-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RzeOSToz181aSS6cDmJeQS8AVFBom1K0F0Ju5wsLd2+uAGhsSpfBpp6iTAlLZ/zM q1KOGqWdv+4wSEBJni6YqA== 0000771252-99-000001.txt : 19990201 0000771252-99-000001.hdr.sgml : 19990201 ACCESSION NUMBER: 0000771252-99-000001 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL ADVISORY SYSTEMS INC CENTRAL INDEX KEY: 0000771252 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 521233960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 002-98314-W FILM NUMBER: 99516963 BUSINESS ADDRESS: STREET 1: 8050 SOUTHERN MARYLAND BLVD CITY: OWINGS STATE: MD ZIP: 20736 BUSINESS PHONE: 3018558070 MAIL ADDRESS: STREET 1: 8050 SOUTHERN MARYLAND BLVD CITY: OWINGS STATE: MD ZIP: 20736 10KSB 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended October 31, 1998 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) Issuer's Telephone Number (301)855-8070 Securities registered pursuant to Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Exchange Act: None (Title of class) (Title of class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment of this Form 10-KSB. [ X ] State issuer's revenues for its most recent fiscal year: $3,514,135 for the fiscal year ending October 31, 1998. State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act): $13,601,948 based on stock closing price on January 21, 1999. 3,819,938 Shares of Common Stock ($ 0.005 par value per share) were outstanding at December 31, 1998. PART I Item 1. Description of Business. Medical Advisory Systems, Inc. (the "Company" or "MAS") is a Delaware corporation incorporated on December 1, 1981, with its principal office located in Owings, Maryland. Its mailing address is: 8050 Southern Maryland Blvd., Owings, Maryland 20736 (telephone: 301-855-8070). The Company provides medical assistance products and services. The products and services offered by the Company include: * 24-hour-a-day medical information to the public via the Internet under an exclusive contract with America's Doctor, Inc., which provides real-time live online chats between physicians and Internet users. * 24-hour-a-day medical information to individuals, groups, and associations via 800/900 telephone numbers. * 24-hour-a-day medical advice to ships at sea through a worldwide telecommunications system, and ancillary services including training programs, medical records maintenance, and medical cost containment services; * 24-hour-a-day call center services and assistance to Health Maintenance Organizations (HMO's), multi-national corporations and the international travel industry, and; * customized pharmaceutical and medical supply kits which are sold to the maritime and aviation industries. The Company provides services from its 24 hour-a-day Call Center located in Owings, Maryland. The Company utilizes an agent in Hong Kong to maintain relations with maritime customers. The Company participates in a world-wide network of 24-hour call centers in 24 countries and utilizes other centers in the network to provide certain services outside the U.S. a. History. The Company began operations at the beginning of 1982 to take advantage of the privatization opportunity created by the U.S. Government's decision to dismantle the U.S. Public Health Hospital and Clinic System, thereby disenfranchising U.S. seafarers of free health care. Revenues during the initial years only partially covered substantial losses incurred first to establish and then to enhance the Company's operational medical advice system. The Company has now operated at a profit for 9 consecutive years. Key to acceptance of the Company's maritime medical advice services was the Company's ability to demonstrate the cost-effectiveness of those services. Since modern vessels can be operated with relatively few people (e.g., a crew of 18-25 for a supertanker), physicians are not required to be aboard. Consequently, in the event of a medical emergency, a ship usually diverts from its charted course to facilitate an airlift evacuation for a victim of an accident or illness. Unnecessary diversions are made when trained medical personnel are not available to determine whether or not a medical emergency really exists. The cost of a diversion to a shipping concern can be high. The Company proved that by eliminating just one unnecessary diversion in ten years, its customers benefited from the Company's services, since the cost of such a diversion exceeded the fee which the Company charged for a ship during the period. The Company succeeded in the maritime industry by identifying and fulfilling a real need in a professional manner which is cost beneficial. During fiscal year 1993, the company entered into an agreement with SACNAS International of Paris, France to market services under the trademark name, "Mondial Assistance," in the U.S., Canada, and Mexico. A newly formed company, Assistance Services of America (ASA) Inc., was organized and incorporated in November of 1993 to promote the joint marketing effort. The company and SACNAS International each have 50% ownership of ASA. Travel Assistance services are being marketed to HMO's, multi-national corporations and insurance companies. Services include medical consultation and logistical support for individuals traveling outside of their home country. ASA collects fees from the subscribing company. Service fees are paid to MAS for cases in North America and to SACNAS International for cases outside North America. During the first quarter of FY 1998, the Company entered into an agreement with SACNAS International (SACNAS), the 50% shareholder of ASA. The agreement grants SACNAS an option to purchase 100% of the Company's shares in ASA for $2,000,000 during the period January 1, 1998 through December 31, 1999. At the time SACNAS exercises its option, SACNAS shall tender to the Company the 305,378 shares of the Company shares that SACNAS owns. The Company's shares shall be sold by SACNAS to the Company for $122,151 and the proceeds shall be used to offset the $2,000,000 purchase of the Company's ASA shares. The Company has the option to retain 8% of total ASA shares while allowing SACNAS to retain their 305,378 Company shares. If the Company exercises this option, the SACNAS option to purchase the remaining ASA shares shall be reduced to $1,680,000. Provided SACNAS has not exercised the option agreement, beginning January 1, 1998, and at the end of each quarter, SACNAS shall forgive 1/8th of the $500,00 unsecured loan to the Company along with interest accrued to that date. Any loan amount forgiven including both principal and interest shall be credited to the option price. If SACNAS does not elect to exercise the option agreement during the term provided, the remaining principal balance of the $500,00 loan not forgiven plus any accrued interest, shall be forgiven in its entirety. During FY 98 the Company wrote down $187,500 of the outstanding $500,000 loan and accumulated interest. The company is continuing to consolidate ASA financial results during the option period. In July 1998, the company entered into a "Call Center Service Agreement" with America's Doctor, Inc. to provide real time online chats between doctors at the Company Call Center in Owings, Maryland and America's Doctor users via the Internet. America's Doctor, Inc. is an anchor tenant on the America Online Health Page where it initially promotes the physician chat services. The Company began providing the service for America's Doctor in September 1998. The Company purchased an equity interest in America's Doctor, Inc. in 1998. In May 1998, the Company incorporated the wholly owned subsidiary Doc-Talk L.L.C. Doc-Talk will begin operating in FY1999 as an adjunct to the Internet chat service capability of the Call Center. Doc-Talk has created its own web site which will be hyper-linked to the America's Doctor web site allowing visitors to browse Doc-Talk and evaluate the benefits of speaking over the telephone directly with a physician at the Call Center. Doc-Talk has secured both 800 and 900 telephone service and will be marketing its services via the Internet, to associations, and through network marketing organizations. b. Segments. Revenues from the Company's medical assistance services can be broken down as follows: Percent of Revenues Years Ended October 31, 1997 and October 31, 1998 1997 1998 ---- ---- Internet "Chat" Services ------ 21% Maritime Response Services 29% 22% Pharmaceutical Sales 19% 14% Assistance 42% 29% Training 6% 3% Clinic Services 1% 2% Other/Ancillary Services/Interest/Fees 3% 11% _____ _____ 100% 100% Internet "Chat" Services. A specially trained and monitored staff of physicians, supported by pharmacists and dieticians, operates out of the Company's newly developed state-of-the-art Call Center in Owings, Maryland to provide medical information via the Internet. The Company's services