When the promises don't pan out
By KRIS HUNDLEY
c St. Petersburg Times, published March 16, 1998
In late 1996, Universal Medical Systems Inc. of
Clearwater seemed to be on a roll.
The tiny high-tech medical equipment company was
hyping new products and cutting deals to ship goods to
the Far East. The company hit pay dirt. It had sold three
of its signature product -- a scanner with software to
design cancer treatment plans -- to hospitals in Taiwan.
The deal helped Universal Medical's stock, which was
selling at less than $3 a share, grab the attention of a
handful of analysts. Suddenly, the firm was a Wall Street
darling on Internet sites and in investment newsletters.
Less than two years later, Universal's stock is trading at
less than a nickel a share. Plenty of investors, including a
church in Indiana, feel cheated. Employees, many owed
months of back wages, are left with uncovered medical
bills and underfunded pension accounts. The landlord has
locked the company out of its corporate headquarters
near Largo and is suing to evict.
As for the scanners in Taiwan, they don't work. Several
employees now describe them as little more than a box of
bolts, a far cry from the earlier promise of a breakthrough
in cancer treatment. On Thursday, company officials, now
working out of their homes, said they still hope to raise
$1-million to fix the scanners.
The tale of Universal's rise and fall offers a glimpse into the
tumultuous world of small companies that go public on
promises of big breakthroughs.
Universal was never more than a small player on the OTC
bulletin board, with just 25-million shares and a stock
price that peaked at a little over $3 in March 1996. The
company, which had about 50 employees, reported less
than $1-million in revenues and never posted a profit.
Following a loss of $3-million in 1996, Universal expects
its loss for 1997 to be about $5-million.
But Universal was able to attract shareholders and more
than $8-million in capital in two years. Its hook: promises
of quick riches in the sexy world of medical high
technology. Universal claimed its devices would be faster
and cheaper in the fight against breast cancer, heart
disease and spinal injuries. But the equipment never lived
up to promises.
In a hot stock market, however, stories like Universal's
sell. Every investor is eager to spot the next Microsoft.
Few investors researched the track record of Universal's
executive team. Analysts and newspaper reporters
accepted Universal's promises. Even regulators ignored
the company when management failed to submit any
financial reports.
Arthur Leavitt, chairman of the Securities and Exchange
Commission, recently called for a crack-down on
micro-cap stock fraud, which is believed to cost investors
$6-billion a year. The Nasdaq stock market is considering
dropping most of its bulletin board companies.
But Universal's problems never seem to have popped up
on the SEC's radar screen. That's true even now when the
company's shares are in the gutter and investors, vendors
and former employees have sued. It's not like the SEC
didn't know the company's president and chief executive,
Myron A. "Mike" Baker. Baker was disciplined by the
SEC in 1992 in response to complaints about false
financial reports.
When asked about Baker, an SEC spokesman said the
agency did sanction him, but the SEC can't find the file on
the case.
Meanwhile, Baker, a youthful 68-year-old, presides over
Universal from his half-million-dollar home in Nevada
City, Calif. Or from his more modest home now for sale in
Palm Harbor. He and Dennis D. Cole, Universal's
counsel, strenuously deny any wrongdoing and reject the
suggestion that Universal is in trouble. "We are trying our
best to make the company successful," Baker said. "We'll
do whatever needs to be done to keep the company going
forward." Beyond that, Baker refused to comment and
referred all questions to Cole.
Howard Sirota, a former Nasdaq investigator who now
practices securities law in New York, said Universal's
blunders are common, especially with the rise of
investment hype on the Internet.
"These pump-and-dump operations promote the stock,
sell their own shares to the public and move on," Sirota
said. "It's the Wild West out there."
Baker built trust among industry watchers by talking about
his credentials in Corporate America. In interviews with
analysts, Baker said he had 30 years of management
experience with Dresser Industries and Fairchild Camera
and Instrumentation. He did not mention his role over the
past two decades as officer and director in dozens of
corporations that sold everything from oil purification units
to an herbal cure for AIDS.
By late 1994, Baker, along with Cole and Guy Zani Jr.
were doing business as MedHealth Imaging Inc. in Largo,
promoting a device for detection of breast cancer. In the
search for capital, they turned to the Church of God in
Anderson, Ind., where Cole had once been a member.
Cole and Baker persuaded the church to lend the
company $657,599.47 so it could complete development
of its promising new medical device.
Looking for ways to grow even faster, Baker, Cole and
Zani took over small troubled companies. In late 1995,
they approached a struggling Clearwater company called
Medical High Technology International.
Medical High Technology was started in the early 1980s
by three friends who had worked for Pfizer Medical
Systems. The men built a healthy business, servicing
scanners in the United States and Latin America. By the
late-1980s, they began developing the CT Simulator, a
scanner with additional computer hardware and software
for designing radiation treatment plans for cancer patients.
While a conventional scanner spots a cancerous tumor,
this improved model also maps precise coordinates for
radiation therapy. That saves surrounding healthy tissue
from getting zapped.
Medical High Technology sold about 40 of its scanners
and was developing an advanced model when the money
ran out. Enter Baker and company.
He convinced Medical High Technology officials that he
could raise the cash they needed. He failed to mention his
track record. And Medical High Technology apparently
didn't check him out. For instance, in 1989, Baker paid
$265,000 to settle charges of breach of contract and
fraud while he headed a consulting company from his Palm
Harbor home.
