEDICAL ADVISORY SYSTEMS, INC
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING INFORMATION
This Form 10-QSB contains certain "forward-looking statements" that represent
Medical Advisory Systems, Inc. ("MAS") (AMEX: "DOC"), expectations or beliefs,
including, but not limited to, statements concerning industry performance and
MAS's operations, performance, financial condition, plans, growth and
strategies. Statements contained in this Form 10-QSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "will," "expect,"
"anticipate," "intend," "could," "estimate," "continue" or the negative or other
variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond MAS's control. Actual
results may also differ materially depending on a variety of important factors,
many of which are beyond the control of MAS.
The following selected financial data and Management's Discussion and Analysis
of Financial Conditions and Results of Operations should be read in conjunction
with the Company's first quarter ended January 31, 2001 and 2002 financial
statement and notes thereto, included elsewhere in this Form 10-QSB.
OVERVIEW
During the quarter ended January 31 ("fiscal quarter") 2002, MAS continued with
its efforts to diversify its sources of revenue in order to reduce its
dependence on any one segment as a primary generator of revenue. MAS continues
to explore strategic alliances and investments in entities that can maximize the
profitability of its 24/7 physician-staffed medical call center and the recently
completed ASP facility.
In May 2000, MAS purchased 12% of the outstanding common stock of CORIS for
$400,000 in cash and 10,000 in shares of its common stock with a fair value of
$113,750 for a total investment of $513,750. CORIS provides medical and
non-medical travel assistance and insurance claims services to the travel
industry and insurance clients through an independent network of 24-hour call
centers in 37 countries. The investment agreement with CORIS calls for the
development of international internet medical chat services and foreign language
chat services in the U.S., using CORIS's 24-hour call centers to provide
infrastructure and personnel. It also calls for CORIS to serve as the
international arm of MAS's ASP operations. This investment has been accounted
for using the cost method.
In December 2000, MAS purchased 15.0% of the issued and outstanding common
shares of Jaspin Interactive, Inc., a software and web development company
headquartered in Dulles, Virginia, for $159,000 in cash and 40,000 restricted
shares of MAS's common stock. The alliance provides MAS with the right to use
Jaspin Interactive's proprietary ChatCentre and RoomCentre software, as well as
benefit from upgrades and technical support. MAS uses this software to support
its medical and informational chat services. This alliance did not generate any
revenue or expense for the quarter ended January 31, 2002.
In February 2001, Digital Angel Corporation, a wholly owned subsidiary of
Applied Digital Solutions, Inc, purchased a 16.6% interest in MAS from Mr.
Ronald Pickett, MAS's chairman, his two minor children and Dr. Thomas Hall,
MAS's Chief Executive Officer. Through this transaction, Digital Angel will have
use of MAS's secure, FDA-compliant ASP computer facility for management of
sensitive data and a 24/7 physician-staffed medical call center. MAS and Digital
Angel are currently developing various business and revenue models for the
on-going development and launch of a joint product offering.
On September 6, 2001, MAS announced a new traveler assistance and insurance
service, "Travelers Angel Protection Plan." The product was offered in limited
release in November 2001. This program is being brought to the public by
Travelers Angel Assistance, Inc., a wholly owned subsidiary of MAS. The
Travelers Angel Protection Plan product has a number of protection and
assistance benefits that are beneficial to both U.S. travelers and travel
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MEDICAL ADVISORY SYSTEMS, INC
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
================================================================================
agents. The benefits of this program include: trip cancellation/interruption
insurance, air flight accident insurance, baggage loss insurance, 24/7 telephone
access to U.S. licensed physicians and medical repatriation benefits. An
unrelated third party insurance company is underwriting the insurance component
of the product. Initially, an existing network of travel agents will market the
product. MAS expects to generate sales of the product during fiscal year 2002.
This product did not produce any revenue or expense in the quarter ended January
31, 2002.