are provided to America's Doctor, Inc. under an exclusive "Call Center Service Agreement." America's Doctor operates a web site and is an anchor tenant of the main health page of America Online, the largest Internet service provider in the U.S., currently having over 14 million subscribers. From the Center, a staff of over 100 physicians provides real time online chats directly with users seeking general medical information. The physicians do not practice medicine or in any way suggest specific treatment or consultation to the users, but seek to provide reasonable answers to medically-related questions. The Call Center physicians have immediate access to the America's Doctor electronic medical library and can electronically send printed information to users upon request. The physicians are also able to provide local health care information on behalf of organizations that sponsor the America's Doctor web page. The service is provided 24-hours/day 365 days a year, and currently over 2,000 chats per day are handled. Maritime Response Services. A staff of physicians and communication specialists operates out of the Company's state-of-the-art Call Center in Owings, Maryland to provide medical advice to people in remote locations, anywhere in the world, 24-hours-a-day, 365-days-a-year. All assistance is provided exclusively through telecommunications systems utilizing telephones, satellite, high frequency radio, fax and telex. Subscribers to the Company's medical advice service are provided with two standardized and up-to-date manuals which have been developed by the Company: a "Medical Protocol Manual" and a "Pharmaceutical Manual". When a call for medical assistance is received, the caller is guided through the Medical Protocol Manual as prompted by the physician in order to identify the symptoms of the patient. Once the physician has ascertained the nature of the problem, proper procedures and treatment can be advised making use of the Pharmaceutical Manual to assist the caller in identifying the proper medicines and supplies. The physician can help determine whether a patient can be treated on board or whether shore care is warranted as soon as possible. When the caller identifies himself, a database enables the physician to examine medical records, if available, and to identify whether or not pharmaceuticals are on board. The center currently receives an average of fifteen to twenty case calls each 24-hour period. In a typical case, four or more contacts are made between the caller and the physician to enable the patient's condition to be monitored and the case resolved. Every call received by the Company is documented and timed, and a case report is written and signed by the staff physicians. Reports are forwarded to the subscriber for insurance purposes and company records. A copy of the report is also included in the patient's MAS medical history file. The Company charges for its maritime medical advice services according to one of two methods. The subscriber can elect to have unlimited service for a rated flat annual fee or to have the service available on a timed per-minute basis. Subscribers are responsible for all communication costs. Most U.S. maritime customers have flat-fee contracts which have terms of one to three years. Pharmaceutical Sales. The Company sells a variety of kits containing pharmaceutical and medical supplies. Included in the kits are both prescription and nonprescription medications and controlled substances. The kits are designed following US Government and international guidelines and include the Company's Pharmaceutical Manual, which provides information on proper storage, use and inventory control. All medications are specially labeled for use in the Company's system. The Company directly supplies pharmaceuticals to its maritime and airline customers through the Company's warehouse facility whose inventory includes various commonly needed pharmaceuticals and supplies. This internalization of the supply function has resulted in greater profitability for the Company and greatly improved service for its customers, who often have time-critical supply needs. Assistance. A major market for the Company's services is the international travel insurance and assistance industry. Since 1991 the Company has functioned as a correspondent for SACNAS International (trade name Mondial Assistance), a Paris based assistance corporation with branch offices in 24 countries. The Company provides medical consultation and logistical support for Mondial subscribers who become ill or injured while traveling in North America. Services include coordination of medical care, physician consultation, translation assistance, claims handling, and cost containment. The Company charges a fee for consultation and additional fees if the traveler requires special arrangements or other logistical services. During fiscal year 1993, the company entered into an agreement with SACNAS International to market services under the trademark name, "Mondial Assistance," in the U.S., Canada, and Mexico. A subsidiary company, Assistance Services of America (ASA) Inc., was organized and incorporated in November of 1993 to promote the joint marketing effort. The Company and SACNAS International each have 50% ownership of ASA. Assistance services are being marketed to HMO's, multi-national corporations and insurance companies. Services include medical consultation, logistical support, and access to the Mondial Assistance worldwide network of correspondents for individuals traveling outside of their home country. ASA collects fees from the subscribing company. Service fees are paid to MAS for cases in North America and to SACNAS International for cases outside North America. During the first quarter of FY 1998, the Company entered into an agreement with SACNAS International (SACNAS), the 50% shareholder of ASA. The agreement grants SACNAS an option to purchase 100% of the Company's shares in ASA for $2,000,000 during the period January 1, 1998 through December 31, 1999. At the time SACNAS exercises its option, SACNAS shall tender to the Company the 305,378 shares of the Company shares that SACNAS owns. The Company's shares shall be sold by SACNAS to the Company for $122,151 and the proceeds shall be used to offset the $2,000,000 purchase of the Company's ASA shares. The Company has the option to retain 8% of total ASA shares while allowing SACNAS to retain their 305,378 Company shares. If the Company exercises this option, the SACNAS option to purchase the remaining ASA shares shall be reduced to $1,680,000. Provided SACNAS has not exercised the option agreement, beginning January 1, 1998, and at the end of each quarter, SACNAS shall forgive 12.5% of the $500,000 unsecured loan to the Company along with interest accrued to that date. Any loan amount forgiven including both principal and interest shall be credited to the option price. If SACNAS does not elect to exercise the option agreement during the term provided, the remaining principal balance of the $500,00 loan not forgiven plus any accrued interest, shall be forgiven in its entirety. During the FY98 the Company wrote down $187,500 of the outstanding $500,000 loan and accumulated interest. The company is continuing to consolidate ASA financial results during the options period. Training. MAS provides emergency medical response training programs for seafarers. Seafarers are trained to administer emergency first aid at sea in conjunction with the Company's radio / satellite / telephone medical advice services. Training also includes discussions of other MAS services that are important to the seafarer's occupational health and welfare. The training is performed both at Company facilities and at customer locations, including on board ship. Clinic Services. The Company has established a network of approximately 200 U.S. clinics and hospitals through which it provides clinic services. Through this network the Company coordinates pre-placement and periodic physical examinations and U.S. Coast Guard required alcohol and drug testing. The Company receives fees for each examination and for entering medical reports in the Company's depository of more than 20,000 health records. The Company also provides other work, health and safety recommendations to employers. In 1998 the Company began operating a clinic for out-patient health services at its headquarters building. c. Markets. Internet "Chat" Services The Internet is considered the "super-highway" for information. Subscribers gain access to the Internet through service providers. The largest provider in the U.S. is America Online (AOL) which currently has over 14 million subscribers. America's Doctor, Inc. has an exclusive contract with AOL to be an anchor tenant on the AOL Health Page. Through a "Call Center Service Agreement," the Company has an