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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended September 30, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to _______
Commission File No. 0-22947
HEALTHCORE MEDICAL SOLUTIONS, INC.
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(Name of Small Business Issuer)
Delaware 43-1771999
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11904 Blue Ridge Boulevard, Grandview, Missouri 64030
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 763-4900
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, $.01 par
value
Class A
Warrants
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve (12) months (or for such shorter period that the registrant was required
to file such report(s)), and (2) has been subject to the filing requirements for
the past ninety (90) days.
YES [X] NO [_]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein 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 to this Form 10-KSB [X].
State issuer's revenues for its most recent fiscal year: $84,402
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 December 28, 1998 $2,892,000.
State the number of shares outstanding of each of the issuer's common equity as
of December 28, 1998 3,018,000 shares of Class A Common Stock, $.01 par value
and 216,000 shares of Class B Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
See Part III hereof with references to incorporation by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act.
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PART I
Statements in this Form 10-KSB that are not statements or descriptions of
historical facts are forward-looking statements under the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward looking statements and other forward looking
statements made by the Company or its representatives are based on a number of
assumptions and actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth under "Risk
Factors" and elsewhere in, or incorporated by reference into, this Form 10-KSB,
such as history of operating losses; anticipated future losses; limited
operating history; unproven commercial acceptance; need for market acceptance;
limited marketing capabilities; competition; government regulation; dependence
on third parties; and other risks.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
HealthCore Medical Solutions, Inc. (the "Company") markets and administers
a health care benefit services program which is designed to enable participants
("Members")to obtain discounts on purchases of health care products and services
through certain networks (the "Networks") of health care providers (the
"Providers"). For an annual fee of approximately $55 to $100, individuals can
join the Company's card membership program and use their HealthCare Solutions
Card to receive discounts of up to 5% to 60% off the retail price of health care
services and products including retail and mail-order eye care, pharmaceutical
and durable medical equipment ,retail dental, hearing, physical and occupational
therapy and chiropractic, and retail mail-order vitamins and supplements. In
addition to the HealthCare Solutions Card, the Company recently began marketing
two new products: the Savings Solutions Card, which was customized for an
organization to offer discounted ancillary health care services as well as
non-medical consumer products to certain subscribers in the New York
metropolitan area, and the Medical Solutions Card, which provides nationwide
discounts to enrollees for hospital and physician services. The Company
anticipates marketing the Savings Solutions Card on a nationwide basis similar
to the Medical Solutions Card and the HealthCare Solutions Card. As of December
28,1998,the Company had contracts with approximately 40 different Networks which
consisted of approximately 450,000 participating Providers.
The Company's target market includes uninsured individuals who, whether
because of their medical history, age or occupation, either do not have
insurance or have limited insurance coverage but who seek to access health care
products and services at discounted costs. Acceptance into the Company's
membership programs is unrestricted, and the Company's membership card products
may be used by any member of the cardholder's household. The Company primarily
uses brokers, insurance agents and consumer marketing organization to sell its
products to either individuals or to group enrollees such as employers, health
maintenance organizations ("HMOs") and other organizations (collectively,
"Sponsors") who purchase the Company's products for their employees or members.
The Company was established in October 1995 as MegaVision L.C., a Missouri
limited liability company ("MegaVision"). In February 1997, MegaVision merged
into HealthCore Medical Solutions, Inc. Except as otherwise required by the
context, all references to the Company and its operations include MegaVision and
its operations. The Company's executive offices are located at 11904 Blue Ridge
Boulevard, Grandview, Missouri 64030 and its telephone number is (816) 763-4900.
PRODUCTS
The HealthCare Solutions Card. The HealthCare Solutions Card enables
Members to obtain discounts of approximately 5% to 60% on purchases of ancillary
health care products and services through certain Networks of Providers.
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For an annual fee of approximately $55 to $100, Members have access to
participating Providers, and automatically receive a discount at the
point-of-purchase upon presentation of the HealthCare Solutions Card. To date,
the Company has entered into non-exclusive agreements with national networks of
eye care service providers, dental service providers, pharmaceutical providers,
a hearing service provider, a national network of chiropractic service
providers, a national network of physical and occupational therapy service
providers, a national network of providers of durable medical equipment and
providers of mail-order vitamins and supplements, pharmacy and eye care to
participate in the Company's Networks. The Networks with which the Company has
contracted were generally created to provide individuals with access to health
care products and services at reduced costs and to provide such individuals with
broader geographical access to such providers. Pursuant to agreements entered
into between the Networks and the Providers, the Providers have agreed to
provide health care services to members of the Networks at reduced costs and, in
exchange, Providers are given access to additional patients and additional
sources of revenue.
The Company's agreements with its Networks are generally for a term of one
to three years and provide for termination by either party in the event of a
default or, at any time after a stipulated period of time following the
execution of the agreement (generally ranging from six months to three years)
upon 60 to 90 days prior written notice. The agreements also provide that upon
termination of an agreement for any reason, the Company and the Providers
participating in such Networks will continue to provide services to Members, for
the term of their enrollment, if they purchased the HealthCare Solutions Card
for access to such Provider's Network prior to such termination. In addition,
under certain agreements, the Company pays a stipulated access fee per Member
per year to the respective Network in exchange for access by Members to such
Networks. In the case of the Company's agreement with one of its pharmaceutical
Networks, the Company also receives a stipulated commission from such Network
for each prescription ordered by a Member.
Eye Care Services. The Company's Networks include eye care services and
products designed to provide savings to Members by reducing the cost of eye
examinations, contact lenses and eyeglass frames and lenses (the "Eye Care
Plan"). Pursuant to non-exclusive agreements with several national networks of
eye care providers, as of December 28, 1998, the Eye Care Plan was comprised of
an aggregate of approximately 16,000 opticians, optometrists and
ophthalmologists located throughout the United States. Under the Eye Care Plan,
Members are entitled to receive eye care services and products, including eye
examinations, contact lens fittings and eye wear purchases, at a pre-determined
discount off the usual and customary amounts charged by the Providers. Members
are also eligible to receive a discount on radial keratotomy (RK) surgical
procedures, a surgical procedure designed to correct nearsightedness and which
is typically not covered by traditional health care insurance. In addition,
Members can purchase contact lenses and non-prescription eyeglasses by mail.
Pursuant to the Company's contracts with its Eye Care Plan Networks,
Providers have agreed to provide eye care services and products to Members in
the Company's Eye Care Plan at discounts ranging from 5% to 30% off retail
prices and discounts ranging from 20% to 60% off retail prices for mail-order
contacts and non-prescription eyeglasses. Such services and products are
provided by opticians, optometrists and ophthalmologists working at vision care
centers managed and administered by the Eye Care Plan Networks. The Eye Care
Plan Networks are expected to solicit and contract with additional Providers to
participate in the eye care segment of the Company's Networks and have agreed to
continue to manage and provide administrative services to Providers in their
respective Network.
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Dental Services. The Company's Networks include dental services and
products designed to provide savings to Members by reducing the cost of dental
examinations and products (the "Dental Plan"). Pursuant to non-exclusive
agreements with several national networks of dental service providers, as of
December 28, 1998, the Dental Plan was comprised of an aggregate of
approximately 20,000 dentists located throughout the United States. Under the
Dental Plan, Members are entitled to receive dental services and products,
including routine check-ups and cleanings, at a pre-determined discount off the
usual and customary amount charged by the Providers.
Pursuant to the Company's contracts with its Dental Plan Network's,
Providers have agreed to provide dental services and products to Members in the
Dental Plan at discounts of up to 40% off usual and customary prices. Members in
the Dental Plan will have access to networks of dentists throughout the United
States, and as the Company expands the Dental Plan, the Dental Plan Networks
have agreed to solicit and contract with additional dental Providers to
participate in the Networks. The Dental Plan Networks have agreed to continue to
manage and provide administrative services to Providers in their respective
Network.
Pharmaceutical Plans. The Company's Networks include a retail
pharmaceutical plan (the "Retail Pharmaceutical Plan") and a mail-order
pharmaceutical plan (the "Mail-Order Pharmaceutical Plan"). Pursuant to
non-exclusive agreements with several networks of national pharmacy chains, as
of December 28, 1998, the Retail Pharmaceutical Plan was comprised of
approximately 44,000 pharmacies throughout the United States.
Members enrolling in the Retail Pharmaceutical Plan are able to obtain
discounts of up to 50%. Members enrolling in the Mail-Order Pharmaceutical Plan
are able to obtain discounts of up to 60%. The Company also receives a small
commission from one of its Mail-Order Pharmaceutical Networks for each
prescription order filled by such Network, which to date has generated only
minimum commissions.
Hearing Services. The Company's Networks include hearing services and
products designed to provide savings to Members by reducing the cost of hearing
examinations and products (the "Hearing Plan"). Pursuant to agreements with two
national networks of hearing products and service providers, as of December 28,
1998, the Hearing Plan was comprised of an aggregate of approximately 2,000
retail locations throughout the United States. Under the Hearing Plan, Members
are entitled to receive hearing services and products, including routine
check-ups and hearing aid products and accessory purchases, at a pre-determined
discount off the usual and customary amount charged by the Providers.
Pursuant to the Company's contracts with its Hearing Plan Networks, the
Providers have agreed to provide hearing examinations and certain other services
at no cost to Members in the Hearing Plan and hearing aid products and accessory
purchases at discounts of 15% to 20% off retail prices. Members in the Hearing
Plan have access to participating providers throughout the United States, and as
the Company expands the Hearing Plan, the Hearing Plan Networks have agreed to
solicit and contract with additional Providers to participate in the Networks.
The Hearing Plan Networks have agreed to continue to manage and provide
administrative services to Providers in their respective Network.
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Chiropractic Services. The Company's Networks include chiropractic services
designed to provide savings to Members by reducing the cost of chiropractic
examinations and related services (the "Chiropractic Plan"). Pursuant to
agreements with several national networks of chiropractic service providers, as
of December 28, 1998, the Chiropractic Plan was comprised of an aggregate of
approximately 5,000 providers throughout the United States. Under the
Chiropractic Plan, Members are entitled to receive chiropractic services, many
of which the Company believes were not covered by traditional healthcare
insurance, including chiropractic examinations and related services, at a
pre-determined discount off the usual and customary amount charged by the
Providers.
Pursuant to the Company's contracts with its Chiropractic Plan Networks,
Providers have agreed to provide chiropractic examinations and related services
at discounts ranging from 30% to 50% off usual and customary prices. Members in
the Chiropractic Plan have access to participating chiropractors throughout the
United States. The Chiropractic Plan Networks have agreed to solicit additional
Providers to participate in the chiropractic segment of the Company's Networks
and have agreed to continue to manage and provide administrative services to
Providers in their respective Networks.
Physical and Occupational Therapy Services. The Company's Networks include
physical and occupational therapy services designed to provide savings to
Members by reducing the cost of physical and occupational therapy related
services (the "Physical Therapy Plan"). Pursuant to agreements with two national
networks of physical and occupational therapy service providers, as of December
28, 1998, the Physical Therapy Plan was comprised of an aggregate of
approximately 6,500 providers throughout the United States. Under the Physical
Therapy Plan, Members are entitled to receive physical and occupational therapy
services, including examinations and related services, at a pre-determined
discount off the usual and customary amount charged by the Providers.
Pursuant to the Company's contracts with its Physical Therapy Plan
Networks, Providers have agreed to provide physical and occupational therapy
services at discounts of up to 20% off usual and customary prices. Members in
the Physical Therapy Plan have access to participating providers throughout the
United States. The Physical Therapy Plan Networks have agreed to solicit
additional Providers to participate in the physical and occupational therapy
segment of the Company's Networks and have agreed to continue to manage and
provide administrative services to the Providers in their respective Network.
Vitamins and Supplements. The Company's Networks include access to
mail-order vitamin and supplement products. Pursuant to an agreement with a
national mail-order network provider of vitamins and supplements, Members are
entitled to purchase vitamins and supplements at discounts of up to 60% off
retail prices.
Durable Medical Equipment. The Company's Networks include access to durable
medical equipment (the "Durable Medical Equipment Plan"). As of December 28,
1998, the Durable Medical Equipment Plan was comprised of an aggregate of
approximately 500 locations through the United States. Under the Durable Medical
Equipment Plan and pursuant to an agreement with a national network provider of
durable medical equipment, Members can receive home delivery of durable medical
equipment by purchasing such equipment by mail at discounts of up to 15% off
retail prices.