In November 2001, the Board of Directors approved an agreement and plan of
merger pursuant to which MAS would acquire the Advanced Wireless Group of ADS,
an affiliate and beneficial owner of 16.6% of the MAS common stock. As
consideration for the merger, the Company will issue 18,750,000 shares of MAS
common stock to ADS. As a result, ADS will own 82.1% of the outstanding shares
of MAS common stock and will be able to control the MAS board of directors and
decide all matters submitted to MAS stockholders for approval. The merger will
be accounted for using the purchase method of accounting as a reverse
acquisition of MAS by ADS. The agreement is subject to the approval of IBM
Credit Corporation, a secured lender of ADS and the MAS's stockholders and other
closing conditions. The Securities and Exchange Commission approved proxy
materials, concerning the proposed merger with ADS, for mailing on February 14,
2002. MAS will hold a special meeting of stockholders on March 18, 2002 to
ratify the Agreement and Plan of Merger.
RESULTS OF OPERATIONS
NET LOSS
The net loss for the first quarter of 2002 was $312,785 compared to a net loss
of $305,293 for the same period in fiscal year 2001. The loss of the eRT
contract and AmericasDoctor.com program was primarily responsible for the
decline in revenues for the first quarter of fiscal 2002 as compared to the same
period in fiscal 2001. However, this reduction in revenue was nearly offset by a
corresponding reduction in operating expenses that resulted from a decrease in
salaries and wages, non-cash management fees and depreciation and amortization
expenses.
24/7 MEDICAL RESPONSE AND ASSISTANCE SERVICES
Revenues decreased 32.4% from $990,000 for the first quarter of fiscal year 2001
to $669,000 for the same period in fiscal year 2002. Operating expenses
decreased 34.9% from $797,000 for the first quarter of fiscal year 2001 to
$519,000 for the same period in fiscal year 2002. For that same period, gross
profits decreased 31.1% from $193,000 in fiscal year 2001 to $133,000 in fiscal
year 2002. The decrease in revenue is attributable to an overall decrease in
travel assistance cases, resulting from the significant decline in travel since
the attacks on September 11, 2001. The corresponding decrease in operating
expenses is attributable to a decrease in the third party expenses that MAS pays
in connection with the management of travel assistance cases, ultimately billed
back to customers. The decrease in gross profit is due primarily to an increase
in costs of clinic services program and salaries and wages.
ASP AND WEB HOSTING SERVICES
Revenues decreased 94.0% from $252,000 for the first quarter of fiscal year 2001
to $15,000 for the same period in fiscal year 2002. Operating expenses increased
100.0% from $7,000 for the first quarter in fiscal year 2001 to $14,000 for the
same period in fiscal year 2002. Gross profits decreased from $245,000 for the
first quarter fiscal 2001 to a break-even for the same period in fiscal 2002.
Revenues decreased due to a loss of service revenue from eResearch Technologies
(eRT), MAS's primary customer for this service. During the third quarter of
fiscal year 2001, eRT insisted on renegotiating the monthly fee under the
service agreement originally executed in March 2000. Ultimately, the service
contract was cancelled in the fourth quarter, as the parties were unable to
agree on a revised fee structure. As a result, MAS did not recognize any revenue
from eRT in the first quarter of fiscal year 2002. Consequently, MAS, based on a
further review of undiscounted cash flows, including the estimated fair market
value of certain long-lived assets, recorded an impairment charge of
approximately $32,000 in the first quarter of fiscal year 2002.