exclusive contract to provide medical information for America's Doctor to AOL subscribers. Under the terms of the agreement, the Company may not provide competing "chat" services to other Internet providers. Therefore, the Company's Internet market, as it relates to physician keyboard chats, is limited to users provided by the America's Doctor contract through the America's Doctor web site. The Company is not limited from any other types of electronic or "e" commerce on the Internet and may use its exposure on the America's Doctor web site to promote direct voice medical information services. Maritime. The maritime market consists of three primary segments. One market segment consists of privately-owned U.S. flag ships which transport U.S. goods to and from ports within the United States. In this group, there are approximately 400 deep draft vessels for which evacuations due to medical emergencies are complicated and expensive. Over 90% of the companies that operate these vessels utilize the services of the Company. Approximately one-third of these customers have adopted the Company's pharmaceutical program since it was introduced in late 1983. The Company also has contracts with towing, research, and commercial fishing vessels. A second market segment consists of ships owned by U.S. and foreign companies which carry U.S. goods under flags of registry other than the U.S. flag. Over 95% of all U.S. goods are shipped on the approximately 10,000 vessels which fall in this category. The Company has contracts with over 300 of these ships having domiciles in 15 countries. The Company also provides services to U.S. flag ships which are owned by or affiliated with the U.S. Government. The third market segment encompasses the balance of the world's oceangoing vessels and numbers around 75,000 vessels/units. The Company's ongoing effort to sell to this market is enhanced by the effort made to sell to the second market segment as most of the companies operate vessels both in the U.S. and worldwide. The further development of less expensive satellite communication equipment also makes this market more accessible. Although large in number, the ships comprising the second and third market segments historically are infrequent users of the service. This, coupled with relatively high marketing costs led the Company into other markets such as assistance, in which its response capabilities can be marketed at higher margins. Assistance The assistance industry was founded and developed in Europe during the 1960's and 1970's. Due to the close proximity of borders and the variety of languages, there was a need to provide specialized claims handling services for European international travelers who purchased travel insurance. Insurance underwriters found that proper claims handling required the availability of 24-hour call centers, language services, and foreign medical correspondents. Assistance companies were formed to provide these specialized services on behalf of multiple underwriters. Subsequently services were expanded to provide specialized and immediate claims handling for multiple types of insurance policies and manufacturers' warranties. Examples include road-side assistance, legal assistance, home assistance, family assistance, and medical assistance. Assistance is now a multi-billion dollar industry in Europe. In the U.S., assistance services have not been developed to the same extent as in Europe. However, based on population statistics, and extrapolating from the experience of other Mondial Assistance branch offices, the Company estimates the potential North American assistance market to be in excess of one billion dollars. There are three major types of clients to which the Company's subsidiary, Assistance Services of America, has been able to sell assistance services: insurance companies, multi-national corporations, and HMO's. Insurance companies purchase assistance services to gain access to the Company's specialized 24-hour claims handling capabilities. The availability of such services allows the insurance company to offer more attractive programs to policyholders while monitoring claims and controlling costs. Multi-national corporations are faced with the challenge of providing medical and operational services to their employees in foreign countries. The Company's specialized services function as an additional employee benefit and allow the client to control risk. HMO's provide managed health care by designating preferred health care providers or by employing doctors directly. However, enrollees who travel may not have direct access to these doctors. The Company's services allow HMO's to monitor and control claims for enrollees who travel outside the HMO catchment area. d. Competition. The Company competes in the Internet medical information business with potentially many service providers including hospitals and other physician groups who either now operate a web site, or who could launch a competing web site to deliver medical information. The Company believes its strategic affiliation with America's Doctor and its contract with America OnLine provides it with a competitive advantage, however, there can be no assurance that a company with far greater financial resources will not commence operations on the Internet and generate greater competition than now exists. The Company competes in the medical advice market with a few foreign government-operated entities outside of the United States. The Company also knows of a few U.S. companies as well as several hospitals in the U.S. that provide radio medical advice to ships at sea. While the Company believes it has a competitive advantage, the barriers to entry into the Company's major market are relatively low, and there can be no assurance that a company with far greater financial resources will not commence operations similar to those of the Company and generate competition that does not now exist. There are several pharmaceutical suppliers, both domestically and internationally, which market extensively to the maritime market. The Company competes effectively by providing a well-managed pharmaceutical program that is fully integrated with the Company's medical advice service. There are several domestic and foreign companies which provide services similar to the Company's assistance program. These companies have significant financial resources and are capable of competing effectively with the Company's products. The Company has elected to rely upon its French partner, SACNAS International, which operates similar services in 24 countries to lead in the development of this market. The Company's strength rests in its ability to provide cost effective quality assistance services. e. Regulation. There is at this time, very little government regulation regarding the Internet. There can be no assurances that in the future regulations would not be adopted which would affect the current operation on the Internet. The Company takes care to monitor its Internet services to insure that only medical information is provided to Internet users. Physicians providing Internet "chats" do not engage in the practice of medicine and are trained and monitored to limit their chat activity to general medical information only. The Company has been licensed by the Federal Communications Commission to operate a limited coast, high frequency and single side band ("SSB") radio station. The monitoring of "controlled substances" by Company physicians is regulated by the Drug Enforcement Administration. The Company holds licensure from the Drug Enforcement Administration and the Maryland Board of Pharmacy for the distribution of pharmaceuticals. The Company does not hold any direct medical licenses, but utilizes the services of licensed physicians. f. Insurance. The Company maintains liability insurance for its opera- tions. Physician personnel are provided through professional associations of physicians which are covered by a comprehensive professional liability insurance policies. g. Personnel. The Company contracts with Hall & Associates, P.A. for the services of physicians for the Company's 24-hour-a-day medical advice operations for a fixed annual fee and with Hall & AmDoc, Associates, P.A. and Hall & DocTalk, Associates, P.A. for 24-hour-a-day medical information services for various service fees. The Company also pays the premiums on professional liability insurance covering personnel associated with Hall & Associates, P.A., Hall & AmDoc Associates, P.A., and Hall & DocTalk Associates, P.A. The Company does not directly employ its own physicians. See Item 12. The Company employs 37 people (27 in management and administration, and 10 communications coordinators) and believes its relationship with its employees is satisfactory. The Company has 1 full-time physician and over 100 part-time physicians and medical