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The Medical Solutions Card. The Company has recently contracted with a
national network of physicians and hospitals to provide discounts ranging from
15-60% on hospital and physician visits, home health care, cardiovascular care
and nursing home or long-term care (the "Physicians and Hospital Plan"). The
Company recently began marketing this product as the Medical Solutions Card. As
of December 28, 1998, the Physician and Hospital Plan was comprised of an
aggregate of approximately 350,000 physicians and 3,500 hospitals throughout the
United States. The Company is marketing the Medical Solutions Card on a
nationwide basis.
The Savings Solutions Card. The Company has also launched a Savings
Solutions Card, offering discounts on medical services and products, pharmacy
products, vitamins and supplements, veterinary services and pet products,
long-term care and assisted living, home health care, and certain consumer
purchases including jewelry, furniture and travel. This product was developed
specifically for an organization in the New York and New Jersey area. As of
December 28, 1998, the network was comprised of providers in the New York and
New Jersey area and the Company anticipates marketing the Savings Solutions Card
in certain regions throughout the United States.
ADVANTAGES OF THE SOLUTIONS CARD
Advantages to Members. In addition to providing access to health care
products and services on a discounted fee-for-service basis at the point of
purchase, the Company believes the HealthCare Solutions Card, the Savings
Solution Card and the Medical Solutions Card (the "Savings Cards") are
attractive to Members because of their flexibility and ease of use. The
Company's target market includes uninsured individuals who, whether because of
their medical history, age or occupation, either do not have insurance or have
limited insurance coverage but who seek to access health care products and
services at discounted costs. Acceptance into our membership program is
unrestricted, and our Savings Cards may be used by any member of the
cardholder's household. The Savings Cards cover each person in the Member's
immediate household and can be used as often as each participant wishes. In
addition, unlike many traditional indemnity or managed care programs, Members
have no paperwork or claims to prepare, no waiting periods, and no prior
authorizations are required. Moreover, in certain cases, membership in the
Company's programs entitle Members to benefits that would otherwise be
unavailable or difficult to obtain. In addition, even where a Member may already
have insurance for a particular product or service, the Savings Cards entitle
Members to various discounted products and services that would typically be
excluded from traditional health care insurance, including certain
pharmaceuticals, vitamins, growth hormones, oral contraceptives, smoking
deterrents and fertility drugs, and certain elective procedures and services.
Advantages to Providers and Networks. The Company believes that health care
providers are attracted to the Company's programs because it enables them to
obtain additional patients who are Members while allowing Providers to retain
their existing practices. Although Members generally pay fees and charges less
than those of non-Members, the incremental business from Members can be an
important source of revenue to the Providers, with little or no increase in
their overhead costs. However, there can be no assurance that Providers will
continue to participate in the Networks even if their participation results in
such an increase in revenues since the Member portion of their business may be
relatively less profitable. In addition, the Company believes that its programs
are attractive to provider networks because it may increase the likelihood that
providers will affiliate with provider networks in order to have access to
Members, and accordingly, provider networks may realize increased revenues from
such affiliations. Further, the Company believes that its programs are
attractive to provider networks for the following reasons: (i) providers receive
cash at the time services are rendered; (ii) providers are not required to file
claims; and (iii) providers are not subject to a waiting period for payment from
a third party payor.
Advantages to Sponsors. The Company believes that the Savings Cards assist
Sponsors in their efforts to attract and retain employees by enabling them to
offer a more complete health care benefits package. Similarly, as competition
between HMOs for participants continues to intensify, the Company believes that
the Savings Cards enable HMOs to offer a more complete, and therefore more
attractive, array of potential health care benefits. In addition, due to the low
cost of the Savings Cards, sponsors may even choose to offer it to part-time
employees, who often are not eligible for health care
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benefits offered to full-time employees. Moreover, because the Savings Cards are
discount cards and not insurance products, Sponsors can offer discounts to their
employees or members without bearing any economic risk over the annual cost of
the cards.
SALES AND MARKETING
The Company relies primarily upon the services of independent sales
representatives, including brokers, agents, consumer marketing organizations and
associations, to market the Savings Cards. These arrangements generally provide
for commissions based upon a percentage of sales of the Savings Cards, which
commissions range from 20% to 50% of the aggregate sales price. The Company
believes that there are a large number of independent brokers and other agents
nationwide with whom the Company may establish relationships. To date, the
Company has entered into numerous agreements with individuals, including
individuals affiliated with American Family Life Assurance Company ("AFLAC"),
who are expected to serve as independent brokers. The Company intends to
continue to contract with additional independent brokers in the future and
believes that certain of its Networks may provide the Company with access to
additional independent brokers. In addition, the Company maintains an in-house
sales force that currently consists of three persons, and the Company may hire
additional salespersons as needed in the near term.
The Company markets the Savings Cards principally to potential Sponsors,
including insurance carriers, third party administrators, corporations, HMOs,
preferred provider organizations, Blue Cross and Blue Shield organizations and
unions, which have, or have access to, a large number of potential Members. The
Company believes that its use of independent brokers and third party
administrators will not only provide immediate access to specific organizations
with potential Members, but will also enable the Company to establish
relationships with these individuals and entities who may be gatekeepers to even
greater numbers of potential Members through their extensive contacts in their
respective industries.
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The Company anticipates that Sponsors will either fund the Savings Card
program on behalf of their members or employees so that every eligible
individual in the organization becomes a Member or they will offer the Savings
Cards to their members or employees as an option where each individual will be
responsible for purchasing the Savings Cards and paying the annual fee (either
directly or through a payroll deduction plan). The Company also markets the
Savings Cards directly to potential Members, particularly in cases where a
Sponsor offers the Savings Cards as an unpaid option to its members or
employees.
The Company also markets the Savings Cards as "affinity" cards to selected
large Sponsors, including large corporations and consumer marketing
organizations. Pursuant to such affinity card arrangements, the Sponsor would be
able to custom design, and place its own name on the Savings Cards. In certain
cases, the Company's name may not appear on the cards, although the Company
would provide access to its Networks, as well as all required fulfillment
services. The Company believes that affinity cards will be attractive to certain
Sponsors because they will enable the Sponsor to more closely identify itself
with the benefit provided to the Member. Moreover, the Company believes that the
preexisting relationship, or affinity, between the Sponsor and its employees or
members may enhance the likelihood that a potential Member will purchase the
cards.
THE PROPRIETARY DATABASE INFORMATION MANAGEMENT SYSTEM
The Company believes its proprietary database information management system
(the "DBIM System")(i) facilitates the Company's ability to process Member
applications and access Member and Provider data, (ii) enhances the Company's
customer service capabilities and (iii) facilitates the Company's ability to
process and pay commissions to brokers and fees to certain Networks. See
"--Sales and Marketing." The DBIM System contains information relating to
Members, such as eligibility in the respective plan, services and products
available to Members, the discounts available to the Member for services and
products, locations of Providers and utilization data provided to the Company on
a regular basis by each of the Providers in the Networks. The Company believes
that the DBIM System enables it to enroll Members electronically, quickly
respond to information requests from Members, Sponsors and Providers, assist
Members in locating the nearest Provider and facilitate billing and data
processing.
The Company has developed an internet web site at www.solutionscard.com
which is accessible by existing and potential Providers, Sponsors, Members and
independent sales representatives. Individuals accessing the web site are able
to review the health care benefit plans offered by the Company, a list of
Providers in the Networks and their locations, the products and services
provided by the Providers, the discounts available to Members for services and
products and any special promotions. Individuals accessing the Company's
internet web site are able to immediately apply for any of the Company's Savings
Cards by filling out an application online.
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COMPETITION
The Company believes that a critical element of its business is the
competition for a portion of the benefit dollars allocated by various
organizations for employee benefit programs. The Company competes for a portion
of those dollars with various other cost-containment marketing organizations,
pharmacy indemnity programs, retail pharmacies, mail-order prescription, and
vitamin and supplement companies, preferred provider organizations, HMOs, health
care membership programs and other health care insurance programs for Members
and Providers. With respect to its health care services, the Company competes
for potential Sponsors, Members and Providers, depending on the geographic area
or market, with various entities that have developed discount membership cards
which provide national coverage, including a number of companies with longer
operating histories and substantially greater financial and other resources than
the Company and entities that have developed discount membership cards which
provide only regional coverage. The Company also competes with various
organizations which provide services and products in specific areas of health
care such as eye care services, pharmacy indemnity programs, independent and
chain-operated retail pharmacy outlets, retail medical/surgical supply companies
and other mail order prescription and, vitamin and supplement companies, HMOs
and health care membership programs. Most of these competitors have longer
operating histories and have significantly greater financial, marketing and
administrative resources than the Company. There can be no assurance that the
Company will develop products that achieve greater market acceptance than
competitive products or that the Company's competitors will not succeed in
developing products that would render the Company's products less competitive or
obsolete.
The Company believes that the broad range of choices of health care benefit
packages, its customer service capabilities resulting from the DBIM System, its
broad provider base, independent broker market (as opposed to multilevel
marketing) and its competitive pricing differentiate it from its competitors and
enables it to offer a more comprehensive and cost effective solution to its
customers' needs. See "-- Sales and Marketing."
GOVERNMENT REGULATION
The delivery of health care products and services is subject to extensive
federal, state and local regulation, including but not limited to the
prohibition of business corporations from providing medical care, fraud and
abuse provisions of the Medicare and Medicaid statutes, state laws that prohibit
referral fees and fee splitting and certain regulations applicable to insurance
companies and certain organizations that provide or arrange for health care
services. The Company believes that certain registration and licensing laws and
regulations in certain states in which the Company intends to operate may apply
to the Company's operations. In addition, statutes and regulations applicable to
other health care organizations with which the Company may contract, including
without limitation those relating to fee splitting, referral fees, patient
freedom of choice, provider rights to participate and anti-discrimination, may
impact the Company and may result in the delay or denial of any such
organization's participation in the Company's Networks. The utilization fees
received by the Company in connection with the Mail-Order Pharmaceutical Plan
might be construed to contravene the literal provisions of these statutes and
regulations in a number of states in which the Company intends to operate. In
addition, certain states in which the Company offers its Savings Cards have
taken the position that certain of the discounted services offered by the
Company's Networks may be interpreted as prepaid insurance and in such states,
the Company and its Networks have modified the services offered in order to
comply with such state laws. Although the Company has not obtained any rulings
from any governmental authorities or an opinion of counsel with regard to any of
these matters, the Company believes that the extent of its compliance with such
laws and regulations as they are currently enforced and applicable to the
Company is consistent with current industry practices
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and will not have a material adverse effect on its business. However,
legislation in these areas continues to evolve and there can be no assurance
that changes in enforcement and compliance practices will not occur in the
future, or that existing legislation will not be expanded. In any such event,
the Company could be required to effect registration in various additional
states, post substantial fidelity or surety bonds and/or meet other financial
requirements in connection therewith. Alternatively, the Company could be
required to modify the products and services offered by it, modify its
contractual arrangements with Networks and Sponsors or be precluded from
providing some or all of its products and services in certain states. Any or all
of the foregoing consequences, or a determination that the Company is in
violation of any applicable laws or regulations, could have a material adverse
effect on the Company.
PROPRIETARY RIGHTS
The DBIM System is a critical component of the Company's ability to provide
customer service and process other data. The Company relies on trade secrets to
establish and protect its proprietary rights to its DBIM System. However, trade
secrets are difficult to protect and there can be no assurance that others will
not independently develop substantially equivalent proprietary technology or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its rights to
non-patented trade secrets.
The Company has applied for federal registrations of the service marks
"HEALTHCARE SOLUTIONS," "THE SOLUTIONS CARD," "HEALTHCARE SAVINGS. GUARANTEED,"
and "HEALTHCORE MEDICAL SOLUTIONS, INC.", intends to apply for registration of
the service marks "SAVINGS SOLUTIONS", "MEDICAL SOLUTIONS" and certain other
service marks from the United States Patent and Trademark Office, but there can
be no assurance that such rights will be granted. The Company is aware of
several companies who may currently be using variations of the Company's trade
names or service marks in connection with certain health care activities and at
least one other company who may be using certain of the Company's trade names or
service marks in connection with a business that is competitive with the
Company's business. There can be no assurance that the Company's trade names or
service marks will be found to have proprietary significance or that the
Company's rights in such names or marks will be superior to those of other
companies who may use such names or marks. Further, there can be no assurance
that the Company will not commence litigation to protect its position or that
third parties will not in the future claim infringement by the Company with
respect to current or future services, trademarks or other rights (including the
use of the HealthCare Solutions, Savings Solutions and Medical Solutions names).