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MEDICAL ADVISORY SYSTEMS, INC
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
================================================================================
INTERACTIVE MEDICAL INFORMATION SERVICES
Revenues decreased 96.6% from $205,000 in the first quarter of fiscal year 2001
to $7,000 for the same period in fiscal year 2002. Operating expenses decreased
96.8% from $186,000 in the first quarter of fiscal year 2001 to $6,000 for the
same period in fiscal year 2002. Gross profits were decreased 384.2% from
$19,000 for the first quarter in fiscal year 2001 to a loss of $54,000 for the
same period in fiscal year 2002. This segment includes the real-time internet
chat service (DocChat) and the phone-based DocTalk service. Nearly all revenue
and expenses in this segment relate to the DocChat program. MAS introduced its
real time online internet chat service in the fourth quarter of 1998. MAS
provided this product under contract exclusively to AmericasDoctor.com. Upon the
introduction of this service, MAS experienced growth in the volume of its real
time online internet chats. Beginning in the second quarter of fiscal year 2000,
the volume of real time online internet chats began to decline due primarily to
the elimination, by AmericasDoctor.com, of free unlimited consumer access to the
chat feature of the AmericasDoctor.com website. The volume of real time online
internet chats continued to decline from that time until all chats ceased when
AmericasDoctor.com cancelled the call center agreement in late September 2001
after negotiations to continue the agreement failed. As AmericasDoctor.com was
the primary customer under this program, MAS does not expect to generate any
significant revenue or expenses from real time internet chat services in 2002.
MAS recently launched Travelers Angel, its new travel assistance product. This
product includes an Interactive Medical Information service component (DocTalk)
in every policy sold. Therefore, revenue in this segment is expected to grow
based on the success of the Travelers Angel program.
PHARMACEUTICAL KITS AND SERVICES
Revenues increased 4.3% from $163,000 for the first quarter of fiscal year 2001
to $170,000 for the same period in fiscal year 2002. Operating expenses
increased by 12.6% from $103,000 for the first quarter of fiscal year 2001 to
$116,000 for the same period in fiscal year 2002. For that same period gross
profits decreased by 10% from $60,000 in fiscal year 2001 to $54,000 in fiscal
year 2002. The continued growth of the revenue in the pharmaceutical segment is
the result of an expanding customer base. However, the disparity between the
increase in revenues and expenses, in this segment, is primarily the result of
an ordinary increase in salaries and wages.
OTHER
Revenues increased 242.9% from $14,000 for the first quarter of 2001 to $48,000
for the first quarter of 2002. Operating expenses increased 138.5% from $13,000
for the first quarter of 2001 to $31,000 for the first quarter of 2002. Gross
profits increased from $1,000 for the first quarter of 2001 to $2,000 for the
same period in fiscal year 2002. This segment consists of the training program
and the primary laser care clinic. The increase in gross profits is due
primarily to an increase in the number of participants in the training programs.
SALARIES AND WAGES
Salaries and wages decreased 7.0% from $273,000 for the first quarter of fiscal
2001 to $254,000 for the same period in fiscal year 2002. The decrease is due to
reduction in staffing and contract personnel related to the cancellation of the
eRT\ASP contract.
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MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased 46.6% from $363,000 for
the first quarter of fiscal year 2001 to $194,000 for the same period in fiscal
year 2002. This is due primarily to a reduction of investor relations expenses
and non-cash professional compensation expense related to options and warrants
issued to third parties in exchange for services.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased 71.6% from $204,000 for the first
quarter of fiscal year 2001 to $58,000 for the same period in fiscal year 2002.
This reduction is due to the elimination of recurring depreciation and
amortization caused by an impairment of long-lived assets recorded in the fourth
quarter of fiscal 2001.
OTHER INCOME AND EXPENSE
Interest income decreased 87.5% from $32,000 in the first quarter of fiscal 2001
to $4,000 for that same period in fiscal 2002. This was primarily due to a
reduction in MAS's cash accounts, which are MAS's primary investment vehicle.
Interest expense also decreased from $15,000 for the first quarter of fiscal
year 2001 to $2,000 for the same period in fiscal year 2002.
INCOME TAX PROVISION
MAS did not record an income tax provision or benefit in the first quarter of
fiscal year 2001 nor 2002 due to continuing losses. MAS maintains a valuation
allowance for its entire deferred tax assets due to the uncertainty related to
the generation of taxable income in fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities totaled $617,000 during the first quarter of
fiscal year 2002, and was due primarily to the net loss of $313,000 as well as a
net outflow of $377,000 from the changes in working capital. The significant
changes in working capital were a decrease of $430,000 in accounts payable and
accrued expenses in addition to an increase of $136,000 in prepaid expenses
offset by a decrease of $193,000 in accounts receivable. There was no investment
during this period but cash outflows from financing activities was $8,000, due
primarily to principal debt repayments.