professionals contracted to provide services to the Company. Item 2. Description of Property. The headquarters of the Company consists of a newly constructed 12,000 square foot custom designed Call Center and administrative office plus two original buildings containing approximately 5,000 square feet, located on 1.44 acres of commercial land in Owings, Maryland, approximately twenty miles from Washington, D.C. The Company enjoys approval to construct approximately 6,000 additional square feet of office space at the headquarters site, when and if needed, without additional site improvements. The Company's Call Center is staffed 24-hours-a-day. The property is owned by the Company and is secured by a mortgage of only $129,000. To finance the newly constructed call center the Company received a $500,000 loan at 5% simple interest from SACNAS International, which SACNAS has agreed to forgive as part of the consideration for its option to purchase an increased equity interest in ASA from the Company. The medical Call Center is staffed by physicians, a Medical Director, multi-lingual communications coordinators, call center manager, and an experienced support staff. The center is equipped with a bank of commercial telephone lines, inbound WATS lines, telex, fax, electrocardiogram sending and receiving capabilities and a high-frequency single side band ("SSB") radio station. The radio station is licensed by the Federal Communications Commission (see Item 1, "Regulation") and can operate on five specially designated frequencies that are free of other traffic. This capability affords the Company voice communication from Hawaii to Italy with high reliability. Arrangements made with radio relay stations located in Berne, Switzerland; Singapore; Durban, South Africa; Bahrain; and Sidney, Australia give the Company worldwide communications capabilities. All radio and telex equipment is supported with backup equipment and the Call Center uses a generator to maintain continuous operations in case of a power failure. The Company maintains a commercial insurance policy on all buildings and equipment, which in the opinion of management, is adequate to cover the Company's exposure. Item 3. Legal Proceedings. The Company is not a party to any pending legal proceeding. Item 4. Submission of Matters to a Vote of Security Holders. On September 20, 1996 the Company held an annual meeting of stockholders. In preparation for the meeting the Company issued an information statement but did not seek proxies. Individuals holding 1,934,207 shares of common stock (50.7% of 3,816,933 shares issued) were in attendance at the meeting. All four members of the Board of Directors stood for re-election. A motion was made and duly seconded to increase the authorized shares of Common Stock from six million to ten million shares. The motion was passed by unanimous vote with 1,9347,207 shares represented in favor of the resolution. By unanimous vote of those present the following individuals were re-elected as Directors of the Company, constituting the entirety of the Board of Directors: 1. Ronald W. Pickett 2. Thomas M. Hall 3. Judith P. Hoyer 4. Jean-Paul Babey No other matters were submitted to a vote of the stockholders. Judith P. Hoyer deceased in 1997 and the Board seat remains vacant. PART II Item 5. Market for Common Equity and Related Stockholder Matters. There is a limited public trading market for the Company's Common Stock on the "Bulletin Board" in the over-the-counter market, and there were 248 shareholders of record on January 21, 1999. The closing prices for the Common Stock have been: Bid High Low November 1, 1996 to January 31, 1997 1/4 1/4 February 1, 1997 to April 30, 1997 1/4 1/4 May 1, 1997 to July 31, 1997 1/4 1/4 August 1, 1997 to October 31, 1997 1/4 1/4 November 1, 1997 to January 31, 1998 5/16 1/4 February 1, 1998 to April 30, 1998 7/16 3/8 May 1, 1998 to July 31, 1998 1 5/8 .40 August 1, 1998 to October 31, 1998 1 1/8 1/2 On January 21, 1999, the Common Stock closed at $7.25. The Company has never paid a cash dividend on its common stock. Item 6. Management's Discussion and Analysis of Financial Condition. Results of Operation. The Company's consolidated net income for fiscal year 1998 was $529,663 ($0.14 per share), compared to $357,903 ($.09 per share) for 1997, an increase of 32.4%. The increase of $171,760 is primarily due to the addition of Internet revenues and recognition of tax benefits from operating loss carry forwards. FY 1998 represents the ninth consecutive profitable year for the Company. The Company's introduction into the medical Internet arena has increased the Company's profitability. During the 4th quarter of 1998 the Company received gross revenues of $721,463 from Internet activities related to its new Internet services. The Company's other business consists of maritime response services, sales of pharmaceuticals and training services provided to maritime customers. Revenue from maritime response services is derived primarily from providing medical advice to ships. Total revenue from contracts from medical advice to ships at sea during fiscal 1998 was $773,759 as compared to revenues of $756,246 reported in fiscal 1997. 1998 pharmaceutical sales of $500,819 represent an increase of 2% when compared to the previous year's sales of $491,637. Net pharmaceutical revenue, excluding freight, was $153,583 in fiscal year 1998 compared to $155,777 in fiscal 1997. Profits from training services were $110,719 in fiscal 1998 compared to $153,834 in 1997, a decrease of 38.9%. This decrease was due primarily to delays in ongoing training programs as the Company's customers implemented new training standards required by the International Maritime Organization. The Company reported sales of $1,019,150 and net revenue of $917,850 from assistance services in fiscal 1998, compared to $1,101,096 and $1,005,801 respectively for fiscal 1997, a decrease in reported sales of 8%. The decrease in sales is the result of the decline in a major contract during 1998, held by the Company's subsidiary ASA. Salaries and wages were $1,079,963 in fiscal 1998 compared to $759,332 in fiscal 1997, an increase of 30%. The increase reflects the addition of staff to support the Company's new Internet call center, plus additions to the Company's marketing, accounting, information technology, and administrative departments. In conjunction with this the Company's other selling, general and administrative expenses increased by 12.9% to $871,965 in fiscal 1998 from $759,402 in fiscal 1997. Liquidity and Capital Sources. Cash provided by operations was $463,938 in 1998 as compared to $281,247 in fiscal 1997. The ratio of current assets to current liabilities was 1.44 to 1 at the end of fiscal 1998 as compared to 1.26 to 1 at the end of fiscal 1997. The cash flow from ongoing operations is sufficient to meet the Company's current and anticipated short-term liabilities. During 1998 the Company obtained a $500,000 unsecured line of credit from a local bank. The Company has not drawn on this line of credit. Impact of Inflation and Changing Prices. The Company's costs are comprised primarily of staff salaries and physician fees. Salaries and wages were $1,079,963 in fiscal 1998 and 759,332 in fiscal 1997 an increase of $320,631. These increases reflect both increases in the number of employees from the prior year and increases in salaries due to a tightening labor market. Medical staffing costs increased by $299,442 in fiscal year 1998 due to the addition of the America's Doctor chat service. Item 7. Financial Statements. Financial statements and supplementary data required by this item are included at Part IV, item 14. