10QSB 1 0001.txt 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, 2001 ________________ 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 _____________ MEDICAL ADVISORY SYSTEMS, INC. ________________ (Name of small business issuer in its charter) Delaware 52-1233960 -------------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 8050 Southern Maryland Blvd., Owings, MD 20736 ----------------------------------------- ------------ (Address of principal executive offices) (Zip Code) (301) 855-8070 -------------- 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: $1,624,543. Common Stock, $.005 par value 5,161,230 Shares of Common Stock Outstanding as of January 31, 2001 Item 1 FINANCIAL STATEMENTS Medical Advisory Systems, Inc. Consolidated Balance Sheets October 31, January 31, 2000 2001 Assets Current Cash and cash equivalents $ 2,615,842 $ 2,268,410 Accounts receivable, less allowance for doubtful accounts of $115,542 and $90,000 482,202 459,725 Inventories 46,526 48,718 Prepaid expenses and other 41,021 18,391 ----------- ----------- Total current assets 3,185,591 2,795,244 Property and equipment, at cost, less accumulated depreciation and amortization (Note 1) 1,620,847 1,730,378 Purchased software, at cost, less accumulated amortization of $317,123 and $454,246 2,408,353 2,411,230 Investment in affiliates (Note 2) 1,152,921 1,461,921 Deferred investment advisory costs (Note 4) 209,926 175,884 Intangible assets, net 36,390 33,003 ----------- ----------- $ 8,614,028 $ 8,607,660 See accompanying summary of accounting policies and notes to consolidated financial statements. -2- Medical Advisory Systems, Inc. Consolidated Balance Sheets October 31, January 31, 2000 2001 Liabilities and Stockholders' equity Current Current maturities of long-term debt $ 3,719 $ 3,826 Current maturities of capital lease obligations 29,428 30,170 Accounts payable and accrued expenses 264,934 424,259 Deferred income 21,699 19,283 ----------- ----------- Total current liabilities 319,780 477,538 ----------- ----------- Long-term debt 126,661 125,654 Capital lease obligations 68,424 60,598 ----------- ----------- Total liabilities 514,865 663,790 ----------- ----------- Commitments and contingencies Stockholders' equity (Notes 3, 4 and 5) Common stock; $.005 par value; 10,000,000 shares authorized; 5,161,230 and 4,889,129 shares issued and outstanding 25,605 25,805 Additional paid-in capital 14,437,732 14,587,532 Accumulated deficit (6,320,591) (6,625,884) Treasury stock, at cost (50,000 shares) (43,583) (43,583) ----------- ----------- Total stockholders' equity 8,099,163 7,943,870 ----------- ----------- $ 8,614,028 $ 8,607,660 =========== =========== 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, 2000 2001 Revenue: 24/7 medical response and assistance services $ 318,891 $ 990,303 ASP and WEB hosting services - 252,235 Interactive medical information services 2,235,429 204,908 Pharmaceutical kits and equipment 153,382 162,723 Other services 11,243 14,374 ----------- ----------- Total Revenue 2,718,945 1,624,543 ----------- ----------- Operating Expenses: 24/7 medical response and assistance services 152,228 797,023 ASP and WEB hosting services - 7,425 Interactive medical information services 2,023,825 185,741 Pharmaceutical kits and equipment 110,039 102,449 Other services 17,228 13,461 Salaries and wages 209,645 273,290 Other selling, general and administrative (Note 4) 605,006 362,998 Depreciation & amortization 44,914 204,098 ----------- ----------- Total Operating Expenses 3,162,885 1,946,485 ----------- ----------- Operating loss (443,940) (321,942) Other Income/(Expense): Interest income 7,139 31,774 Other income 8,586 26 Interest expense (3,935) (15,151) ----------- ----------- Total Other Income/(Expense) 11,790 16,649 ----------- ----------- Net loss $ (432,150) $ (305,293) =========== =========== Basic and diluted loss per share $ (0.10) $ (0.06) Weighted average shares outstanding 4,430,717 4,889,129 =========== ========== See accompanying summary of accounting policies and notes to consolidated financial statements. -4- Medical Advisory Systems, Inc. Consolidated Statements of Cash Flows Three months ended January 31, 2000 2001 Cash flows from operating activities: Net loss $ (432,150) $ (305,293) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 44,914 204,098 Provision for doubtful accounts 7,500 (33,014) Compensation expense for options and warrants 319,189 34,042 Changes in assets and liabilities: Accounts receivable (388,368) 55,491 Inventory (10,454) (2,192) Prepaid expenses and other 9,151 22,630 Accounts payable and accrued expenses 3,344 159,325 Deferred income (3,864) (2,416) ----------- ----------- Net cash (used in) provided by operating activities (450,738) 132,671 ----------- ----------- Cash flows from investing activities: Investment in equity affiliate - (159,000) Purchase of property and equipment (39,946) (313,119) ----------- ----------- Net cash used in investing activities (39,946) (472,119) ----------- ----------- Cash flows from financing activities