Baker also neglected to disclose that Cole, Universal's
counsel, had been disbarred and given a three-year
suspension for misconduct by both the state of Colorado
bar and federal bar. The suspension followed several
disciplinary actions and was sparked by his failure to
appropriately represent a client. When asked about it,
Cole deemed it "irrelevant" to his current business.
Baker was able to win over Medical High Technology
owners by showing financial statements for his company
that showed ownership of a 1,450-acre resort in northern
Minnesota valued at $5-million. In fact, the resort's owner
said Baker's company never had an ownership interest in
the resort.
But Medical High Technology's owners, who took
Universal stock in return for their company, were happy to
find anyone promising to bring money to their project.
"They were really the only girl at the dance," said James
N. Marsh, one of Medical High Technology's founders.
"We were right on the verge of turning the corner, but we
needed extra revenue."
Baker did raise new capital for the merged companies,
now called Universal Medical. But little of it seemed to
filter from the front office to the engineers, who needed the
money to complete the scanners and other products.
Marsh said he had to turn down orders because the
products were not ready for the market.
"We told them we needed $2-million to $3-million to
complete our task and they said they could provide it,"
Marsh said. "Well, a lot of money came in to the
company, but I can't tell you where it went."
Promised acquisitions didn't materialize. Plans to acquire
two companies with a vascular diagnostic system ended in
a lawsuit. An attempt to buy a new high-tech cobalt
scalpel -- a cancer treatment tool -- also fell apart.
Two years after Baker came on the scene, Marsh is
locked out of work and owed more than $75,000 in back
pay. He estimates he lost several hundred thousand dollars
on the Universal stock he received for his share of
Medical High Technology. The shares were worth about
$2 each at the time of the sale; on Friday, the stock closed
at 3.9 cents a share.
Another Medical High Technology founder, Jerome
Shields, has sued Universal and Baker for breach of
contract and civil theft. That suit is pending. An investor in
Nebraska also sued Universal for breach of contract to try
to reclaim her $660,000 investment.
Beyond the investors, employees are discovering that
payroll deductions for their 401(K) retirement plans were
not turned over to the fund trustee by the company. John
Krawczyk said his pension plan was underfunded by more
than $1,900. "When I told the company, they said they
recognized that fact and had every intention of making it
up," Krawczyk said.
Tracy Luoma, whose ex-husband worked at Universal,
learned the hard way that the company was not sending
her payments to the insurance carrier. After having an
accident and extended hospital stay, Luoma found herself
with more than $150,000 in unpaid medical bills. "I was
devastated when the insurer told me by coverage had
been canceled due to lack of payment," Luoma said. "The
company must have thought no one would ever have to
collect."
Cole, Universal's counsel, denies that the company failed
to fund either pension funds or insurance plans. "I feel the
company more than bent over to take care of those
people," he said.
As for the Indiana church, it's still trying to get its loan
repaid. Baker's company made occasional payments, but
more than $550,000 is outstanding and the church is suing
for repayment.
"The church doesn't normally invest in venture capital type
companies," said Louis Jackson, who handles loans for
the independent congregation, but was not employed by
the church in 1994. "Probably what happened was that
these guys sold the (church) board a bill of goods."
Analysts who once touted Universal have turned sour.
Marc Klee, with American Fund Advisors in Garden City,
N.Y., visited the company's headquarters in early 1996
and expected it to start reporting profits by late that year.
A year ago, Klee told a Times freelance writer that he
predicted the company's stock price could reach $10 a
share by early 1998. But Klee dropped his coverage of
the company when officials repeatedly misled him about
when they would file financial reports. "I told the company
I wouldn't speak with them again until they produced
audited financial statements," Klee said. "They never did
and I haven't spoken to them in over a year."
In its registration statement with the SEC, Universal
admitted it had not sold a single piece of equipment in
1996. Total sales for the year of about $700,000 were
from providing service and parts to machines already in
the field. Final results for Universal for 1996: a net loss of
nearly $3-million.
Baker, Cole and Zani, meanwhile, collected salaries of
$120,000 each, along with "bonuses awarded from time
to time by the company's board of directors." The three
executives were the only members of the company's
board.
Cole said the 1997 annual report is awaiting final approval
by the company's auditor and attorney, a refrain investors
have been hearing since December. Matthew
Szynkiewicz, company controller, said Universal lost
about $5-million last year. But Cole declined to confirm
that figure.
"I can assure you there was probably a loss in 1997," said
Cole, who promises the filing is imminent. "But it was
probably (on) paper, not cash."
As Universal's stock nosedived over the past few months,
anxious investors on an Internet chat room watched its
demise and traded rumors about the company's possible
resurrection. A minor pop in the stock or rise in volume
would spark a round robin of postings, all speculating on a
possible Lazarus-like move.
Tom Kosta, chief executive of Kostech Corp., a Reno,
Nev., research firm that follows small companies, once
believed in Universal's potential.
"When I recommended the stock in January 1997, they
looked like an up-and-coming medical device and service
company that had all the appearances of being a diamond
in the rough," said Kosta, who emphasizes that he never
received any money from the company in exchange for his
report.
Now he has no illusions about the company, despite
recent announcements of possible financing. "Stick a fork
in it," Kosta said. "It's done."
cCopyright 1998 St. Petersburg Times. All |