Any such claims could be time consuming, result in costly litigation or require
the Company to change its name or marks, pay damages or other amounts in
settlement of any claim or redesign any of its products or services, any of
which could have a material adverse effect on the Company's business or
operating results. Although the Company intends to take steps that it considers
appropriate to protect its intellectual property rights, the Company believes
its future success will depend primarily on its ability to effectively market
its current products and introduce new products and services or enhancements to
existing products, rather than upon legal protections afforded existing
intellectual property.
EMPLOYEES
The Company currently has 16 full-time employees. The Company may hire
additional sales, management and administrative personnel, as needed to operate
the business. The Company's future
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success depends in significant part upon the continued service of its executive
officers and key personnel and its ability to attract and retain highly
qualified sales and marketing and managerial personnel. Competition for such
personnel is intense and there can be no assurance that key employees can be
retained or that it can attract, assimilate or retain other highly qualified
sales and marketing and managerial personnel can be retained in the future. None
of the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
RISK FACTORS
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES. Since our formation
in June 1995, we have experienced significant operating losses. We also expect
to incur losses in the future. At September 30, 1998, our accumulated deficit
was approximately $6.6 million. Our losses stem principally from expenses
associated with the development and marketing of our products. We can not assure
you that we will ever achieve significant commercial sales or become profitable.
LIMITED OPERATING HISTORY. Although we were organized in June 1995, we have
only recently contracted with networks of healthcare providers and have made
only minimal sales of the HealthCare Solutions Card, the Savings Card and the
Medical Solutions Card. The success of our business depends upon several
factors, including the quality and quantity of providers in the networks, the
acceptance of the Savings Cards by individuals, employers, HMOs, business and
other associations, providers of medical benefits and card members, the
incentives we offer to independent sales representatives to sell our products
and our ability to manage our business. You should be aware of the difficulties
we face as a new enterprise, as well as the high rate of failure of new
enterprises. Based on the short history of our operations, we cannot assure that
we will ever become a profitable business. While we have initiated sales and
marketing activities and have generated minimal sales, we have yet to generate
significant revenues and may experience many of the problems, delays, expenses
and difficulties commonly encountered by early stage companies, many of which
are beyond our control. These problems include delays or expenses related to
product development and marketing, uncertain market acceptance, lack of
sufficient capital, competition, customer service and regulatory compliance, as
well as additional costs and expenses that may exceed current estimates. We may
not be able to develop a strong cardholder base, to enter into and maintain
agreements with a sufficient number of providers that are accessible and
acceptable to potential members, to generate any revenues or to ever develop
profitable operations.
NEED FOR SIGNIFICANT ADDITIONAL FUNDS. The proceeds from our initial public
offering completed in October 1997 will only be sufficient to fund our
operations, at our current utilization rate, until approximately January 2000.
Thereafter, we will likely need significant additional funds to continue our
operations. Moreover, our future cash requirements may vary significantly from
what we expect them to be based on factors such as product development and
marketing programs, changes in the forms and direction of our business
activities, the timing of receipt of revenues, if any, as well as other factors.
We have no commitments for any future funding and we may not be able to obtain
additional financing in the future from either debt or equity financings, bank
loans, collaborative arrangements or other sources on terms acceptable to us, or
at all. If we are unable to obtain the necessary financing, we will have to
significantly curtail our activities or cease operations.
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UNPROVEN COMMERCIAL ACCEPTANCE; NEED FOR MARKET ACCEPTANCE. Our success
depends on commercial acceptance of our Savings Cards, as well as any other
potential products we may offer in the future. Our commercial success will be
determined in large part by the acceptance of our Savings Cards by individuals,
employers, HMOs, business and other associations, providers of medical benefits
and members, as well as our ability to market effectively and to build alliances
with network providers. To date, we have made only minimal sales of our Savings
Card. We can not assure that we will be able to successfully demonstrate that
the benefits associated with the Savings Cards justify the costs of purchasing
such cards or that the benefits we offer outweigh benefits offered by either
competing medical benefits programs or traditional insurance programs. If we are
unable to achieve commercial acceptance of the Savings Cards, we may be forced
to cease operations.
LIMITED MARKETING CAPABILITIES; DEPENDENCE ON THIRD PARTIES FOR MARKETING
ACTIVITIES. To a large extent, our operating results will depend upon our
ability to successfully market our Savings Cards and other potential
products we offer to members. We will continue to expand in these areas and
concentrate the limited resources we have at present on defined segments of our
target markets. We anticipate that our success will depend, to a significant
degree, upon independent brokers, insurance companies, selected marketing
organizations and our direct sales efforts to market our products. Although
third parties will receive a commission for their services, the success of any
alliance will depend in part upon the third parties' own competitive, marketing
and strategic considerations, including the relative advantages of alternative
competing products. Although we have entered into numerous agreements with
independent brokers and insurance agents, we can not assure that third parties
will successfully market our products. To the extent that we utilize third
parties as a primary distribution source, our ability to control sales and
marketing will be limited. We can not assure that we will be able to hire
experienced marketing personnel or to establish any additional arrangements with
brokers, nor can we be certain that any current or future marketing efforts will
be successful or result in any significant sales of our products.
DEPENDENCE UPON PROVIDERS; POSSIBLE TERMINATION OF PROVIDER AGREEMENTS. The
success of our operations will depend, in part, upon our ability to enter into
and maintain service agreements with providers of health care products and
services which provide for discounts and other pricing terms favorable to our
card members. To date, we have entered into non-exclusive service agreements
with several Networks. The agreements generally expire after approximately one
to three years, but are subject to earlier termination upon the occurrence of
certain events, including notice by the other party. We can not assure that the
Providers affiliated with Networks with whom we have contracted will actually
provide services to Members, that our agreements will be renewed or that our
agreements will not be terminated prior to the end of their respective terms.
The cancellation of a contract by any provider network may negatively affect our
business. Further, we can not assure that we will successfully secure agreements
with additional providers or provider networks, nor can we be certain that
providers who have agreed to join the network will provide services or cost
savings that appeal to members. Our inability to retain our current Providers or
to obtain alternate or additional service providers will likely detract from the
real or perceived value of our Savings Card and may cause us to curtail or alter
our activities or cease operations.
RISKS RELATED TO THE PHYSICIAN AND HOSPITAL NETWORK BUSINESS. The Company
has only recently entered the physician and hospital network business. This
business segment is subject to numerous risks, including risks similar to those
described in this Form 10-KSB, significant barriers to entry, intense
competition with well-capitalized insurance companies and other third party
payors, the possible incurrence of significant additional sales and marketing
costs to develop this benefits program, certain risks related to health care and
government regulations and certain other risks. We are seeking opportunities to
expand this business and have entered into a non-binding letter of intent to
establish a joint venture with a preferred provider organization that
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maintains a nationwide network of approximately 300,000 physicians and
hospitals. We cannot assure that this letter of intent will lead to the
execution of any agreements, nor can we be certain that any such physician and
hospital network will ever achieve commercial acceptance. If we are unable to
achieve commercial acceptance of this benefit program, we may be forced to
curtail or alter our activities or cease operations.
POSSIBLE EXPOSURE TO LIABILITY. Physicians and other medical entities have
become increasingly vulnerable to lawsuits alleging medical malpractice. While
we do not intend to practice medicine or control any affiliated provider's
practice of medicine, we can not assure that we will not become a party to
malpractice litigation in the future. We may also be exposed to claims for
personal injuries as a result of the incorrect preparation or packaging of
prescriptions or from the pilferage of or tampering with the prescription drugs
supplied by pharmacy benefits providers. We will attempt to take precautions to
protect us from such claims, including seeking indemnification from such
providers, but we can not assure that such precautions will be implemented or
will prove adequate. Because we are not permitted to and do not render medical
services, we cannot obtain malpractice insurance nor do we maintain errors and
omissions insurance. We do, however, maintain general liability insurance in the
amount of $2,000,000 which provides general coverage for property damage,
business liability and medical payments. We can not assure that we will not be
sued for malpractice as the result of the activities undertaken by our providers
or that any such suit will not result in a recovery against us in excess of any
applicable general liability insurance coverage, which in turn will negatively
affect our financial health.
HEALTH CARE REFORM. In recent years there have been numerous proposals to
change the health care system in the United States. We are unable to predict the
effect of potential reforms in the health care industry on our business, either
by legislative mandate or through self policing mechanisms, particularly those
affecting physicians, health care payors and affiliated health systems. A change
in the health care system could negatively affect our business.
GOVERNMENT REGULATION. Numerous federal, state and local regulations affect
the health care industry, including the prohibition of business corporations
from providing medical care, fraud and abuse provisions of the Medicare and
Medicaid statutes, the prohibition against referral fees and fee splitting and
statutes regulating insurance companies and other organizations that are
associated with health care services. Some of the states in which we intend to
operate currently enforce or may in the future implement registration and
licensing regulations which may affect our business. In addition, the health
care entities with whom we may enter into contracts are subject to a variety of
regulations such as those relating to fee splitting, referral fees, patient
freedom of choice, provider rights to participate and anti-discrimination. These
regulations may result in the delay or denial of any such organization's
participation in our network, which in turn, may affect our operations. The
practice of receiving utilization for our pharmacy benefits program may, in a
number of states, be interpreted to contravene the literal provisions of the
statutes and regulations of such states. In addition, certain states in which we
offer our Savings Cards have taken the position that certain of the discounted
services offered by our Networks may be interpreted as prepaid insurance. We
have modified the services offered under the Savings Cards in these states in
order to comply with such state laws. At present, we have not obtained any
rulings from any governmental authorities, nor have we received an opinion of
counsel relating to government regulation of our business. However, we believe
that we are in compliance with the laws and regulations that are currently
enforced and that apply to our business and conduct our business in a manner
consistent with current industry practices. Legislation in these areas continues
to evolve and we can not assure that changes in enforcement and compliance
practices will not change in the future, nor can we be certain that existing
legislation will not expand. If such change or expansion affects our business,
we may be required to register in additional states, post substantial fidelity
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or surety bonds and/or meet other financial requirements. Alternatively, we may
be required to modify our products and services, modify our contractual
arrangements with providers or even cease conducting business in certain states.
If any of the above situations were to occur, or it was determined that we
violated any applicable laws or regulations, such an occurrence or determination
would negatively affect our business.
COMPETITION. We believe that a critical element of our business is to
compete for a portion of the benefit dollars allocated by various organizations
for employee benefit programs. We compete for a portion of those dollars with
various other cost-containment marketing organizations, pharmacy indemnity
programs, retail pharmacies, mail order prescription companies, preferred
provider organizations, HMOs, health care membership programs and other
health care insurance programs. Many of these competitors have longer
operating histories than we do and have significantly greater financial,
marketing and administrative resources. We can not assure that we will ever
develop products that achieve greater market acceptance than products and
services offered by our competitors, nor can we be certain that our competitors
will not develop products that would render our products less competitive or
obsolete.
PROPRIETARY RIGHTS; MANAGEMENT INFORMATION SYSTEMS. Our DBIM System greatly
affects our ability to provide customer service and to process important data.
We rely on trade secrets and proprietary software to establish and protect the
proprietary rights affecting our proprietary DBIM System. However, trade secrets
and proprietary software are difficult to protect and we can not assure that
others will not independently develop substantially equivalent proprietary
technology or otherwise gain access to our trade secrets or disclose such
technology, nor can we be certain that we will succeed in meaningfully
protecting our rights to non-patented trade secrets. While we have applied for
federal registrations of several service marks and proprietary software from the
United States Patent and Trademark Office, we can not assure that such rights
will be granted or, if granted, that they will provide meaningful protection.
Although we intend to take steps that we consider appropriate to protect our
intellectual property rights, we believe that the success of our business will
depend primarily upon our ability to effectively market our current products, to
introduce new products and services or to enhance existing products, rather than
on our ability to obtain legal protection over our existing intellectual
property.
RELIANCE UPON DATA PROCESSING; YEAR 2000 COMPLIANCE. Certain aspects of our
business, including our customer service capabilities, our ability to timely pay
brokers their commissions and pay network providers their fees, are dependent
upon the ability to store, retrieve, process and manage data and to maintain and
upgrade the data processing systems we currently rely on. Although we believe
that we have established appropriate safeguard mechanisms, interruption of data
processing capabilities for any extended period of time, loss of stored data,
programming errors or other computer problems may affect our ability to attract
and retain brokers and networks, which in turn may negatively affect our
business. We can not assure that we will not experience problems, delays or
unanticipated costs in the use of our current systems.