Repayment of loans to banks and related parties (8,138) (7,984) ----------- ----------- Net cash used in financing activities (8,138) (7,984) ----------- ----------- Net decrease in cash (498,822) (347,432) Cash at beginning of period 931,949 2,615,842 ----------- ----------- Cash at end of the period $433,127 $ 2,268,410 =========== =========== See accompanying summary of accounting policies and notes to consolidated financial statements -5- Medical Advisory Systems, Inc. Summary of Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Medical Advisory Systems, Inc. (MAS or the Company) and its wholly-owned subsidiaries, MAS Laboratories,Inc., Doc-Talk, Inc., and TLC., Inc. Significant intercompany transactions have been eliminated in consolidation. Effective November 1, 1998, the Company began using the equity method of accounting for its investment in AmericasDoctor.com. The Company determined that the equity method was appropriate based on a combination of its strict ownership percentage, which increased from 8% in October 1998 to 13.5% in April 1999, coupled with the ability to have a representative on the board of directors. Under the equity method, original investments are recorded at cost, increased for subsequent investments in and advances to the investee, and adjusted for the Company's share of undistributed earnings and losses of the investee. The Company's ownership interest was reduced to 5.3% on October 31, 1999 and further reduced to 2.3% on January 6, 2000. Effective November 1, 1999, the Company discontinued using the equity method to account for its investment in AmericasDoctor.com and began to use the cost method. 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. ("Jaspin"). 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) primarily to the clinical research industry, 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 8. -6- Risks and Uncertainties The Company provides medical information and assistance services and related products and services through various methods of distribution. A portion of the Company's revenues result from providing medical information to the public via the internet under a contract with AmericasDoctor.com. AmericasDoctor.com has an exclusive contract with America Online (AOL) to be an anchor tenant on the AOL Health Page. Certain AOL subscribers can "chat" with the Company's doctors located in its call center, which is staffed 24-hours-a-day. The Company has amended its contract with AmericasDoctor.com to allow it to market its internet chat service to other foreign and domestic customers. The Company believes that the ability to market to new customers worldwide could ultimately lead to significantly greater internet chat revenue. During fiscal 2000, the Company negotiated new strategic alliances in the 24/7 medical response and assistance and the application service provider services segments. The Company plans to develop new products and services in fiscal 2001 that should, if successful, replace the revenue lost after amendment of the AmericasDoctor.com agreement. 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 Credit Risk Financial instruments and related items that 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 receivables in determining its allowance for doubtful accounts. Revenues from AmericasDoctor.com, Inc. were $199,119 and $2,233,972 or 12% and 82% of consolidated revenues for the three months ended January 31, 2001 and 2000, respectively. -7- 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 $2,210,000 on January 31, 2001. 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. 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 Advisory Costs Deferred investment advisory and public relations 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. Purchased Software The Company capitalizes the cost of purchased software that is ready for service. These direct costs are amortized using the straight-line method over five years which does not exceed the expected life of the software. The Company regularly reviews the carrying value of the software and a loss is recognized when the value of the estimated undiscounted cash flow benefit related to the asset falls below the unamortized cost. Impairment of Long-Lived Assets Long-lived assets and certain identifiable 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. -8- 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. 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 diluted earnings per share because they are antidilutive. Comprehensive Income Statement of Financial Accounting Standards No. 130, "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 adopted SFAS 130 during the first quarter of fiscal 1999 and has no items of comprehensive income to report. -9- Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters beginning after June 15, 2000 and requires application prospectively. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 will have no impact on its financial position or results of operations. In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25" FIN 44 clarifies the application of APB No. 25. FIN 44 clarifies the application of APB No. 25 for (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 did not have an affect on the Company's financial statements but may impact the accounting for grants or awards in future periods. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 that summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The staff Accounting Bulletin is effective for the fiscal year beginning November 1, 2000. The initial adoption of this guidance is not anticipated to have a material impact on the Company's results of operations or financial position, however, the guidance may impact the way in which the Company will account for future transactions. Reclassifications Certain prior year balances have been reclassified to conform to the current year presentation. -10- Notes to Consilidated Financial Statements 1. Property and Equipment Property and equipment consists of the following: October 31, January 31, Estimated 2000 2001 Useful lives Land $ 65,078 $ 65,078 Buildings and improvement 955,802 1,472,428 10-20 years Furniture, fixtures and equipment 1,212,782 1,244,259 3-5 years Construction in progress 374,984 - 20 years ----------- ----------- 2,608,646 2,781,765 Less: Accumulated depreciation and amortization 987,799 1,051,387 ----------- ----------- $ 1,620,847 $ 1,730,378 =========== =========== 2. Investment in Affiliates Investment in affiliates consists of the following: October 31, January 31, 2000 2001 AmericasDoctor.com $ 639,171 $ 639,171 CORIS 513,750 513,750 Jaspin Interactive - 309,000 ----------- ----------- $ 1,152,921 $ 1,461,921 =========== =========== The Company's remaining investment in AmericasDoctor.com represents goodwill that has been assigned a five-year life. On October 31, 1999, the Company's ownership interest was reduced to 5.3% and further reduced to 2.3% on January 6, 2000. Effective November 1, 1999, the Company began to account for its investment using the cost method. -11- 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, with a fair value of $150,000, for a total investment of $309,000 in exchange for shares. 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. 3. Related Party Transactions Hall & Associates, P.A., Hall & AmDoc, Associates, 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 professional liability insurance. During the three months ended January 31, 2000 and 2001, the Company paid Hall & Associates, P.A., Hall & AmDoc, Associates, P.A. and Hall & DocTalk, Associates, P.A., a combined total of $185,582 and $655,567, respectively, in fees and professional liability insurance premiums. There were no amounts payable to these affiliates at either January 31, 2000 or 2001. -12- During 2000 the Company began construction of a new technology facility (See Note 1). The Company entered into an agreement with a contractor, whose owners are related to the Company's President and Chairman of the Board, to develop and construct the building. The amount of the contract, together with approved change orders was approximately $670,000 which management believes approximates the market value for the services rendered. 4. Stockholder's Equity In January 2000, the Company issued 95,180 shares of common stock in connection with the exercise of previously recorded warrants issued to third parties. In December 2000, the Company issued 40,000 shares of common stock as part of the purchase price for a 15% interest in a privately-held company (see Note 2). 5. Stock Warrants In May 2000, the Company issued 75,000 warrants to purchase its common stock to an investment-banking firm as consideration for providing investment advisory services for two years. The holder of the warrants may purchase 75,000 common shares at $10.50 per share, subject to adjustment as specified in the warrant agreement, for up to one year. There are no vesting requirements associated with these warrants. The Company determined the estimated aggregate fair value of these warrants on the date of grant to be $272,336 based on the Black-Scholes valuation model. The Company recorded the $272,336 as deferred investment advisory fees and is amortizing this cost to expenses over 24 months, the term of the agreement. 6. 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. 7. Income Taxes The Company has estimated its annual effective tax rate at 0% due to the uncertainty over the level of earnings in 2001. Also, the Company has net operating loss carryforwards 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 2001. -13- 8. 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. The ASP and WEB hosting services segment allows the Company to function as an application service provider for a clinical software research provider and to provide other WEB hosting services. In 2000, the Company changed its business to offer both Interactive Internet chats and telephone chats to the same customer base using the same physicians. Accordingly, the Company views this as one segment and has reclassified prior year amounts to be comparable with the current quarter. 