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None PART III Item 9. Directors, Executive Officers, Promoters, and Control Persons. Listed below are the directors and executive officers of the Company. Directors are elected for one year terms or until their successors are elected and qualified. Officers hold office until their successors are elected and qualified or until their earlier resignation or removal. Age at Name Positions with Company January 21,1999 Ronald W. Pickett Chairman of the Board of 51 Directors & President, President of DocTalk, L.L.C. Thomas M. Hall, M.D., M.I.M. Chief Executive Officer, 46 President of Assistance Services of America, Inc., President of Hall & Associates, P.A., Chief Physician of the Company, President Hall & Am Doc Associates, P.A., and Hall and DocTalk, Associates, P.A. Jean-Paul Babey Director 43 Robert P. Crabb Secretary 51 Dale L. Hutchins, Ph.D. Executive Vice President, 37 Chief Operating Officer of Doc- Talk, L.L.C. Robert C. Snyder Chief Financial Officer, 42 Treasurer Ronald W. Pickett is the founder of the Company, Chairman of the Board of Directors and President. He has been an officer and director of the Company since its inception in 1981. A graduate of Gordon College, Mr. Pickett has engaged in various entrepreneurial activities for 30 years. Thomas M. Hall, M.D.,M.I.M., a graduate of George Washington University School of Medicine, "with distinction", has served as President of Hall & Associates, P.A., and its predecessor firm since April, 1988, as Chief Physician of the Company since 1982, and as Chief Executive Officer of the Company since July 1992. Dr. Hall has been a director of the Company since March, 1992. As Chief Executive Officer of the Company, Dr. Hall supervises all day-to-day operations. As Chief Physician, Dr. Hall is in charge of the medical personnel utilized in the Company's medical information, advice and training operations. Dr. Hall is a diplomat of the National Board of Medical Examiners, the American Board of Internal Medicine, and the American Board of Preventive Medicine (Certified Occupational Medicine Specialist). He is a member of Phi Beta Kappa and Alpha Omega Alpha honor societies. Dr. Hall also holds a Masters degree in International Management from the University of Maryland. Jean-Paul Babey, an electronic engineer, is a graduate of Centrale School, Lilles (France) 1979, and received an MBA at ISA, Paris (France) in 1981. After having worked as a Consultant for 5 years, Mr. Babey has served as International Director for Mondial Assistance Group (headquarters in Paris, France) since April 1987. Additionally, Mr. Babey is the Managing Director of Mondial Assistance UK Limited (London, England) since January 1993. Mr. Babey is also a director of ASCI Incorporated (Ireland) and DIMA Incorporated (Netherlands). Robert P. Crabb, has over 30 years of sales, marketing and public and private corporate management experience, including 15 years with the Metropolitan Life Insurance Company where he played an integral role in the company's development and implementation of its marketing and training programs. His entrepreneurial expertise includes marketing and financial consulting and commercial and residential real estate development. Mr. Crabb serves the MAS Board the Directors as Corporate Secretary and Director of Corporate Development and he is the Vice President of Marketing for Doc-Talk L.L.C. Mr. Crabb studied Accounting and Finance at Benjamin Franklin University in Washington, D.C. and Business Finance and Estate Planning at the University of North Carolina. Dale L. Hutchins, Ph.D., Executive Vice President, joined the company in 1982. Dr. Hutchins functions as the Executive Vice President of the company. He also serves as the Chief Operating Officer of DOC-TALK, L.L.C. He has 18 years of experience in management, operations, and marketing. Dr. Hutchins also has considerable import, export, foreign product/capability representation, and counter-trade experience. He holds a Ph.D. in business administration, as well as varied medical certifications. He is active in a wide range of charitable, industry, technology, and civic organizations. Robert C. Snyder, Chief Financial Officer, Joined MAS in May of 1996. Mr. Snyder has over 20 years of accounting experience working in the private sector of Washington D.C. His experience includes senior financial and administrative director for several rapid growth software R&D companies and director of three Maryland based non-profit organizations. He brings to MAS the talents necessary to provide for the successful and controlled financial growth of the Company. Mr. Snyder has degrees from the University of Maryland in Accounting, Business Administration and Economics and is a licensed USCG Captain. Item 10. Executive Compensation. The following is a table which summarizes the compensation awarded to, earned by, or paid to executive officers of the Company for services to the Company for the fiscal years ended October 31, 1997 and 1998: SUMMARY COMPENSATION TABLE Annual Compensation ______________________________________________________________________________ Name and Fiscal Other Annual Principal Position Year Salary Bonus Compensation ______________________________________________________________________________ Thomas M. Hall, M.D., M.I.M. 1998 $ 61,538 $110,231 (2) $ 83,260 (3) CEO and 1997 $ 50,000 $ 95,105 (2) $ 85,694 (3) Chief Physician (1) 1996 $ 50,000 $ 65,135 (2) $ 87,625 (3) Ronald W. Pickett 1998 $ 86,538 0 0 Chairman of the Board, 1997 $ 50,000 0 President and Treasurer 1996 $ 50,000 0 0 Robert P. Crabb 1998 $ 3,231 $ 36,175 (4) Dale L. Hutchins, Ph.D. 1998 $ 55,230 $ 8,077 0 Robert C. Snyder 1998 $ 44,623 $ 5,000 0 (1) Dr. Hall also receives income from the Company as an independent contractor and independent commissioned sales agent, as detailed in notes (2) and (3) below. Dr. Hall is required to pay certain of his own business and travel expenses related to this income. (2) Received as an independent commissioned sales agent, representing a percentage of the Company's gross sales of certain travel-related medical advisory services. See Item 12. "Certain Relationships and Related Transactions." (3) Received as an independent contractor through the Company's agreement with Hall & Associates, P.A., under which Hall & Associates, P.A. provides the Company with medical staff personnel. See Item 12. "Certain Relationships and Related Transactions." (4) Received as an independent consultant to DocTalk, L.L.C. through Susquehanna Development Corporation which is controlled by Mr. Crabb. No person (other than the Chief Executive Officer) who served as an executive officer of the Company at the end of the fiscal year ended October 31, 1997 had total annual salary and bonus for that year in excess of $100,000. But see Item 12. "Certain Relationships and Related Transactions." Directors who are not officers of the Company receive $250 for each meeting of the Board of Directors or committee of the Board of Directors that they attend. Officers of the Company do not receive additional compensation for attending board meetings. Dr. Hall, Mr. Pickett, Mr. Crabb, Dr. Hutchins, and Mr. Snyder have written employment contracts with the Company. Item 11. Security Ownership of Certain Beneficial Owners and Management. Beneficial Ownership. As of December 31, 1998, the Company was aware that the following persons owned beneficially more than 5% of its Common Stock: No. Shares Name and Address Owned Beneficially Percent of Class Thomas M. Hall, M.D., M.I.M. 1,182,750* 31% 8050 Southern Maryland Boulevard Owings, MD 20736 Ronald W. Pickett 637,568** 16.7% 8050 Southern Maryland Boulevard Owings, MD 20736 SACNAS International 305,378 8% 2, rue Fragonard Paris XVII, France Robert P. Crabb 100,000*** 2.6% 583 Lombard Road Rising Sun, MD 21911 Dale L. Hutchins, Ph.D 68,111**** 1.8% 8050 Southern Maryland Boulevard Owings, MD 20736 Robert C. Snyder 30,000***** 0.8% 8050 Southern Maryland Boulevard Owings, MD 20736 * Includes immediately exercisable options to purchase 200,000 shares of MAS common stock at $.50 per share. ** Includes 304,678 shares owned by family members, associates, and 332,890 shares beneficially owned by Ronald W. Pickett and Cynthia P. Pickett (his spouse). *** Consists of 100,000 options to purchase shares of MAS common stock at $0.50/share. Per the terms of a consulting agreement between the Company and Mr. Crabb, 1/3 of the options vested on July 1, 1998, 1/3 will vest upon renewal of the consulting agreement on July 1, 1999, and 1/3 will vest upon renewal of the agreement on July 1, 2000. **** Includes immediately exercisable options to purchase 50,000 shares of MAS common stock at $0.50/share. ***** Consists of 30,000 options to purchase shares of MAS common stock at $0.50/share. Per the terms of an employment agreement between the Company and Mr. Snyder, 6,000 of the options vested on May 8, 1998 and 6,000 will vest on each subsequent anniversary date through May 8, 2002 based on continued satisfactory employment. The following table sets forth the beneficial ownership of shares of Common Stock of the Company as of January 1, 1999 for each director and executive officer and for all directors and executive officers as a group: No. Shares Name Owned Beneficially Percent of Class Thomas M. Hall, M.D., M.I.M. 1,182,750* 31% 8050 Southern Maryland Blvd. Owings, Maryland 20736 Ronald W. Pickett 637,568** 16.7% 8050 Southern Maryland Boulevard Owings, MD 20736 Jean-Paul Babey 305,378*** 8% SACNAS International 2, rue Fragrant Paris XVII, France Robert P. Crabb 100,000**** 2.6% 583 Lombard Road Rising Sun, Maryland 21911 Dale L. Hutchins, Ph.D. 68,111***** 1.8% 8050 Southern Maryland Boulevard Owings, MD 20736 Robert C. Snyder 30,000****** 0.8% 8050 Southern Maryland Boulevard Owings, MD 20736 All directors and executive officers as a group (6 individuals) 2,323,807 60.9% * Includes immediately exercisable options to purchase 200,000 shares