We have commenced review of our computer systems to identify the systems
that could be affected by the "Year 2000" issue and are currently developing an
implementation plan to resolve the issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of our programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The Year
2000 issue could result in a major system failure or miscalculations, affect our
ability to pay commissions and fees to our brokers and networks, as well as our
ability to review network providers in a timely manner and could disrupt our
business operations. We are
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utilizing internal personnel, contract programmers and vendors to review
our information and operational systems for purposes of identifying Year 2000
non-compliance problems. We have identified two specific areas of risks relating
to the Year 2000 problem: internal business systems and software and external
noncompliance by third parties including suppliers of participating providers
data, suppliers requiring information about our eligibility, financial vendors
and sponsors. Although we believe that our computer systems are Year 2000
compliant, we can not assure that our systems will operate as anticipated. In
addition, unanticipated issues and problems may arise with our computer systems
which could affect our operating results. The inability of third parties,
including suppliers of participating provider data, providers and financial
vendors to achieve Year 2000 compliance could also affect our ability to conduct
business and could negatively affect our business.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL; CONFLICTS OF
INTEREST. We depend upon Neal J. Polan, our Chairman and Chief Executive Officer
with whom we have an employment agreement, and David L. Mullikin, our President,
Chief Operating Officer and acting Chief Financial Officer, as well as principal
members of our management team. Mr. Polan devotes approximately 50% of his
business time to our business activities. Mr. Polan devotes approximately 50% of
his business and investments outside of the Company, some of which are or may be
in the health care services field. In the course of his activities, Mr. Polan
may occasionally be presented with various business opportunities in the health
care services industry. Mr. Polan may present certain of these opportunities to
our business, although Mr. Polan has no agreement to do so and we can not be
certain that any such opportunities will ever be presented to us. In addition,
we have entered into a one-year consulting agreement with Practice Management,
Inc., whereby Practice Management, Inc. will market our business to labor
groups, managed care entities, preferred provider organizations and third party
administrators for an annual fee of $50,000. Mr. Polan has entered into a
separate agreement with Practice Management, Inc. whereby Practice Management,
Inc. has agreed in exchange for a one-time payment of $50,000 to present to Mr.
Polan, in preference to others certain business opportunities; provided, that
the agreement between Practice Management, Inc. and Mr. Polan provides that
Practice Management, Inc. shall be obligated to first present to the Company
prior to Mr. Polan, in his individual capacity, any business opportunities that
may be appropriate for our business. These arrangements and agreements may give
rise to certain conflicts of interest.
We currently have only 16 full-time employees. The success of our business
will depend partially upon our ability to attract and retain additional skilled
personnel to manage our operations. The inability to do so, or the loss of
services of certain of our executive officers and directors or other executive
officers or key employees that we may hire in the future, may negatively affect
the business.
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS; POTENTIAL ANTI-TAKEOVER
EFFECT OF SHARES HAVING DISPROPORTIONATE VOTING RIGHTS. Neal J. Polan, our
Chairman and Chief Executive Officer currently owns all of our Class B Common
Stock. Mr. Polan also holds the power to vote by proxy an aggregate of 144,000
shares of Class A Common
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Stock. As such, Mr. Polan has the power vote shares of Common Stock representing
approximately 29.9% of the total voting power held by our stockholders, and
therefore has significant control over the outcome of substantially all matters
submitted to a vote of the stockholders. Furthermore, the disproportionate vote
afforded the Class B Common Stock could impede or prevent a change of control of
our company. As such, potential acquirors seeking to acquire control of us
through the purchase of Class A Common Stock may be discouraged from doing so,
which in turn, could have a depressive effect on the price of our securities.
POTENTIAL ADVERSE EFFECTS OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER
PROVISIONS. Our Certificate of Incorporation authorizes us to issue shares of
"blank check" preferred stock, which will have such designations, rights and
preferences as our Board of Directors may determine from time to time.
Accordingly, our Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could negatively affect the voting power or other rights of the holders of
the Common Stock. If such preferred stock were to be issued, it could be used,
under certain circumstances, to discourage, delay or prevent a change in control
of our company. Although we have no present intention to issue any shares of
preferred stock, we can not be certain that we will not do so in the future.
There is also a Delaware statute regulating business combinations that could
discourage, hinder or preclude an unsolicited acquisition of our company and
make it less likely that stockholders receive a premium for their shares as a
result of such attempt. This Delaware statute may negatively affect the market
price of our securities.
CHARGES AND POTENTIAL CHARGES TO EARNINGS. As a condition to our initial
public offering completed in October 1997, the holders of our Class A and Class
B Common Stock prior to our initial public offering agreed to place, on a pro
rata basis, 900,000 shares, or three-quarters of their outstanding shares of
Common Stock before the initial public offering into escrow. These escrow shares
will be released only if we attain certain earnings or market price thresholds.
The Securities and Exchange Commission has taken the position that in the event
any shares are released from escrow to holders who are officers, directors,
employees or consultants, a compensation expense will be recorded for financial
reporting purposes. Accordingly, if the escrow shares are released, we will
recognize for the period in which the earnings thresholds are probable of being
met or such stock levels achieved, a substantial non-cash charge to earnings
equal to the fair market value of such shares on the date of their release. This
kind of charge to earnings may significantly increase our loss or reduce or
eliminate earnings, if any, at such time. The recognition of such compensation
expense may also have a depressive effect on the market price of our securities.
In addition, the achievement of defined earnings or market price thresholds
affect whether certain warrants issued to Neal J. Polan may be exercised. If
Mr. Polan is able to exercise these warrants, we will recognize during the
period in which the earnings thresholds are probable of being met or such stock
levels achieved, an additional non-cash charge to earnings equal to the fair
market value of the portion of the warrants subject to such earnings or market
price thresholds. This charge to earnings may affect our market price and
significantly increase our loss or reduce or eliminate earnings, if any, at such
time.
POSSIBLE VOLATILITY OF MARKET PRICE. The market prices of our Units (each
Unit consisting of one share of Class A Common Stock and one Class A Warrant),
Class A Common Stock and Class A Warrants could fluctuate significantly in
response to variations in our development efforts, intellectual property
position, government regulation, general trends in the industry and as a result
of other
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factors, including extreme price and volume fluctuations which have been
experienced by the securities markets from time to time.
SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF OUTSTANDING OPTIONS AND
WARRANTS; EXERCISE OF REGISTRATION RIGHTS. Future sales of our securities by
existing securityholders through the exercise of outstanding registration rights
or through the issuance of shares of Class A Common Stock upon exercise of
options, warrants or otherwise may decrease the price of our securities. Of the
3,018,000 shares of Class A Common Stock outstanding as of December 28, 1998,
approximately 2,024,000 shares of Class A Common Stock are freely tradeable
without restriction under the Securities Act of 1933, as amended, except if any
shares are purchased by "affiliates" as defined in Rule 144 under the Securities
Act. The remaining 994,000 shares of Class A Common Stock outstanding are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act, and under certain circumstances may be sold without registration under Rule
144 or otherwise. In addition, we have filed a Registration Statement with the
Securities and Exchange Commission registering approximately 1,100,000
outstanding Redeemable Class A warrants for resale and approximately 3,400,000
shares of Class A Common Stock, of which approximately 3,150,000 shares of Class
A Common Stock are issuable upon exercise of outstanding Class A warrants and
other warrants. The remaining approximately 250,000 shares of Class A Common
Stock are being registered for resale by certain stockholders of the Company. In
addition, the holders of the Unit Purchase Option to purchase a total of 352,000
shares of Class A Common Stock (assuming exercise of the underlying Class A
Warrants) issued in our initial public offering have certain demand and
"piggy-back" registration rights. Sales of Class A Common Stock or the
possibility of such sales in the public market may negatively affect the market
price of our securities.
We have outstanding 3,473,000 warrants (including the Class A Warrants) to
purchase a total of 3,473,000 shares of Class A Common Stock and a Unit Purchase
Option to purchase a total of 352,000 shares of Class A Common Stock, assuming
exercise of the underlying Class A Warrants. We have also reserved for issuance
200,000 shares of Class A Common Stock under our 1997 Stock Option Plan. To
date, options to purchase 159,500 shares (net of forfeitures) have been granted
under our 1997 Stock Option Plan. 216,000 shares of Class A Common Stock will
also be issued upon conversion of the 216,000 shares Class B Common Stock which
we have outstanding. The existence of these securities could decrease the price
of our outstanding securities. If any of these securities are exercised, the
value of the Class A Common Stock held by public investors will be diluted if
the value of such stock immediately prior to the exercise of such securities
exceeds their exercise price, with the extent of such dilution depending upon
such excess. These securities afford the holders the opportunity, at nominal
cost, to profit from a rise in the market price of the Class A Common Stock,
which may negatively affect the terms upon which we could issue additional Class
A Common Stock during such term. In addition, holders of warrants and options
are likely to exercise them when, in all likelihood, we could obtain additional
capital on terms more favorable than those provided by the warrants and options.
Further, while these securities are outstanding, our ability to obtain
additional financing on favorable terms may be negatively affected.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. While our
Units, Class A Common Stock and Class A Warrants are listed on the Nasdaq
SmallCap Market, we can not assure that we will, on an ongoing basis, meet the
criteria for continued listing. Continued inclusion on Nasdaq would require that
(i) we maintain (A) net tangible assets of at least $2,000,000, (B) net income
of $500,000 in two of the last three years, or (C) market capitalization of at
least $35,000,000, (ii) the minimum bid price of the Class A Common Stock be
$1.00 per share, (iii) there be at least 500,000 shares in the public float
valued at $1,000,000 or more, (iv) the Class A Common stock have at least two
active market markers
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and (v) the Class A Common Stock be held by at least 300 holders. From time to
time, our Class A Common Stock has traded below the $1.00 minimum bid price
requirement.
If we are unable to satisfy Nasdaq's maintenance requirements, our
securities may be delisted from Nasdaq and trading, if any, in these securities
would thereafter be conducted in the over-the-counter market in the so-called
"pink sheets" or the NASD's "Electronic Bulletin Board" and could also be
subject to additional restrictions. Consequently, the liquidity of these
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions and
lower prices for our securities that may result.
NO DIVIDENDS. We have not paid any cash dividends on our Class A Common
Stock and do not expect to declare or pay any cash or other dividends in the
foreseeable future.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. We may redeem the Class
A Warrants at a redemption price of $.05 per Warrant upon not less than 30 days'
prior written notice if the closing bid price of the Class A Common Stock
averaged in excess of $9.10 per share for 30 consecutive trading days ending
within 15 days of the notice. Redemption of the Class A Warrants could force the
holders (i) to exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous for the holders to do so, (ii) to sell the Warrants at
the then current market price when they might otherwise wish to hold the
Warrants, or (iii) to accept the nominal redemption price which, at the time the
Warrants are called for redemption, is likely to be substantially less than the
market value of the Warrants.
CURRENT PROSPECTUS AND STATE REGISTRATION TO EXERCISE WARRANTS. Holders of
Class A Warrants will be able to exercise the Warrants only if (i) a current
prospectus under the Securities Act relating to the securities underlying the
Warrants is then in effect and (ii) such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of Warrants reside. Although we have undertaken and
intend to use our best efforts to maintain a current prospectus covering the
securities underlying the Class A Warrants to the extent required by Federal
securities laws, we can not assure we will be able to do so. The value of the
Class A Warrants may be greatly reduced if a prospectus covering the securities
issuable upon the exercise of the Class A Warrants is not kept current or if the
securities are not qualified, or exempt from qualification, in the states in
which the holders of Class A Warrants reside. Persons holding Class A Warrants
who reside in jurisdictions in which such securities are not qualified and in
which there is no exemption will be unable to exercise their Class A Warrants
and would either have to sell their Warrants in the open market or allow them to
expire unexercised. If and when the Class A Warrants become redeemable by their
terms, we may exercise our redemption right even if it is unable to qualify the
underlying securities for sale under all applicable state securities laws.
RISKS OF LOW-PRICED OR "PENNY" STOCK. If our securities were delisted from
Nasdaq (See "-- Possible Delisting of Securities from The Nasdaq Stock Market,
Inc."), they could become subject to Rule 15g-9 under the Securities Exchange
Act of 1934, as amended, which imposes additional sales practice requirements on
broker-dealers which sell such securities except in transactions exempted by
such Rule, including transactions meeting the requirements of Rule 505 or 506 of
Regulation D under the Securities Act and transactions in which the purchaser is
an institutional accredited investor (as defined) or an established customer (as
defined) of the broker or dealer. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, such rule may adversely affect the ability of broker-dealers
to sell our securities.