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- 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 Three months ended Segment Total January 31, 2000 Revenues Profit(loss) Assets 24/7 medical response & assistance services $ 318,891 $ 166,663 $ 498,633 Interactive medical information services 2,235,429 211,604 1,631,717 Pharmaceutical kits and equipment 153,382 43,343 154,149 Other services 11,243 (5,985) - Unallocated corporate expenses - (849,565) - Unallocated assets - - 1,175,478 ----------- ----------- ----------- $ 2,718,945 $ (443,940) $ 3,459,977 =========== =========== =========== -15- 9. Subsequent Event In February 2001, the Company announced completion of Digital Angel Corporation's purchase of a 16.5% interest in Medical Advisory Systems from certain members of senior management. In addition, the Company expanded the Board of Directors from five to seven members. Applied Digital Solutions, Inc., parent company of Digital Angel Corporation, has the authority to name four of the seven directors that give it effective control of the Company's Board. The Company expects to generate revenue for its ASP and 24/7 medical response segments through a proposed service agreement with Digital Angel Corporation. As part of this agreement the Company would provide a computer hosting facility for management of sensitive data and a full-time physician- staffed medical call center for use by Digital Angel Corporation's customers and end-users. Applied Digital Solutions is a publicly held information and solutions company headquartered in Palm Beach, Florida. -16- Medical Advisory Systems, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Forward-Looking Information The Private Securities Litigation Reform Act of 1995 provides "safe harbor" for certain forward-looking statements made by the Company in its disclosures to the public. There is certain information contained herein, in the Company's press releases and in oral statements made by authorized officers of the Company that are forward-looking statements as defined by such Act. When used herein in the Company's press releases and in such oral statements, the words "estimate", "project", "anticipate", "expect", "intend", "believe", "plan", and similar expressions are intended to identify forward-looking statements. 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 interim financial statements and notes thereto, included elsewhere in this Form 10QSB. In fiscal 2000, the Company took steps to diversify the sources of revenue to reduce its dependence on the interactive medical information segment as its primary generator of revenue. The Company 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. The current status of this diversification effort is set forth below. In October 2000, the Company announced plans for a new strategic relationship with Drkoop.com, Inc., a leading Internet health network that provides e- health solutions for business and individual customers worldwide. As part of this relationship the Company and Drkoop.com, Inc. will jointly develop and promote products and services. The goal of this relationship is to leverage the primary assets of both companies, adding new lines of services to the drkoop.com network and increasing potential revenue streams for both companies. The Company and Drkoop.com are working to finalize an agreement to provide these new products and services. In December 2000, the Company purchased 15% of the issued and outstanding common shares of Jaspin Interactive, Inc. (Jaspin). Jaspin is a software and web development company headquartered in Dulles, Virginia. The purchase price of the shares was $159,000 and 40,000 restricted shares of the Company's common stock. The alliance will provide the Company with the right to use Jaspin's proprietary ChatCentre and RoomCentre software, including upgrades and support. Further, as part of a separate agreement, the Company will provide ASP and hosting services to Jaspin for a fee in the near future. In January 2001, the Company completed construction of the new building that was started in March of 2000. Construction was completed one month ahead of schedule. The building houses the Company's new Technology Center and expanded pharmacy. Included in the Technology center is a new FDA and industry compliant ASP and web hosting center. In February 2001, Digital Angel Corporation, a wholly owned subsidiary of Applied Digital Solutions, Inc. purchased a 16.5% interest in the Company from certain members of senior management. In conjunction with this transaction, the Company has expanded the number of members to its Board from five to seven. Two members of the previous board resigned, and new members Mercedes Walton, David A. Loppert, Dr. Richard Seeling and Dr. Paul Sanberg were named. Through this transaction Digital Angel Corporation will have access to the Company's secure, FDA-compliant ASP computer facility for management of sensitive data and a 24/7 physician-staffed