at $.50 per share. ** Includes 304,678 shares owned by family members, associates, and 332,890 beneficially owned by Ronald W. Pickett and Cynthia P. Pickett (his spouse). *** Consists of 305,378 shares held in the name SACNAS International, as to which Mr. Babey shares voting and investment power, but of which Mr. Babey disclaims beneficial ownership. **** Consists of 100,000 options to purchase shares of MAS common stock at $0.50/share. Per the terms of a consulting agreement between the Company and Mr. Crabb, 1/3 of the options vested on July 1, 1998, 1/3 will vest upon renewal of the consulting agreement on July 1, 1999, and 1/3 will vest upon renewal of the agreement on July 1, 2000. ***** Includes immediately exercisable options to purchase 50,000 shares of MAS common stock at $0.50/share. ****** Consists of 30,000 options to purchase shares of MAS common stock at $0.50/share. Per the terms of an employment agreement between the Company and Mr. Snyder, 6,000 of the options vested on May 8, 1998 and 6,000 will vest on each subsequent anniversary date through May 8, 2002 based on continued satisfactory employment. Item 12. Certain Relationships and Related Transactions. a. Medical Staffing The Company has an agreement with Hall & Associates, P.A. to provide the Company with medical personnel as needed to staff its maritime and international travel operations. The Company pays Hall & Associates, P.A. fees in equal amounts every two-week pay period for personnel provided, plus reimbursement for professional liability insurance, the direct costs of any extra physicians for coverage of the call center, training costs and incidental expenses. The agreement with Hall & Associates derives from a written agreement with the predecessor of Hall & Associates, Vaillancourt Associates, P.A., which was executed in 1982. The written agreement has been modified by oral agreement on several occasions. Ronald W. Pickett, the Chairman, President and second largest shareholder of the Company, is the Treasurer of Hall & Associates, but has no direct or indirect financial interest in Hall & Associates. Thomas M. Hall, M.D.,M.I.M., who was elected Chief Executive Officer of the Company on July 16, 1992 and is the largest shareholder of the Company, controls Hall & Associates, P.A. Prior to being elected CEO, Dr. Hall served as Chief Physician of the Company, and he continues to serve the Company as Chief Physician. b. Subsequent Event On December 4, 1998 two new Professional Associations were created: Hall & AmDoc Associates, P.A., and Hall & DocTalk Associates, P.A. The company plans to enter into agreements with these Professional Associations to provide medical staffing for its programs with America's Doctor, Inc., and Doc-Talk, L.L.C., respectively. Ronald W. Pickett, the Chairman, President and second largest shareholder of the Company, is the Treasurer of Hall & AmDoc, Associates, P.A., and Hall and DocTalk Associates, P.A., but has no direct or indirect financial interest in either Professional Association. Thomas M. Hall, M.D., M.I.M., who is the chief executive officer of the company and the largest shareholder, controls the two new professional associations. Item 13. Exhibits List and Reports on Form 8-K. (a) A list of the exhibits filed as part of this report is found in the Exhibits Index . SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDICAL ADVISORY SYSTEMS, INC. Date: By: Ronald W. Pickett Chairman of the Board President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: By: Ronald W. Pickett Chairman of the Board President Date: By: Thomas M. Hall, M.D., M.I.M. Chief Executive Officer Director (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) Date: By: Jean-Paul Babey Director SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT 1. An annual report for fiscal year 1997 has not yet been sent to the Company's stockholders. 2. The Company will distribute an annual report to security holders subsequent to the filing of this Form. EXHIBITS INDEX Sequential Exhibit No. Description of Exhibit Page Number 3(a) Restated Certificate of Incorporation, N.A. filed as Exhibit 3(a) to Registration Statement on Form S-18 (No. 2-98314) on June 7, 1985* 3(b) Certificate of Amendment of certificate N.A. of incorporation dated Sept. 8, 1988, filed as Exhibit 3(a)(2) to Annual Report on Form 10-K on March 28, 1990* 3(c) Bylaws, as amended, filed as Exhibit N.A. 3(b) to Registration Statement on Form S-18 (No. 2-98314) on June 7, 1985* 4 Form of Common Stock Certificate, filed N.A. as Exhibit 4 to Amendment No. 1 to registration Statement on Form S-18 (No.33-02991) on February 28, 1986* 10(a) Letter dated December 2, 1988 evidencing N.A. agreement between Medical Advisory Systems, Inc. and Hall and Associates, P.A. with respect to provision of medical services to Customers of Medical Advisory Systems, Inc., filed as Exhibit 10(c) to Form 8 amending Annual Report on Form 10-K on April 18, 1989* 10(b) Joint Venture Agreement dated June 21, 1993 between N.A. SACNAS International and Medical Advisory Systems, Inc., Agreement between the Company and filed as Exhibit 10(b) to Annual Report on Form 10-KSB on March 15, 1994* 11 Statement regarding Computation of earnings or E-1 loss per share *Incorporated herein by reference. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FINANCIAL STATEMENTS AND SCHEDULES OCTOBER 31, 1998 FORMING A PART OF ANNUAL REPORT PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-KSB OF MEDICAL ADVISORY SYSTEMS, INC MEDICAL ADVISORY SYSTEMS, INC. Index to Financial Statements Page Report of Independent Certified Public Accountants F-3 Consolidated Balance Sheet at October 31, 1998 F-4 Consolidated Statements of Earnings for the two years in the period ended October 31, 1998 F-6 Consolidated Statements of Stockholders' Equity for the two years in the period ended October 31, 1998 F-7 Consolidated Statements of Cash Flows for the two years in the period ended October 31, 1998 F-8 Notes to Consolidated Financial Statements F-9 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Medical Advisory Systems, Inc. We have audited the accompanying consolidated balance sheet of Medical Advisory Systems, Inc. and subsidiaries as of October 31, 1998 and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years ended October 31, 1998 and 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medical Advisory Systems, Inc. and subsidiaries as of October 31, 1998, and the results of its operations and its cash flows for the years ended October 31, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ STEFANOU & COMPANY, LLP STEFANOU & COMPANY, LLP Certified Public Accountants McLean, Virginia January 28, 1999 F-3 MEDICAL ADVISORY SYSTEMS, INC. CONSOLIDATED BALANCE SHEET OCTOBER 31, 1998 ASSETS CURRENT ASSETS: Cash and equivalents $ 579,331 Accounts receivable, less allowance for doubtful receivable of $ 77,744 907,720 Inventory, at lower of cost or market 26,745 Current deferred tax asset (Notes A and F) 37,015 Prepaid expenses 6,802 --------- Total current assets 1,557,613 PROPERTY AND EQUIPMENT-AT COST: (Notes A and C) Land 65,078 Building and improvements 918,699 Furniture, fixtures and equipment 675,537 --------- 1,659,314 Less accumulated depreciation 644,259 --------- 1,015,055 OTHER ASSETS: Investment (Note B) 660,000 Deferred income taxes (Notes A and F) 387,739 --------- 1,047,739 --------- $ 3,620,407 ========= See accompanying notes to consolidated financial statements F-4 MEDICAL ADVISORY SYSTEMS, INC. CONSOLIDATED BALANCE SHEET OCTOBER 31, 1998 LIABILITIES CURRENT LIABILITIES: Current maturities of long-term debt (Notes C and D $ 315,617 Accounts payable and accrued expenses 437,249 Deferred income 327,565 ---------- Total current liabilities 1,080,431 LONG-TERM DEBT, less current maturities (Note C) 134,069 COMMITMENTS AND CONTINGENCIES (NOTE J) JOINT VENTURER'S INTEREST (NOTE A) (24,706) STOCKHOLDERS' EQUITY: Convertible preferred stock, par value, $ 1.75 per share; 1,000,000 shares authorized; none used - Common stock, par value, $ .005 per share; 10,000,000 shares authorized; 3,819,938 shares issued (Notes E and K) 19,415 Additional paid-in-capital 3,824,778 Accumulated deficit (1,369,997) ----------- 2,474,796 Less 65,940 shares of common stock held in treasury-at cost ( 43,583) ----------- 2,430,613 ----------- $ 3,620,407 =========== See accompanying notes to consolidated financial statements F-5 MEDICAL ADVISORY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED OCTOBER 31, Revenues: 1998 1997 Internet call center services $ 721,463 $ - Maritime response services 773,759 756,246 Assistance services 1,019,150 1,101,096 Pharmaceutical sales 500,819 491,637 Maritime clinic systems 44,704 33,736 Medical clinic services 9,679 - Training 110,719 153,294 Other 62,532 65,309 Interest 56,467 44,971 --------- --------- 3,299,292 2,646,289 Cost and expenses: Pharmaceuticals 347,236 335,860 Medical professional services 323,902 321,260 Maritime clinic system 28,632 20,420 Medical clinic services 32,739 - Training 24,945 29,425 Internet call center services 323,204 - Salaries and wages 976,812 759,332 Selling, general and administrative 894,769 759,402 Depreciation 86,624 84,725 Interest 34,848 29,562 --------- --------- 3,073,711 2,339,986 --------- --------- Operating income 225,581 306,303 Extinguishment of debt (Note C and D) 214,843 - Income tax benefit (Notes A and F) 36,058 55,567 Earnings before joint Venturer's interest 476,482 361,870 Joint Venturer's interest loss (income) 53,181 (3,967) --------- --------- NET EARNINGS $ 529,663 $ 357,903 ========= ========= Earnings per common share (basic and assuming dilution) $ .14 $ .09 ========== ========== Weighted average common shares outstanding $3,819,938 $3,819,938 See accompanying notes to consolidated financial statements F-6 MEDICAL ADVISORY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1998 AND 1997 Common Stock Additional Accumulated Treasury Stock Shares Amount Paid-in Deficit Shares Amount Total Capital Balance at 3,882,873 $19,415 $3,824,778 $(2,257,563) 65,940 $(43,583)$1,543,047 Nov 1,1996 Net earnings - - - 357,903 - - 357,903 --------- ------- ---------- ----------- ------ -------- ---------- Balance at 3,882,873 19,415 3,824,778 (1,899,660) 65,940 (43,583) 1,900,950 Oct 31,1997 Net earnings - - - 529,663 - - 529,663 --------- ------- ---------- ----------- ------ -------- ---------- Balance at 3,882,873 $19,415 $3,824,778 $(1,369,997) 65,940 $(43,583)$2,430,613 Oct 31,1998 ========= ======= ========== ============ ====== ======== ========== See accompanying notes to consolidated financial statements F-7 MEDICAL ADVISORY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, Increase (decrease) in cash and equivalents 1998 1997 Cash flows from operating activities Net earnings for the year $ 529,663 $ 357,903 Adjustments to reconcile net earnings to net cash provided by operating activities: Deferred income taxes (36,058) (57,661) Equity interest in Joint Venture income (loss) (53,181) 3,968 Depreciation 86,624 84,725 (Increase) decrease in: Accounts receivable 136,892 (202,173) Prepaid expenses and other 7,210 (13,468) Inventory (4,540) (2,072) Increase (decrease) in: Accounts payable and accrued expenses (163,065) (7,414) Deferred income (39,607) 125,375 ---------- ---------- Net cash provided by operating activities 463,938 289,183 Cash flows used in investing activities: Capital expenditures, net of disposals (135,149) (269,434) Decrease in investments (295,031) - ---------- ---------- Net cash used in investing activities (430,180) (269,434) Cash flows used in financing activities: Repayments of loans to banks and related parties (184,036) (7,818) ---------- ---------- Net cash, provided (used) in financing activities (184,036) (7,818) ---------- ---------- Net (decrease) increase in cash and equivalents (150,278) 11,931 Cash and equivalents at beginning of year 729,609 717,678 ---------- ---------- Cash and equivalents at end of year $ 579,331 $ 729,609 ========= ========= Supplemental Disclosures of Cash Flow Information Cash paid during the year for interest $ 12,567 $ 16,789 ========= ========= See accompanying notes to consolidated financial statements F-8 MEDICAL ADVISORY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND 1997 NOTE A-SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. Basis of Presentation The consolidated financial statements include the accounts of Medical Advisory Systems, Inc. (MAS) and its wholly-owned subsidiaries, MAS Laboratories, Inc. Doc-Talk, LLC, and T.L.C. Inc. Significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements also include 100% of the assets, liabilities and operating results of Assistance Services of America, Inc. (ASA). Pursuant to a joint venture agreement, the Company formed ASA and purchased 250 shares (50%) of ASA common stock in fiscal 1994 for $25,000 in cash. The Joint Venture's Interest reflected on the 1998 consolidated balance sheet and the consolidated statements of earnings represents the other joint venturer's share (50%) of ASA's equity (deficit) and results of operations for 1997 and 1998 Business Operations MAS provides medical advice to ocean-going vessels and other individuals or entities located outside the continental United States, operates an out- patient medical clinic and provides medical information service via "chats" over the internet and telephone. ASA provides medical assistance services to multi-national corporations, health maintenance organizations, and insurance companies in Canada and the United States. MAS Laboratories is currently inactive. 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 to contract clients. 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. Property and Equipment For financial statement purposes, property and equipment are depreciated using the straight-line method over their estimated useful lives (five years for furniture, fixtures and equipment and 25 years for building and improvements). The straight line method of depreciation is also used for tax purposes. F-9 MEDICAL ADVISORY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND 1997 NOTE A-SUMMARY OF ACCOUNTING POLICIES-CONTINUED Income Taxes Income taxes are provided based on the liability method for financial reporting purposes in accordance with the provisions of Statements of Financial Standards No. 109, "Accounting for Income Taxes". Deferred and prepaid taxes are provided for on items which are recognized in different periods for financial and tax reporting purposes. 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. Impairment of Long-Lived Assets Effective November, 1, 1996 the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No.121 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly actual results could differ from those estimates. Concentrations of Credit Risk Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist primarily of cash, 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. Stock Based Compensation The Company accounts for stock transactions in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees." In accordance with statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," the Company has adopted the proforma disclosure requirements. F-10 MEDICAL ADVISORY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND 1997 NOTE A-SUMMARY OF ACCOUNTING POLICIES-CONTINUED Earnings Per Share The Company has adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share," specifying the computation, presentation and disclosure requirements of earnings per share information. Basic earnings per share has been calculated based upon the weighted average number of common shares outstanding. Stock options and warrant's have been excluded as common stock equivalents in the diluted earnings per share because they are either antidilutive, or their effect is not material. There is no effect on earnings per share information for the year ended October 31, 1997 relating to the adoption of this standard. NOTE B-INVESTMENTS As of October 31, 1998, the Company has invested $660,000 in consideration for 32,666 shares of common stock in America's Doctor, Inc. The Company's investment represents approximately 8% of the outstanding equity of America's Doctor, Inc. The Company's investment is covered under the scope of SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities," classified as "available for sale." The value of this investment approximates book value (See Note J). NOTE C-LONG-TERM DEBT Long-term debt at October 31, 1998 consists of the following: Mortgage loan payable in monthly installments of $ 1,222, including interest at 8.5% per annum, secured by first deed of trust on Company's building and land $ 137,186 Note Payable to SACNAS International including interest at 5% per annum; unsecured (See Note D) 312,500 -------- 449,686 Less current portion 315,617 -------- $ 134,069 ========= Aggregate maturities of long-term debt as of October 31, 1998 are as follows: Year Amount ---- ------ 1999 $ 315,617 2000 3,393 2001 3,693 2002 4,019 2003 and after 122,964 -------- $ 449,686 ======== The Company has an unused $500,000 bank credit agreement that extends until October, 1999. F-11 MEDICAL ADVISORY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND 1997 NOTE D-RELATED PARTY TRANSACTIONS Hall & Associates, P.A., which is owned by the Company's chief Executive Officer, Thomas M. Hall, M.D., provides medical professional services to MAS. Amounts paid to Hall & Associates, P.A. represent fees for professional services rendered and premiums on professional liability insurance. During 1998 and 1997, the Company paid Hall & Associates, P.A. $ 278,534 and $337,922, respectively, in fees and professional liability insurance premium payments made on Hall & Associates, P.A.'s behalf. During fiscal years 1998 and 1997, Thomas M. Hall, M.D., received $ 110,231 and $ 95,104, respectively, representing a percentage of the Company's gross sales of certain travel-related medical services. The Company entered into a cooperative venture with SACNAS International (trade name- Mondial Assistance) through ASA, the Company's 50% owned joint venture. Additionally, as a result of its affiliation with SACNAS International (which is also a shareholder in the Company), the Company derived net revenues of approximately $189,000 and $160,000 during 1998 and 1997, respectively, exclusive of the joint venture activities. At October 31, 1998, the net accounts receivable from various Mondial centers were approximately $247,170. During 1996 the Company began construction of a new 12,000 square foot office building. 