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SEC regulations define a "penny stock" to be any non-Nasdaq equity security
that has a market price (as therein defined) of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
The above required penny stock restrictions will not apply to our
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or meet certain
minimum net tangible assets or average revenue criteria. We can not assure that
our securities will qualify for exemption from these restrictions. In any event,
even if our securities were exempt from such restrictions, they would remain
subject to Section 15(b)(6) of the Exchange Act, which gives the Securities and
Exchange Commission the authority to prohibit any person that is engaged in
unlawful conduct while participating in a distribution of a penny stock from
associating with a broker-dealer or participating in a distribution of a penny
stock, if the Securities and Exchange Commission finds that such a restriction
would be in the public interest. If our securities were subject to the rules on
penny stocks, it may severely negative impact the market liquidity of our
securities.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 4,000 square feet of office
space in Grandview, Missouri for its executive offices pursuant to a lease
agreement that provides for monthly rent of approximately $2,300 and expires in
October 1999. The Company also reimburses an entity affiliated with the
Company's Chairman and Chief Executive Officer approximately $3,000 per month
for the use of certain office space in New York, New York. The Company believes
that such office space will be suitable for the current and anticipated needs of
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security-holders of the Company.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Since October 14, 1997, the date of the Company's initial public
offering (the "IPO"), the Company's Units, each Unit consisting of one share of
Class A Common Stock and one Class A Warrant, have traded on the Nasdaq SmallCap
Market under the symbol HMSIU. The Company's Class A Common Stock and Class A
Warrants have traded on the Nasdaq SmallCap Market under the symbols HMSI and
HMSIW, respectively, since February 10, 1998. The following sets forth the
average of the high and low bid prices of the Class A Common Stock for the
fiscal year ended September 30, 1998 as reported by The Nasdaq Stock Market,
Inc.
Bid Prices
--------------------
High Low
---- ---
Year ended
September 30, 1998
Second Quarter (commencing February 10, 1998)(1) 3 1/4 3 1/4
Third Quarter 2 5/8
Fourth Quarter 1 1/8 5/8
(b) The number of holders of record of the Company's Class A Common Stock
as of December 28, 1998 was 18 holders.
During the quarter ended September 30, 1998, a portion of the net proceeds
from the Company's IPO were used (i) to make principal and interest payments in
the amount of approximately $14,000 on a capital lease entered into in April
1997; (ii) to purchase equipment in the amount of approximately $5,000 and (iii)
for working capital purposes in the amount of approximately $662,000. The
remaining portion of the net proceeds from the IPO and other available cash in
the amount of approximately $4,040,000 has been invested in short-term
interest-bearing, investment grade securities.
(c) The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
- ----------
(1) The Company's Class A Common Stock did not begin trading separately on the
Nasdaq Small Cap Market until February 10, 1998. Therefore, the average of
the high and low bid prices of the Class A Common Stock for the first
quarter for the year ended September 30, 1998 is not available.
-20-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company markets and administers a health care benefit services program
designed to enable Members to obtain discounts on purchases of health care
products and services through Networks of health care providers with which the
Company has executed provider agreements. The Company's revenues are derived
principally from the receipt of annual or monthly enrollment fees paid by or on
behalf of Members for the right to obtain discounts at the point of purchase
from providers in the Networks. A significant portion of the Company's revenue
is received in the form of monthly bank drafts and monthly payroll deductions
made by employers on behalf of their employees. Accordingly, all monthly payment
sales and their corresponding expenses, including sales commissions and provider
fees, will be recognized in the monthly periods for which they are billed.
However, since the initial cost of delivering the cards to the Company's
customers will be incurred and expensed in the first month, the gross profit
associated with each new individual card issued will be lower in the month of
issuance than in the remaining eleven months prior to the card's expiration
date. In addition, since all renewal cards will be subject to the same costs of
issuance, this twelve month pattern of lower gross profits in the first month
will likely continue for any renewal periods. We offer a full money back
guarantee to annual members who, if during the first 90 days, are not completely
satisfied with any of our Savings Cards. We recognize revenues from the sale of
our annual Savings Cards on a monthly basis ratably over the life of the
membership subsequent to the expiration of the money back guarantee period.
During the fiscal year ended September 30, 1998, the Company's primary
activities have consisted of (i) completing the design and development of the
DBIM System, which the Company believes facilitates data processing and enhances
its customer service capabilities, (ii) expanding the Networks and the types of
services covered by the Providers, (iii) increasing the Company's sales and
marketing force and (iv) expanding the Company's products. To date, while only
minimal sales of the Savings Cards have taken place, the Company believes that
its activities have positioned it for future growth, However, there can be no
assurance that the Company will successfully maintain or expand the Networks
and/or market the Savings Cards.
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.
-21-
<PAGE>
RESULTS OF OPERATIONS:
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1998. Revenues of approximately
$84,000 were generated during the fiscal year ended September 30, 1998 ("Fiscal
1998") compared to no revenues during the fiscal year ended September 30,
1997("Fiscal 1997"). This increase resulted primarily from the commencement of
the Company's sales and marketing of its HealthCare Solution Card following the
IPO.
Selling, general and administrative expenses decreased by approximately
12.4% from approximately $2,489,000 in Fiscal 1997 to approximately $2,180,000
in Fiscal 1998 primarily as a result of non-recurring, non-cash charges of
approximately $789,000 relating to the fair market value adjustments of certain
warrants and shares of capital stock issued to two stockholders of the Company
in Fiscal 1997. This decrease was partially offset by (i) an increase in
compensation paid as a result of an increase in the number of employees at the
Company following the IPO (ii) an increase in sales and marketing expenses to
support growth in provider Networks and customer and sales support and (iii)
an increase in rent expense due to the installation of the Company's telephone
system.
Interest expense decreased by approximately 90.9% from approximately
$778,000 in Fiscal 1997 to approximately $71,000 in Fiscal 1998. This decrease
was due to the repayment of certain notes (the "Bridge Notes") issued in a
Bridge Financing completed in February and March 1997 (the "Bridge Financing")
and amortization of approximately $610,000 being recognized in Fiscal 1997.
Interest income increased by approximately 901% from approximately $25,000 in
Fiscal 1997 to approximately $253,000 in Fiscal 1998 primarily as a result of
the investment of the net proceeds of the Company's IPO.
Net loss decreased by approximately 38.7% from approximately $3,242,000 in
Fiscal 1997 to approximately $1,987,000 in Fiscal 1998 as a result of the
foregoing factors.
-22-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes capital resources primarily for general corporate
purposes and to support anticipated growth. At September 30, 1998, the Company
had working capital of approximately $4,025,000 including cash and cash
equivalents of approximately $4,040,000.
Net cash used in operating activities was approximately $2,395,000 for
Fiscal 1998. Net cash used in operating activities primarily consisted of the
Company's net loss of approximately $1,987,000 and accounts payable of
approximately $432,000.
Net cash used in investing activities was approximately $88,000 for Fiscal
1998. The Company's uses of cash in investing activities related exclusively to
the acquisition of property and equipment.
Net cash provided by financing activities for the Fiscal 1998 was
approximately $6,376,000. The Company realized net proceeds of approximately
$8,748,000 in connection with its IPO which was completed in November 1997 in
which it sold to the public 2,024,000 units at $5.00 per unit (which consisted
of one share of Class A common stock and one redeemable Class A warrant to
purchase one share of Class A common stock at an exercise price of $6.50 at any
time until October 2002), of which approximately $2,300,000 was utilized to
repay the Bridge Notes
-23-
<PAGE>
issued in the Bridge Financing which was completed in February and March 1997,
approximately $104,000 was utilized in repayment of other notes payables, and
approximately $54,000 was used in principal payments under capital lease
obligations.
The Company intends to use the remaining proceeds of the IPO to implement
its business plan, which includes the refinement, sales and marketing of its
Savings Cards. In addition, from time to time, the Company evaluates possible
acquisitions or investments in businesses and products that are complementary to
those of the Company and the Company may use a portion of the remaining proceeds
of the IPO in connection with any such potential acquisition or investment.
However, the Company currently has no present commitments or agreements with
respect to any material acquisition or investment.
The Company expects to continue to incur substantial costs in the near term
in connection with its sales and marketing activities, all of which are expected
to be financed from a substantial portion of the remaining proceeds of the IPO.
The Company also expects that general and administrative costs necessary to
support the establishment of a sales and marketing organization and other
infrastructure will increase in the future. Unless the Company is able to
generate significant commercial sales of the its Savings Cards, the Company will
continue to incur operating losses. There can be no assurance that the Company
will ever achieve profitable operations.
The Company believes that its existing resources will provide the necessary
liquidity and capital resources to sustain its planned operations until January
2000. In the event that the Company's internal estimates relating to its planned
expenditures prove materially inaccurate, the Company may be required to
reallocate funds among its planned activities and curtail certain planned
expenditures. In any event, the Company anticipates that it will likely require
substantial additional financing after such time, which financing could be in
the form of equity or debt financing or money received in connection with
collaborative arrangements, that may be entered into in the future. The Company
has no commitments for any future financing and there can be no assurance as to
the availability or terms of any required additional financing, when and if
needed. In the event that the Company fails to raise the funds it requires, it
may be necessary for the Company to significantly curtail its activities or
cease operations.
YEAR 2000 COMPLIANCE. Certain aspects of the Company's business, including
its customer service capabilities, the Company's ability to timely pay brokers
their commissions and pay network providers their fees, are dependent upon the
ability to store, retrieve, process and manage data and to maintain and upgrade
the data processing system the Company currently relies on. Although the Company
believes that it has established appropriate safeguard mechanisms, interruption
of data processing capabilities for any extended period of time, loss of stored
data, programming errors or other computer problems may affect its ability to
attract and retain brokers and networks, which in turn may negatively affect its
business. The Company can not assure that it will not experience problems,
delays or unanticipated costs in the use of its current system.
The Company has commenced review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and is currently
developing an implementation plan to resolve the issue. The Year 2000 issue is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Year 2000 issue can arise at any point in the Company's
processing, distribution and financial chains and could result in a major system
failure or miscalculations, affect its ability to pay commissions and fees to
its brokers and networks, as well as its ability to review network providers in
a timely manner and on the whole disrupt its business operations.
-24-
<PAGE>
The Company is utilizing internal personnel, contract programmers and
vendors to review its information and operational systems, including the DBIM
System, for purposes of identifying Year 2000 non-compliance problems. The
Company has identified two specific areas of risks relating to the Year 2000
problem: internal business systems and software and external noncompliance by
third parties including suppliers of participating providers data, suppliers
requiring information about our eligibility, financial vendors and the Company's
members.
Internal Business Systems and Software - The Company's systems, including
the DBIM System, were developed utilizing program source code and off-the-shelf
software that was Year 2000 compliant. The total estimated cost of the hardware,
software and installation cost of the Company's system, including the DBIM
System system, was approximately $600,000, a portion of which was allocated to
year 2000 compliance. All available upgrades for off-the-shelf products (which
include Year 2000 compliance) have been loaded and are in active use. The
Company's telephone system vendors have indicated Year 2000 compliance including
services relating to long distance, local, 1-800, telephone switch and audix.
External Non-Compliance by Third Parties - Suppliers of Participating
Providers Data - A survey of all suppliers of participating providers data has
been conducted and is 90% completed. Of the suppliers who have responded to our
survey, all have indicated that they are Year 2000 Compliant, although the
Company can not guarantee that the remaining suppliers are Year 2000 compliant.
External Non-Compliance by Third Parties - Suppliers Requiring Information
About Eligibility. A survey of all suppliers requiring information about the
Company's eligibility has been conducted with an 85% response rate to date. Two
pharmacy benefits management suppliers with whom the Company has contracts have
indicated that they are Year 2000 compliant. However, the Company can not
guarantee that other pharmacy benefits management suppliers with whom it has
arrangements are Year 2000 compliant. Year 2000 non-compliance by pharmacy
benefits management companies that require information about the Company's
eligibility may negatively affect the Company's business.
To the extent that the Company determines that any of its suppliers'
responses to the Year 2000 issue are unsatisfactory, it will consider alternate
sources of suppliers. The Company can not assure that it will be successful in
finding such alternative suppliers.