MAS currently has a $500,000 credit facility agreement with a bank. At January
31, 2002 there was no outstanding balance. The agreement extends through March
2002 and an annual renewal is expected. MAS believes that current levels of cash
($763,693 at January 31, 2002) together with cash from operations and its
existing credit facilities will be sufficient to meet its working capital
requirements for the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS No. 141). SFAS No. 141 changed the accounting
for business combinations, requiring that all business combinations be accounted
for using the purchase method and that intangible assets be recognized as assets
apart from goodwill if they arise from contractual or other legal rights, or if
they are separable or capable of being separated from the acquired entity and
sold, transferred, licensed, rented or exchanged. SFAS No. 141 is effective for
all business combinations initiated after June 30, 2001.
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MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
================================================================================
In June 2001, the FASB issued Statement of Financial Standards No. 142,
"Accounting for Goodwill" (SFAS 142). SFAS 142 establishes accounting standards
for existing goodwill related to purchase business combinations. Under SFAS 142,
MAS will discontinue the periodic amortization of goodwill effective with
adoption of the SFAS 142. Also, MAS will have to test any remaining goodwill for
possible impairment within six months of adopting SFAS 142, and periodically
thereafter, based on new valuation criteria set forth in the statement. Further,
SFAS 142 has new criteria for purchase price allocation. SFAS 142 became
effective January 1, 2002. If the proposed merger is completed, the transaction
would be subject to the requirements of SFAS 141 and 142.
In August 2001, the FASB approved Statement on Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 supersedes SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of the Accounting Principles Board Opinion No 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 establishes a single accounting model, based
on the framework established in SFAS 121, for long-lived assets to be disposed
of by sale and resolved significant implementation issues related to SFAS 121.
SFAS 144 retains the requirements of SFAS 121 to recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and measure an impairment loss as the difference between
the carrying amount and fair value of the asset. SFAS 144 excludes goodwill from
its scope, describes a probability-weighted cash flow estimation approach, and
establishes a "primary-asset" approach to determine the cash flow estimation
period for groups of assets and liabilities. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. MAS believes the adoption of SFAS 144
will not have a material impact on its financial position or results of
operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Silva, et al. v. Customized Services Administrators, Incorporated, dba CSA
Travel Protection, Inc. et al., No. CV798528 (Santa Clara County Superior Court)
On May 29, 2001, Janet Silva, individually and as Guardian AD LITEM for Jonathan
Silva, a minor, and the Estate of Clarence William Silva, Jr. (collectively,
"Plaintiffs") filed suit against Customized Services Administrators,
Incorporated ("CSA"), Pricesmart, Inc. ("Pricesmart"), Commercial Union
Insurance Company ("Commercial Union"), CGU Insurance Group, and the Company
(collectively the "Defendants") in the Superior Court of the State of California
in and for the County of Santa Clara. The allegations of the complaint arise
from a vacation guarantee insurance policy (the "Insurance Contract") allegedly
purchased by Plaintiffs from Defendants on March 6, 2000. The complaint alleges,
among other things, that Defendants breached the Insurance Contract, defrauded
Plaintiffs, acted in bad faith, engaged in deceptive and unlawful business
practices, resulting in the wrongful death of Clarence William Silva, Jr. (the
"Deceased") and the intentional infliction of emotional distress on Plaintiffs.
The complaint seeks the cost of funeral and burial expenses of the Deceased and
amounts constituting the loss of financial support of the Deceased, general
damages, attorney's fees and costs, and exemplary damages.
CSA has filed a cross-claim against the Company alleging that the Company should
be held liable for any liability that CSA may have to Plaintiffs. The Company
has denied the allegations of the complaint and the CSA cross-claim and is
vigorously contesting all aspects of this action.
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ITEM 2. CHANGE IN SECURITIES
NONE
ITEM 3. DEFAULTS FROM SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
NONE
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