medical call center for use by its customers and product end-users. At this time the Company and Digital Angel Corporation are developing various business and revenue models for the on-going development and launch of a joint product offering. -17- NET LOSS The Company's net loss for the first three months of FY 2001 was $305,293 compared to a net loss of $432,150 for the comparable period in FY 2000. The decrease in the net loss is attributed primarily to operating income generated by the ASP segment, which was introduced in the second quarter of fiscal 2000, and an increase in operating income for the 24/7 medical response & assistance services segment. The increased income was offset by higher amortization expense associated with the deferred investment advisory fees, increased depreciation associated with the purchase of eResearch Technology (eRT) software and increased payroll related to new technology personnel and salary increases. 24/7 MEDICAL RESPONSE AND ASSISTANCE SERVICES Revenues increased 211% from $318,891 in the first quarter of 2000 to $990,303 for the same period in fiscal 2001. Operating expenses increased 424% from $152,228 in the first quarter of 2000 to $797,023 in the first quarter of 2001. Operating income increased from $166,663 in the first quarter of 2000 to $193,280 in the first quarter of 2001. This 16% increase in operating income is primarily attributed to an increase in assistance services. The Company charges a fixed fee per case to process an assistance claim and passes the external expenses through to its clients. ASP and WEB HOSTING SERVICES ASP and WEB Hosting Services had revenues of $252,235, costs of $7,425 and operating income of $244,810 in fiscal 2001. This program began in April 2000 and therefore did not have revenues or expenses in the first quarter of 2000. The revenue in this segment is attributed primarily to a service agreement with eResearch Technology (eRT). Under this agreement the Company is currently paid a flat fee for providing ASP and hosting services. The Company began providing these services to eRT in April 2000. In February 2001, the Company began to offer its ASP and web hosting services to markets outside of the United States. In late February 2001, the Company signed an agreement with its first international ASP client. This agreement, signed with a leading provider of clinical psychology and employee assistance services to the French Market, is to provide web development and Internet Chat ASP services. Under this agreement, the Company will provide the client with 24-hour access to the chat application software housed on servers in the Company's ASP hosting center in Owings, Maryland. INTERACTIVE MEDICAL INFORMATION SERVICES Revenues decreased 91% from $2,235,429 in the first quarter of 2000 to $204,908 in the first quarter of 2001. Operating expenses decreased 91% from $2,023,825 in the first quarter of 2000 to $185,741 in the first quarter of 2001. Operating income decreased 91% from $211,604 in the first quarter of 2000 to $19,167 in the first quarter of 2001. The decline in Interactive Medical Information Services is primarily attributed to the reduction in the volume of real time internet chats owing to the elimination, by AmericasDoctor.com, of unlimited, free to the consumer access to the chat feature of the AmericasDoctor.com website. Further, in September 2000, the Company and Americasdoctor.com amended their Call Center Service Agreement. Under the amended agreement, MAS calculates revenue based on a fixed fee per -18- Internet chat plus a monthly access fee compared to a cost plus 20% fee for Internet chats under the previous agreement. Additionally, as part of the amended Call Center Agreement, the Company has negotiated better placement of the Doc-Talk service link on the AmericasDoctor.com website and a release from the exclusivity restrictions of the original agreement. With this release the Company is now afforded the opportunity to pursue offering real- time, physician-based, Internet chat domestically to any customer. Effective late March 2001, MAS began "live" testing of the Doc-talk service on the DrKoop.com website. This on-going test is undertaken as part of a strategic relationship formed between the Company and DrKoop.com in late October of 2000. DrKoop.com is a leading Internet health network providing information to consumers worldwide. In an effort to offset the decrease in operating income from this segment, MAS has significantly reduced operating expenses and consolidated personnel resources, including physicians, from the real time interactive chat and Doc- Talk programs. These two programs, now merged as one, are known as Interactive Medical Information Services. At this time Medical Advisory Systems, Inc. expects the current Interactive Medical Information Services revenue stream and associated costs to remain constant at the present level. PHARMACEUTICAL KITS AND SERVICES Revenues increased $9,341 or 6% from $153,382 in the first quarter of 2000 to $162,723 in the first quarter of 