External Non-Compliance by Third Parties - Financial Vendors - Financial
vendors such as the Company's merchant bank and credit card processor have not
yet been surveyed. The Company expects that such surveys will be conducted no
later than the first quarter of 1999. To the extent that the Company's financial
vendors are not Year 2000 compliant, the Company will consider alternate sources
of financial vendors who are Year 2000 compliance. The Company can not assure
that it will be successful in finding such alternative financial vendors.
External Noncompliance by Third Parties- Sponsors. The Company does not
currently have any formal information abot the status of its Sponsors and the
Year 2000 issue. The Company has, however, received indications that most of the
Company's Sponsors are in the process of becoming Year 2000 compliant. Year 2000
non-compliance by any of the Company's subscribers may negatively affect the
Company's business.
Through September 30, 1998, the Company incurred costs of approximately
$600,000 to update the Company's systems, a portion of which was allocated to
year 2000 compliance. In addition, the Company has incurred additional costs in
connection with the Company's review of internal and external systems
compliance, none of which is material.The Company does not anticipate that it
will incur any additional material costs associated with addressing Year 2000
issues.
The impact of the Year 2000 problem on the Company's business as presented
is based on the management's best estimates at the present time. The Company
does not expect these estimates to change substantially.
-25-
<PAGE>
Such estimates are based on the results of the Company's internal review of
its information and operational systems and formal surveys received from third
parties to date. The Company can not assure that these estimates are accurate.
The estimates were made using assumptions of future events including the
continued availability of certain resources, Year 2000 modification plans,
implementation success by key third-parties, and other factors. New developments
may occur that could affect the Company's estimates of the amount of time and
costs needed to modify and test its information and operational systems for Year
2000 compliance. These developments include, but are not limited to: (i) the
availability and cost of personnel trained in this area; (ii) the ability to
locate and correct all relevant date-sensitive codes in its information and
operational systems; (iii) unanticipated failures in its information and
operational systems; and (iv) the planning and Year 2000 compliance success that
third-parties attain. The Company has not yet determined the extent of
contingency planning that may be required.
The Company cannot determine the impact of these potential developments on
the current estimate of probable costs of making its systems Year 2000
compliant. Accordingly, the Company is not able to estimate its possible future
costs beyond the current estimates of costs. As new developments occur, these
cost estimates may be revised to reflect the impact of these developments on the
costs to the Company of making its systems Year 2000 compliant. Such revisions
in costs could have a material adverse impact on the Company's results of
operations in the quarterly period in which they are recorded. Although the
Company considers it unlikely, such revisions could also have a material adverse
effect on the business, financial condition or results of operations of the
Company.
Release of Escrow Shares. In connection with the IPO, the pre-IPO
stockholders of the Company placed, on a pro rata basis, a portion of their
shares into escrow pending the Company's attainment of certain earnings
thresholds or per share stock price thresholds. The Commission has taken the
position with respect to the release of securities from escrow that in the event
the Escrow Shares are released from escrow to directors, officers, employees or
consultants of the Company, the release will be treated, for financial reporting
purposes, as compensation expense to the Company. Accordingly, in the event of
the release of the Escrow Shares, the Company will recognize during the period
in which the earnings or market price targets are met or become probable of
being met, a substantial non-cash charge which would substantially increase the
Company's loss or reduce or eliminate earnings, if any, at such time. The amount
of compensation expense recognized by the Company will not affect the Company's
total stockholders' equity. There can be no assurance that the Company will
attain the targets which would enable the Escrow Shares to be released from
escrow. In addition, a portion of the warrants issued to Neal J. Polan will
become exercisable only upon the attainment by the Company of certain earnings
or market price thresholds. In the event that such warrants become exercisable,
the Company will recognize during the period in which the earnings thresholds
are probable of being met or such stock levels achieved, an additional non-cash
charge to earnings equal to the fair market value of the portion of the warrants
subject to such earnings or market price thresholds, which could have the effect
of significantly increasing the Company's loss or reducing or eliminating
earnings, if any, at such time.
The recognition of the potential charges to income described above may have
a depressive effect on the market price of the Company's securities.
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Accountants
Balance Sheet as of September 30, 1998 and 1997
Statements of Operations for the years ended September 30, 1998 and 1997
Statements of Stockholders' Equity for the years ended September 30,
1998 and 1997
Statements of Cash Flows for the years ended September 30, 1998 and 1997
Notes to the Financial Statements
This information appears in a separate section of this Report following
Part III.
-26-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
The information called for by Item 9 (Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act), Item 10 (Executive Compensation), Item 11 (Security Ownership of Certain
Beneficial Owners and Management), and Item 12 (Certain Relationships and
Related Transactions) is incorporated by reference from the Registrant's
definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1* -- Amended and Restated Certificate of Incorporation of the
Registrant
3.2* -- By-laws of the Registrant
4.1* -- Form of Bridge Note
4.2* -- Bridge Warrant Agreement
4.3* -- Form of Warrant Agreement
4.4* -- Form of Representative's Unit Purchase Option
5.1* -- Opinion of Bachner, Tally, Polevoy & Misher LLP
10.1* -- 1997 Stock Option Plan
10.2* -- Amended and Restated Escrow Agreement dated as of July 31,
1997 by and between the Registrant, American Stock Transfer &
Trust Company and certain stockholders of the Registrant
10.3* -- Form of Network Provider Agreement
10.4* -- Form of Indemnification Agreement
10.5* -- Lease Agreement for office space in Grandview, Missouri
between the Registrant and J.C. Nichols Company, as amended by
an Assignment and First Amendment of Lease dated July 18,
1997.
10.6* -- Voting Agreement dated June 5, 1997 by and between Theodore W.
White, Jr. and Neal J. Polan
10.7* -- Form of Broker Agreement
10.8* -- Agreement between M.K.D. Capital Corp. and the Registrant, as
amended.
10.9 -- Employment Agreement dated as of September 30, 1998 between
the registrant and Neal J. Polan.
-27-
<PAGE>
27.1 -- Financial Data Schedule
- -----------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-28233) declared effective by the Securities and Exchange
Commission on October 14, 1997.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1998.
-28-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors............................................. F-2
Balance Sheet as of September 30, 1998..................................... F-3
Statements of Operations for the years ended September 30, 1998 and 1997 .. F-4
Statements of Changes in Stockholders' Equity for the years ended
September 30, 1998, 1997 and 1996.......................................... F-5
Statements of Cash Flows for the years ended September 30, 1998 and 1997 F-6
Notes to Financial Statements.............................................. F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
HealthCore Medical Solutions, Inc.
Grandview, Missouri
We have audited the accompanying balance sheet of HealthCore Medical Solutions,
Inc. (the business successor to MegaVision, L.C.) as of September 30, 1998 and
the related statements of operations, changes in stockholders' equity/(capital
deficiency) and cash flows for the years ended September 30, 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
on 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
misstatement. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of HealthCore Medical Solutions, Inc.
as of September 30, 1998 and the results of its operations and its cash flows
for the years ended September 30, 1998 and 1997, in conformity with generally
accepted accounting principles.
As described more fully in Note A to the financial statements, the business of
the Company was conducted by MegaVision, L.C. prior to the merger in February
1997.
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
December 2, 1998
F-2
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 4,040,449
Prepaid expenses and other current assets 163,453
-----------
Total current assets 4,203,902
-----------
Property and equipment, net 210,841
Other assets 15,570
-----------
226,411
-----------
$ 4,430,313
===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 114,886
Current portion of obligation under capital lease - affiliate 63,988
-----------
Total current liabilities 178,874
Obligation under capital lease - affiliate 18,632
-----------
Total liabilities 197,506
-----------
Commitment and other matters
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000 shares
Common stock, $.01 par value:
Class A, authorized, 19,784,000 shares; issued
and outstanding 3,018,000 shares 30,180
Class B, authorized, 216,000 shares; issued and outstanding
216,000 shares 2,160
Additional paid-in capital 10,755,932
Accumulated deficit (6,555,465)
-----------
Total stockholders' equity 4,232,807
-----------
$ 4,430,313
===========
See notes to financial statements F-3
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
STATEMENTS OF OPERATIONS (NOTE A)
YEAR ENDED SEPTEMBER 30,
-------------------------
1998 1997*
----------- -----------
Revenues:
Membership revenues $ 84,402
----------- -----------
Costs and expenses:
Costs of membership 73,506
General and administrative 1,794,457 $ 2,183,067
Selling and marketing 385,462 306,213
Interest expense 71,463 778,136
----------- -----------
Total 2,324,888 3,267,416
----------- -----------
Loss before other income (2,240,486) (3,267,416)
Other income - interest 253,302 25,491
----------- -----------
NET LOSS $(1,987,184) $(3,241,925)
=========== ===========
Basic and diluted net loss per common share $(.89) $(12.07)
===== ========
Weighted average number of common shares outstanding 2,220,466 268,677
=========== ===========
- ----------
* Reclassified to conform to current year's presentation
See notes to financial statements F-4
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY\CAPITAL DEFICIENCY (NOTE A)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
CLASS A CLASS B ADDITIONAL
------------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1996 684,000 $ 6,840 144,000 $ 1,440 $ 1,242,998 $(1,326,356) $ (75,078)
Common stock issued 132,000 1,320 216,000 2,160 378,960 382,440
Conversion of debt to common stock 24,000 240 47,985 48,225
Warrants issued in connection with the bridge
units, net of costs of $4,823 305,677 305,677
Compensatory warrants issued 416,922 416,922
Conversion of Class B shares to Class A shares 144,000 1,440 (144,000) (1,440)
Net loss (3,241,925) (3,241,925)
--------- -------- ------- --------- ----------- ------------ -----------
BALANCE - SEPTEMBER 30, 1997 984,000 9,840 216,000 2,160 2,392,542 (4,568,281) (2,163,739)
Compensatory common stock issued 10,000 100 8,650 8,750
Common stock issued 2,024,000 20,240 8,354,740 8,374,980
Net loss (1,987,184) (1,987,184)
--------- -------- ------- --------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1998 3,018,000 $ 30,180 216,000 $ 2,160 $10,755,932 $ (6,555,465) $4,232,807
========= ======== ======= ========= =========== ============ ==========
</TABLE>
See notes to financial statements F-5
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
STATEMENTS OF CASH FLOWS (NOTE A)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,987,184) $(3,241,925)
Adjustments to reconcile net loss to net cash (used in) operating
(used in) operating activities:
Depreciation and amortization 52,462 52,055
Amortization of discount on notes payable - bridge units 31,764 609,759
Common stock and warrants issued for services 8,650 789,212
Write-down of worthless equipment 32,865
Changes in:
Prepaid expenses and other assets (68,824) (105,906)
Accounts payable and accrued expenses (431,744) 440,553
Other liabilities (8,493)
------------ ------------
Net cash (used in) operating activities (2,394,876) (1,431,880)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (87,672) (31,512)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank overdraft (9,914)
Decrease (increase) in restricted cash 85,000 (85,000)
Proceeds (repayment) of notes payable - bridge units (2,300,000) 1,695,323
Proceeds from notes payable 41,031
Repayment of notes payable (103,600)
Principal payments on obligation under capital lease (53,567) (13,791)
Net proceeds from issuance of common stock 8,747,814 10,150
Proceeds from issuance of warrants 305,677
Deferred offering costs (332,734)
------------ ------------
Net cash provided by financing activities 6,375,647 1,610,742
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,893,099 147,350
Cash and cash equivalents - beginning of year 147,350
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 4,040,449 $ 147,350
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 177,700 $ 30,377
See Notes C and H for information regarding noncash investing and financing activities
</TABLE>
See notes to financial statements F-6
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
HealthCore Medical Solutions, Inc. ("HealthCore" or the "Company") was organized
as a Delaware corporation in February 1997 and was in the development stage
through September 30, 1997. The year ended September 30, 1998 is the first year
during which it is considered an operating company. The Company markets and
administers health care service discount programs (the "HealthCare Solutions
Card") which are designed to enable participants (members), who are enrolled
through various organizations such as insurance carriers, corporations, and
unions to realize savings on purchases of products and services. These savings
will be obtained through a company-organized network of providers, such as
opticians, chiropractors, optometrists, hearing specialists, pharmacists,
dentists, physical therapists, physicians and hospitals. The Company is the
business successor to MegaVision, L.C.