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 $614,429, which management believes approximates the market value for the services rendered. The Company took occupancy of the building in February, 1997. During 1998, the Company entered into an agreement with SACNAS International (SACNAS). The agreement grants SACNAS an option to purchase 100% of the Company's shares in ASA for $2,000,000 during the period January 1, 1998 through December 31, 1999. At the time SACNAS exercises its option, SACNAS shall tender to the Company the 305,378 shares of the Company SACNAS owns. The Company's shares shall be sold by SACNAS to the Company for $122,151 and the proceeds shall be used to offset the $2,000,000 purchase of the Company's ASA shares. The Company has the option to retain 8% of total ASA shares while allowing SACNAS to retain their 305,378 Company shares. If the Company exercises this option, the SACNAS option to purchase the remaining ASA shares shall be reduced to $1,680,000. Provided SACNAS has not exercised the option agreement, beginning January 1, 1998, and at the end of each quarter, SACNAS shall forgive 12.5% of the $500,000 unsecured loan to the Company (See Note C) along with interest accrued to that date SACNAS forgave principal and interest of $214,843 in 1998. Any principal loan amount forgiven shall be credited to the option price. If SACNAS does not elect to exercise the option agreement during the term provided, the remaining principal balance of the $500,000 loan not forgiven plus any accrued interest, shall be forgiven in its entirety. SACNAS has not exercised the option agreement as of the date of these financial statements. F-12 MEDICAL ADVISORY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND 1997 NOTE E-STOCK OPTIONS AND WARRANTS 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. Number Prices Per Number of of shares Share Range Shares Exercisable --------- ----------- ------------------ Outstanding at October 31, 1996 240,000 $.50 240,000 ======= Granted - - - Exercised - - - Cancelled - - - --------- Outstanding at October 31, 1997 240,000 $.50 240,000 ======= Granted 165,000 $.50 - Exercised - - - Cancelled - - - --------- Outstanding at October 31, 1998 405,000 $.50 294,334 ======= The employee stock options scheduled to expire during the period SACNAS has an option to purchase 100% of ASA's common stock (January 1, 1998 through December 31, 1999), have been extended to 60 days after SACNAS exercises its option. If SACNAS does not exercise its option, the employees' stock options that would have otherwise expired, will be extended to January 31, 2000 (See Note D). For disclosure purposes the fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for stock options granted during the years ended October 31, 1998 and 1997, respectively: annual dividends of $0.00 for both years, expected volatility of 50%, risk free interest rate of 6.0% an expected life from three to five years for all grants. The weighted-average fair values of the stock options granted during the years ended October 31, 1998 and 1997 were immaterial. If the Company recognized compensation cost for employee stock options in accordance with SFAS No. 124, the Company's proforma net income and net income per share would have been unchanged in 1998 and 1997. NOTE F-INCOME TAXES The Company files a consolidate U.S. federal income tax return. The Company determines deferred tax liabilities and assets based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Components of deferred tax assets as of October 31, 1998 are as follows: Current Deferred income $ 17,106 Allowance for doubtful accounts 19,909 ------- Current deferred tax asset 37,015 Noncurrent Net operating loss carryforwards 387,739 ------- Total deferred taxes $ 424,754 ======= F-13 MEDICAL ADVISORY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND 1997 NOTE F-INCOME TAXES-CONTINUED Deferred income taxes (asset) were increased in 1998 by $36,058 and in 1997 by $57,567. The Company has sustained profitable operations for the past nine years and management expects this to continue. Therefore, management believes it is more likely than not that it can realize deferred tax assets totaling approximately $ 424,754 over the next five years. In 1998 and 1997, MAS utilized approximately $ 640,000 and $ 296,000, of operating loss carryforwards on its tax return. For tax reporting purposes, unused net operating losses approximate $1,111,000, which expire as follows: Year Amount ---- ------ 2002 197,000 2003 226,000 2004 316,000 2005 106,000 2006 266,000 --------- $ 1,111,000 ========= The deferred tax asset related to the carryforward is approximately $388,000. NOTE G- MAJOR CUSTOMERS Revenue from two major customers approximated $865,446 or 26.2% of sales for the year ended October 31, 1998. Revenue from two major customers approximated $518,307 or 19.5% of sales for the year ended October 31, 1997. NOTE I-RETIREMENT PLAN In 1994 the Company adopted a retirement savings plan (Plan) in accordance with section 401(k) of the Internal Revenue Code. The Plan is available to all eligible employees, as defined in the Plan's agreement. Participants are allowed to contribute up to 15% of their annual compensation to the maximum amounts prescribed by law. The Company provides for discretionary matching contributions to the Plan equal to a percentage of the participant's contributions. The Company's contribution in 1998 and 1997 were $2,993 and $ 2,364, respectively. NOTE J - COMMITMENTS AND CONTINGENCIES The Company has entered into a Common Stock Purchase Agreement whereby the Company has agreed to purchase an additional 57,334 shares of common stock in America's Doctor, Inc. for $1,346,680 in cash which will increase the Company's ownership interest in America's Doctor, Inc. to approximately 18% (See Note B). The Company expects to fund this obligation from internally generated funds and outside sources. F-14 MEDICAL ADVISORY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND 1997 NOTE K - SUBSEQUENT EVENT Subsequent to the date of the financial statements, the Company issued warrants to purchase Company common stock to certain consulting firms as partial consideration for services being rendered to the Company. The terms of the warrants are as follows: Exercise Price per share Number Outstanding Date of Expiration - ------------------------ ------------------ ------------------ $1.13 15,000 11-30-98 1.13 15,000 12-31-98 3.00 100,000 11-23-01 4.00 100,000 11-23-01 5.00 30,000 03-30-00 An additional 70,000 warrants may be issued at the exercise price of $5.00 per share and expire March 30, 2001 contingent upon the consultant meeting certain conditions. F-15 EXHIBITS EXHIBIT INDEX Number Description of Exhibit Page - ------ ---------------------- ---- (11) Computation of Earnings per Common and Common Share Equivalents E-1 MEDICAL ADVISORY SYSTEMS, INC. COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES For the years ended October 31, 1998 and 1997 1998 1997 ---- ---- Shares outstanding at beginning of period 3,819,938 3,819,938 Weighted average of common shares issued during the period - - --------- --------- Weighted average of common shares outstanding during the period 3,819,938 3,819,938 Stock options and warrants outstanding-not included as they have no dilutive effect - - Shares used in computing earnings per common share 3,819,938 3,816,938 Earnings per common share ($529,663 / 3,819,938) $ .14 ======= Earnings per common share ($357,903 / 3,819,938) $ .09 ======= E-1 EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR YEAR ENDED 10/31/98 10KSB
5 12-MOS Oct-31-1998 Nov-01-1997 Oct-31-1998 579331 660000 907720 77744 26745 1557613 1659314 644259 3620407 1080431 0 19415 0 0 2454781 3620407 3242825 2299292 347236 347236 2726475 0 34848 440424 0 418805 0 0 0 529663 .14 .14
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