2001. Operating expenses were reduced by $7,590 or 7% from $110,039 in the first quarter of 2000 to $102,449 in the first quarter of 2001. Operating income increased by 39% or $16,931 from $43,343 in fiscal 2000 to $60,274 in fiscal 2001. The growth of this segment is attributed to an expanded customer base and increased efficiency of operations. The pharmacy began operating out of the new facility in early January 2001. The new space is expected to increase the efficiency of on- going pharmacy operations. OTHER Revenues from other health-related services, which consists of the medical responder training programs and the medical clinic, increased 28% from $11,243 in the first quarter of 2000 to $14,374 in the first quarter of 2001. Expenses decreased by 22% from $17,228 in the first quarter of 2000 to $13,461 in the first quarter of 2001. The net income increased to $913 in the first quarter of 2001, as compared to a loss of $5,985 in the first quarter of 2000. Net income is expected to increase throughout the year as a result of the Company's recent approval, by the United States Coast Guard, of its expanded "Response to Illness and Injury at Sea" training course. SALARIES AND WAGES Salaries and wages increased $63,645 or 30% from $209,645 in the first quarter of 2000 to $273,290 in the first quarter of 2001. This increase is attributed to the hiring of additional key personnel and regular and ordinary increases in compensation levels of existing personnel. -19- SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses decreased 40% from $605,006 in the first quarter of 2000 to $362,998 in the first quarter of 2001. The decrease is due primarily to a decrease in non-cash compensation expense related to options and warrants issued to third parties in exchange for services. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased from $44,914 in the first quarter of 2000 to $204,098 in the first quarter of 2001, an increase of 354%. This increase is due primarily to the amortization of new software and hardware purchases related to the Company's ASP and WEB Hosting Services. INCOME TAX BENEFIT/EXPENSE The Company did not record an income tax provision or benefit for the three months ended January 31, 2000 and 2001 due to the net loss for the periods. The Company has provided a valuation allowance related to the deferred tax asset represented by the net operating losses due to the uncertainty surrounding the amount of taxable income to be generated in fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities increased to $132,671 in fiscal 2001 compared to cash used in operations of $450,738 in fiscal 2000. This increase is due to a reduction in the net loss and more efficient collection of accounts receivable. Cash used by investing activities relates to capital expenditures for construction of the new building, as well as, the investment in Jaspin completed in December 2000. The Company currently has a $500,000 credit agreement with a local financial institution. As of January 31, 2001 there is no outstanding balance. The agreement currently extends through October 31, 2001. The Company has a strong cash position as of January 31, 2001 and relatively little debt. Management believes the Company's cash flow from operations will continue to improve throughout fiscal 2001 as it works to diversify its sources of operating revenue. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters beginning after June 15, 2000 and requires application prospectively. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 will have no impact on its financial position or results of operations. -20- In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25" FIN 44 clarifies the application of APB No. 25. FIN 44 clarifies the application of APB No. 25 for (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 did not have an affect on the Company's financial statements but may impact the accounting for grants or awards in future periods. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 that summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The staff Accounting Bulletin is effective for the fiscal year beginning November 1, 2000. The initial adoption of this guidance is not anticipated to have a material impact on the Company's results of operations or financial position, however, the guidance may impact the way in which the Company will account for future transactions. Part II - OTHER INFORMATION Item 1. Legal Proceedings NONE Item 2. Changes in Securities In December 2000 the Company purchased 15% of the issued and outstanding common shares of Jaspin Interactive, Inc. The purchase price of the shares included 40,000 restricted shares of the Company's common stock. 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 SIGNATURES Pursuant to 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 ADVISORY SYSTEMS, INC. Registrant Date: 03/23/2001 By: /s/ Dale L. Hutchins, Ph.D. ---------- --------------------------------- Dale L. Hutchins, Ph.D. Executive Vice President/ Chief Operating Officer -21-