In February 1997, MegaVision, L.C. ("MegaVision" or the "Predecessor"), a
Missouri limited liability company in the development stage, merged into
HealthCore, a newly formed entity. In conjunction with the merger, 1,100 member
units of MegaVision were exchanged for 708,000 shares of Class A common stock of
HealthCore and 600 member units of MegaVision were exchanged for 360,000 shares
of Class B common stock of HealthCore. The business of the Company was conducted
by MegaVision from June 1, 1995 to February 19, 1997. The merger described above
has been accounted for in a manner similar to a pooling of interests and, except
as otherwise indicated or where the context otherwise requires, the information
set forth in these financial statements has been adjusted to give retroactive
effect to the reorganization.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash on hand, demand deposits and all
highly liquid investments with a maturity of three months or less at the
time of purchase. As of September 30, 1998, $4,007,700 was held in a
money market mutual fund.
[2] PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation and
amortization are being provided on the straight-line method over the
estimated useful lives of the assets. Equipment is depreciated over
periods ranging from five to seven years. Leasehold improvements are
amortized over the shorter of the lease term or their estimated useful
life.
Equipment under capital leases is recorded at the lesser of the present
value of the lease payments or fair value of the equipment. Such
equipment is amortized on a straight-line basis over the shorter of the
lease term or its estimated useful life.
F-7
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[4] REVENUE RECOGNITION:
Membership revenues are recognized ratably over the life of the membership
for the period subsequent to the expiration of the money back guarantee,
if any.
[5] NET LOSS PER COMMON SHARE:
In February 1997, the Financial Accounting Standards Board Issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128") which is effective for periods ended after December 15, 1997
and requires that, upon adoption, all prior periods be restated. As a
result of the adoption of FAS 128 and related interpretations the net loss
per share for the year ended September 30, 1997 increased by $3.29.
Basic per common share data has been computed on the basis of the loss for
the period dividend by the weighted average shares outstanding during the
period excluding 900,000 shares placed in escrow (see Note H[1]). All
warrants and stock options which are potentially dilutive securities have
been excluded from the calculation since they would be anti-dilutive.
[6] STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") allows companies to either expense
the estimated fair value of employee stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") but
disclose the pro forma effects on net loss had the fair value of the
options been expensed. The Company has elected to apply APB 25 in
accounting for its employee stock options incentive plans.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment (at cost) as of September 30, 1998 consists of:
Equipment $ 283,844
Leasehold improvements 46,391
---------
330,235
Less accumulated depreciation and 119,394
amortization
---------
$ 210,841
=========
In April 1997, the Company acquired equipment under capital leases aggregating
$175,865. Depreciation expense on this equipment totaled $35,173 and $17,587 for
the years ended September 30, 1998 and 1997, respectively.
NOTE D - DEFERRED OFFERING COSTS
As of September 30, 1997, the Company incurred $372,734 of incremental costs in
connection with the initial public
F-8
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
offering ("IPO") of its common stock. Upon consummation of the offering during
the year ended September 30, 1998, the deferred offering costs were charged
against the gross proceeds of the offering.
NOTE E - RELATED PARTY TRANSACTIONS
During the year ended September 30, 1997, stockholders loaned the Company
$160,553. Interest expense, at rates ranging from 8.5% to 11% per annum,
aggregated $2,231. Additionally, beginning in November 1996, the Company has
rented office space from an affiliate of the Chairman of the Board. Rent expense
related to this office space amounted to $21,500 and $10,000 for the years ended
September 30, 1998 and 1997, respectively.
From April through June 1997, the Company loaned $37,200 to a former officer
bearing interest from 8% to 10% per annum, collateralized by 15,000 shares of
the Company's Class A common stock. Principal payments were payable through
March 1999. During the year ended September 30, 1998, principal payments
aggregated $400. As of September 30, 1998, the outstanding principal balance of
$36,800 is in default and, during 1998, the Company established an allowance of
$22,000.
NOTE F - OBLIGATION UNDER CAPITAL LEASE
In April 1997, the Company entered into an obligation under a capital lease,
with an affiliate of a stockholder, due in monthly installments of $6,472,
including interest imputed at 25%, through January 2000. The following are the
minimum future lease payments:
Year Ending
September 30,
-------------
1999 $ 71,192
2000 25,888
----------
97,080
Less amount representing interest 14,460
----------
Present value of net minimum lease payments 82,620
Less present value of net minimum lease payments
due within one year 63,988
----------
$ 18,632
==========
Interest expense for the years ended September 30, 1998 and 1997 aggregated
$30,570 and $12,099, respectively.
F-9
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE G - NOTES PAYABLE - BRIDGE UNITS
In February and March 1997, the Company sold 46 Bridge Units, each consisting of
a $50,000, 10% subordinated note and warrants to purchase 25,000 shares of Class
A common stock. The notes (aggregating $2.3 million principal amount) were paid
from the proceeds of the IPO in October 1997. Effective with the IPO, the
warrants were converted into IPO warrants. The Company received $1,964,154, net
of offering costs, in the Bridge Unit offering. One Bridge Unit was purchased by
the chairman of the board and his wife and one-half of one Bridge Unit was
purchased by a director, on the same terms as the other Bridge Units.
The Company valued the warrants at $310,500. Accordingly, additional paid-in
capital has been credited with $305,677 which represents the value of the
warrants less the allocable portion of the offering costs. The short-term note
has been discounted by the value of the warrants and the offering costs. The
discount has been amortized as additional interest expense from the date of
issuance to October 1997, when these notes were repaid.
NOTE H - STOCKHOLDERS' EQUITY
[1] INITIAL PUBLIC OFFERING:
On October 17 1997, the Company, in its IPO, sold 1,760,000 units. Each
unit consists of one share of Class A common stock and one redeemable
warrant to purchase a share of Class A common stock at $6.50, expiring
October 2002. On November 10, 1997, the underwriter executed its option to
sell an additional 264,000 shares of the Company's common stock. Proceeds
from the IPO, net of expenses of $1,745,000, approximated $8,355,000. In
connection with the IPO, the underwriter was granted an option to purchase
up to 176,000 units at $6.00 per unit and a director was granted a warrant
to purchase 15,000 shares at $5.00 per share.
Upon consummation of the Company's initial public offering, certain
shareholders deposited 900,000 shares of common stock (the "Escrow
Shares") into an escrow account. Some or all of these shares are to be
released upon the Company meeting certain performance goals or the stock
price exceeding certain targets. If these goals are not met the shares
will be canceled. However, should the goals be met, the release of the
shares owned by officers, directors and consultants aggregating 432,000
shares of the 900,000 shares in escrow will result in the Company
recognizing an additional expense equal to the market value of the shares
released. A total of 400,000 shares of common stock held in escrow are to
be released if either (a) the Company's minimum pretax income, as defined,
equals or exceeds $3,800,000 for the year ending September 30, 1998,
$5,500,000 for the year ending September 30, 1999 or $7,500,000 for the
year ending September 30, 2000 or (b) the average closing price of the
common stock equals or exceeds $12.50 per share for a 30 trading day
period in the 18-month period beginning with the consummation of the IPO
or $16.50 per share for 30 trading days in the period beginning after 18
months after the consummation of the IPO and ending 36 months after the
IPO. All shares of common stock held in escrow are to be released if
either (a) the Company's minimum pretax income, as defined, equals or
exceeds $4,600,000 for the year ending September 30, 1998, $6,600,000 for
the year ending September 30, 1999 or $9,000,000 for the year ending
September 30, 2000 or (b) the average closing price of the common stock
equals or exceeds $15.00 per share for a 30 trading day period in the
18-month period beginning with the consummation of the IPO or $18.00 per
share for 30 trading days in the period beginning after 18 months after
the consummation of the IPO and ending 36 months after the IPO.
As of September 30, 1998, the Company did not attain the income level nor
did the stock price meet or exceed the per share value necessary for the
release of the escrow shares.
F-10
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
[2] ISSUANCE OF CLASS A COMMON STOCK:
The Company had entered into a financing arrangement with DHF
International, Inc. ("DHF") which represented two short-term notes secured
by computer equipment owned by the Company. The notes, originally due
September 24, 1996 and February 28, 1997, were restructured in October
1996. Under the restructuring agreement the collateral remained the same,
however, the Company was obligated to pay DHF $50,000. The payment terms
were $20,000 on December 1, 1996, and $10,000 on each of January 1, 1997,
February 1, 1997 and March 1, 1997. However, subsequently DHF canceled the
Company's obligation to pay and transferred all rights, title and interest
in the computer equipment to the Company, in exchange for 24,000 shares of
the Company's Class A common stock and a right of first refusal with
respect to the leasing of equipment to the Company.
In February 1997, the Company issued an assignee of M.K.D. Capital
Corp. ("M.K.D."), 132,000 shares of Class A common stock for total
consideration of $149,160. The shares were valued at their fair value at
the date of issuance. M.K.D. paid $3,850 in cash, and the remaining
$145,310 has been charged to operations for services rendered.
[3] ISSUANCE OF CLASS B COMMON STOCK:
In November 1996, the Company entered into an agreement to issue 216,000
shares of Class B common stock for $6,300 to the Chairman of the Board and
Chief Executive Officer. The Company valued these shares at $233,280,
their estimated fair value at the date of issuance, and charged $226,980
to operations as compensation in the year ended September 30, 1997.
[4] ISSUANCE OF WARRANTS:
In September 1997, the Company granted warrants to purchase 284,000 shares
of Class A Common Stock to its Chairman of the Board and Chief Executive
Officer. The warrants are exercisable at $1.00 per share and expire in
September 2007. The Company valued these warrants at $416,922, the
estimated fair market value of the warrants at the date of grant and
incurred a noncash charge to operations of $416,922. Warrants for 142,000
shares are immediately exercisable and the remaining 142,000 will become
exercisable upon the Company meeting certain performance goals or the
stock price exceeding certain targets. If these targets are not met the
warrants will be canceled. However, should the goals be met, the Company
will recognize an additional expense equal to the fair market value of the
portion of the warrants subject to such targets. The warrants will become
exercisable if either (a) the Company's minimum pretax income, as defined,
equals or exceeds $3,800,000 for the year ending September 30, 1998,
$5,500,000 for the year ending September 30, 1999 or $7,500,000 for the
year ending September 30, 2000 or (b) the average closing price of the
common stock equals or exceeds $12.50 per share for a 30 day trading
period in the 18-month period beginning with the consummation of the IPO
or $16.50 per share for 30 trading days in the period beginning after 18
months after the consummation of the IPO to 36 months after the IPO.
As of September 30, 1998, the Company did not attain the income level nor
did the stock price meet or exceed the per share value necessary for the
remaining warrants to become exercisable.
[5] STOCK OPTION PLAN:
In 1997, the Company adopted a stock option plan under which 200,000
shares of Class A common stock are reserved for issuance upon exercise of
either incentive or nonincentive stock options which may be granted from
time to time by the board of directors to employees and others. The
options have a term of 10 years and outstanding options expire between May
through June 2007.
F-11
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
[5] STOCK OPTION PLAN (CONTINUED)
The fair value of each option granted has been estimated on the date of
grant using the Black-Scholes options pricing model with the following
assumptions; no dividend yield, expected volatility of 40%, risk-free
interest rates ranging from 6.00% and 6.75%, and expected lives of
approximately 10 years. The weighted average fair value of options granted
during 1998 and 1997 were $0.73 and $1.20 per share, respectively.
The Company applies APB 25 in accounting for its stock option incentive
plan and, accordingly, recognizes compensation expense for the difference
between fair value of the underlying common stock and the exercise price
of the option at the date of grant. The effect of applying FAS 123 on 1998
and 1997 pro forma net loss and net loss per common share is not
necessarily representative of the effect on reported net loss in future
years due to, among other things (1) the vesting period of the stock
options and (2) the fair value of additional stock options in future
years. Had compensation cost for the Company's stock option plan been
determined based upon the fair value at the grant date for awards under
the plan consistent with the methodology prescribed under FAS 123, the
Company's pro forma net loss for 1998 and 1997 would have been
approximately $(2,057,000) and $(3,311,000), respectively, and net loss
per share would have been approximately $(0.93) and $(12.32),
respectively.
The following table summarizes stock option transactions under the Plans:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- --------- ------ --------
<S> <C> <C> <C> <C>
Outstanding options at the
beginning of year 57,500 $5.00
Options granted 125,000 1.37 57,500 $5.00
Options forfeited (23,000) 5.00
-------- ----- ------ -----
Outstanding options at the
end of year 159,500 $2.16 57,500 $5.00
======= ===== ======= =====
</TABLE>
The following table summarizes information about stock options outstanding as of
September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER, CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.875 110,000 9.75 $0.875 0
$5.00 49,500 8.99 $5.00 21,300 $5.00
</TABLE>
F-12
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
[6] SHARES RESERVED FOR ISSUANCE:
The Company has reserved 4,025,000 shares of its Class A common stock for
issuance upon exercise of the outstanding warrants and options, including
warrants issued in connection with the IPO.
[7] COMMON AND PREFERRED STOCK:
The shares authorized aggregate 19,784,000 shares of Class A common stock,
216,000 shares of Class B common stock and 5,000,000 shares of preferred
stock all with $.01 par value. The Class A and Class B shares of common
stock are substantially identical except that the Class A common
stockholders have the right to cast one vote per share and the Class B
common stockholders have the right to cast five votes per share. Class B
shares automatically convert to Class A shares on a one-for-one basis upon
(i) the sale, gift or transfer, (ii) death of the original stockholder,
(iii) termination of employment of the stockholder by the Company or (iv)
if, for the year ended September 30, 1999, the minimum pretax income, as
defined, is less than $1,000,000 or if, for any subsequent year through
September 30, 2002, the Company's minimum pretax income does not equal or
exceed 110% of the prior year's minimum pretax income.
NOTE I - INCOME TAXES
The Company, prior to March 1997, was a limited liability company and was not
subject to income taxes; however the Company's income or loss was required to be
recognized by the members and taxed on their individual income tax returns.
Accordingly, the losses incurred through February 1997 are not available to
offset the Company's future taxable income, if any.
The Company's deferred tax asset as of September 30, 1998 represents a benefit
from net operating loss carryforwards of $1,504,500 which is reduced by a
valuation allowance of $1,504,500 since the future realization of such tax
benefit is not presently determinable.
As of September 30, 1998, the Company has a net operating loss carryforward of
approximately $3,946,000 expiring in 2012 and 2018. As a result of the IPO,
usage of approximately $2,000,000 of this net operating loss carryforward is
limited to approximately $789,000 per year.
The difference between the statutory federal income tax rate applied to the
Company's net loss and the Company's effective income tax rate for the years
ended September 30, 1998 and 1997 is summarized as follows:
YEAR ENDED
SEPTEMBER 30,
------------------
1998 1997
------ ------
Statutory federal income tax rate 34.0% 34.0%
Loss available to members (6.1)
Compensation charge (2.4)
Increase in valuation allowance (33.7) (25.5)
Miscellaneous (0.3)
---- -----
Effective income tax rate 0.0% 0.0%
==== =====
F-13
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE J - COMMITMENT AND OTHER MATTERS
[1] OPERATING LEASES:
The Company leases office space and equipment under operating leases
with initial or remaining terms of one year or more expiring through
October 2001. Certain leases obligate the Company for property taxes,
insurance and maintenance. Future minimum rental payments (including
maintenance costs) under these leases are as follows:
YEAR ENDING
SEPTEMBER 30,
-------------
1999 $ 88,400
2000 61,970
2001 4,971
--------
$155,341
========
Rent expense inclusive of taxes, maintenance and insurance,
aggregated $153,790 for the year ended September 30, 1998 and $78,000
for the year ended September 30, 1997.
[2] BROKER AGREEMENTS:
In October 1996, the Company entered into an agreement with M.K.D. which
was modified January 16, 1997, that provides for M.K.D. to introduce the
Company to businesses that may be interested in either purchasing
products or services from the Company or providing services under the
HealthCare Solutions Card. In the event the introductions lead to the
purchase of the Company's products, M.K.D. will receive a commission
equal to 3% of gross payments. Gross payments shall mean payments
collected by or on behalf of any business contact for any of the
Company's products, less any direct manufacturing costs incurred by the
Company in the production of such products and any broker's commissions
payable. In addition, in connection with the January 1997 modification,
the Company issued 132,000 shares of Class A common stock to M.K.D.'s
assignee for $3,850 (see Note H[2]).
In August 1998, the Company entered into an agreement with Practice
Management, Inc. ("PMI") that provides for PMI to market the discount
programs to labor groups, managed care facilities, preferred provider
organizations and third party providers for one year for an annual fee
of $50,000. Concurrently, the chairman of the board entered into an
agreement with PMI whereby PMI will present business opportunities to
the chairman. However, this agreement requires that business
opportunities appropriate to the Company be presented to the Company
prior to the chairman of the board.
[3] EMPLOYMENT AGREEMENT:
On September 30, 1998, the Company entered into an employment agreement
with an executive of the Company which expires in November 2000. Under
the terms of the agreement, the base salary effective December 1, 1998
increased to $200,000.
[4] AGREEMENTS WITH CERTAIN PROVIDER NETWORKS
Under certain agreements the Company is required to pay an access fee
per member per year.
F-14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: December 29, 1998 HEALTHCORE MEDICAL SOLUTIONS, INC.
By: /S/ NEAL J. POLAN
----------------------------------------
Neal J. Polan
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons in the capacity and
as of the date indicated.
Name Title Date
---- ----- ----
/S/ NEAL J. POLAN
- --------------------- Chairman of the Board December 29, 1998
Neal J. Polan and Chief Executive Officer
(principal executive officer)
/S/ DAVID L MULLIKIN
- ---------------------- President, Chief December 29, 1998
David L. Mullikin Operating Officer Interim
Chief Financial Officer and Director
/S/ ELI LEVITIN Director December 29, 1998
- ----------------------
Eli Levitin
/S/ NORMAN H. WERTHWEIN Director December 29, 1998
- -----------------------
Norman H. Werthwein
II-1
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT, dated as of September 30, 1998, between HealthCore Medical
Solutions, Inc., a Delaware corporation (the "Company"), and Neal J. Polan (the
"Employee").
WHEREAS, the Company desires to retain the services of the Employee,
and the Employee desires to provide such services to the Company, on the terms
set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Employment and Duties.
(a) The Company hereby employs the Employee, and the Employee accepts
employment, to serve as Chief Executive Officer of the Company and to perform
such duties consistent with his current responsibilities and as may reasonably
be assigned to him from time to time by the Company's Board of Directors. The
Employee shall also serve without additional compensation as Chairman of the
Board of Directors of the Company, if so elected or appointed.
(b) The Employee hereby agrees to perform such duties, to fulfill such
responsibilities and to serve the Company faithfully, industriously and to the
best of his ability, subject to the direction and control of the Company's Board
of Directors. The parties hereto acknowledge that Employee shall not be required
to devote more than 50% of his working time to his responsibilities hereunder
and that Employee shall not be restricted in his abilities to pursue other
business interests during the remaining portion of his working time.
2. Term; Termination.
Except in the case of earlier termination as hereinafter specifically
provided in Paragraph 4, this Agreement shall be effective as of September 30,
1998 and the term hereof and the Employee's employment hereunder shall continue
until November 30, 2000 (the "Initial Term"). This Agreement shall be renewed
automatically for successive one year terms thereafter (each, a "Renewal Term")
unless either party gives not less than 30 days prior written notice to the
other party that such party elects to have this Agreement terminate at the end
of the Initial Term or the then current Renewal Term.
3. Compensation; Expenses; Benefits.
(a) As compensation for his services hereunder in whatever capacity
rendered, the Company shall pay the Employee a salary, payable in accordance
with the Company's standard payroll practices with respect to senior officers of
the Company and/or its
<PAGE>
affiliated corporations, at a rate of $150,000 per year; provided, that such
salary shall be increased to $200,000 for the twelve month period commencing
December 1, 1998. Such salary may be increased, but not decreased by the Board
of Directors and shall be reviewed by the Board no less frequently than
annually. Such salary and the Employee's employee benefits provided pursuant to
Paragraph 3 hereof shall continue to be paid and provided, regardless of any
illness or incapacity of the Employee, until this Agreement is terminated.
(b) The Employee shall also be entitled to receive such bonuses as the
Company's Board of Directors or Compensation Committee, if any, may deem
appropriate. The Employee shall also be entitled to participate in the Company's
employee stock option plan, as may be determined by the Company's Board of
Directors or Compensation Committee, if any.
(c) The Employee and the Employee's spouse and children, if any, shall be
entitled to participate in all employee benefit plans generally available from
time to time to the senior officers of the Company, so long as such benefits
comply with applicable law (including without limitation the Internal Revenue
Code and ERISA). In addition, Employee shall be entitled to annual vacation in
accordance with Company policy at such times as are mutually convenient to
Employee and the Company.
(d) The Employee shall be entitled to advances or reimbursement in
accordance with the Company's standard business practices for his ordinary and
necessary business expenses incurred in the performance of his duties hereunder
provided that his claims therefor shall be supported by the documentation
required by the Company in accordance with its usual practice.
(e) The Company shall supply a luxury automobile to Employee for his use
and shall pay all costs, including insurance, associated therewith.
(f) The Company shall pay the yearly premium during the Initial Term and
any subsequent Renewal Term on a term life insurance policy for the Employee in
the amount of $2,000,000 under which the Employee's estate shall be the
beneficiary.
4. Termination of Employment. If any of the following events occur before
the expiration of the Term, Employee's employment with the Company shall
terminate upon the occurrence of such event:
(a) Employee's death, or, in the event that the Company maintains
disability insurance for the Employee, any illness, disability or other
incapacity that renders Employee physically unable regularly to perform his
duties hereunder for a period in excess of one hundred eighty (180) days. The
determination regarding whether Employee is physically unable regularly to
perform his duties hereunder shall be made by the Company's Board of Directors
in the reasonable, good faith exercise of their judgment.
-2-
<PAGE>
(b) Thirty (30) days after the Company gives Employee written notice of the
termination of Employee's employment if said termination is for cause. For
purposes of this Paragraph 4(b), "cause" is defined as (i) Employee's conviction
of a crime constituting a felony or involving moral turpitude or (ii) an act by
Employee of material dishonesty or fraud in connection with Employee's
performance of his duties to the Company.
5. Representations, Warranties and Covenants of Employee. The Employee
represents, warrants and covenants to and with the Company that (a) he is not
and will not become a party to any agreement, contract or understanding, whether
employment or otherwise, and that he is not subject to any order, judgment or
decree of any court or governmental agency, which would, in any way, restrict or
prohibit him from undertaking or performing his employment in accordance with
the terms and conditions of this Agreement and (b) he is of sufficient physical
and mental health to fulfill his duties, obligations and responsibilities under
the terms of this Agreement.
6. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed in that state.
(b) Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand (with receipt confirmed), (b) sent by telex or telecopier
(with receipt confirmed), provided that a copy is mailed by registered mail,
return receipt requested, or (c) when received by the addressee, if sent by
Express Mail, Federal Express or other express delivery service (receipt
requested), in each case to the appropriate addresses and telecopier numbers set
forth below (or to such other addresses and telecopier numbers as a party may
designate as to itself by notice to the other parties):
If to the Employee:
Neal J. Polan
1325 Avenue of the Americas,
Suite 1200 New York, New York 10019
Telecopier No.: (212) 399-9199
with a copy to:
Neal J. Polan
20 Cameron Drive
Greenwich, Connecticut 07831
-3-
<PAGE>
If to the Company:
HealthCore Medical Solutions, Inc.
11904 Blue Ridge Boulevard
Grandview, Missouri 64030
Telecopier No.: (816) 765-6573
with a copy to:
Bachner, Tally, Polevoy & Misher LLP
380 Madison Avenue
New York, New York 10017
Telecopier No.: (212) 682-5729
Attention: Sheldon E. Misher, Esq.
(c) Entire Agreement; Amendment. This Agreement shall supersede all
existing agreements between the Employee and the Company relating to the terms
of his employment. This Agreement may not be amended except by a written
agreement signed by both parties.
(d) Waiver. The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver thereof
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement.
(e) Assignment. Subject to the limitations below, this Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, representatives, successors and assigns. This Agreement shall
not be assignable by the Employee, and shall be assignable by the Company only
to an affiliate of the Company or any corporation resulting from the
reorganization, merger or consolidation of the Company with any other
corporation or any corporation to which the Company may sell all or
substantially all of its assets.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each executed this Executive
Employment Agreement as of the day and year first above written.
HEALTHCORE MEDICAL SOLUTIONS, INC.
By:/S/ DAVID L. MULLIKIN
------------------------------------
Name: David L. Mullikin
Title: President and Chief Operating
Officer
/S/ NEAL J. POLAN
------------------------------------
Neal J. Polan
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 4,040,449
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,203,902
<PP&E> 330,235
<DEPRECIATION> (119,394)
<TOTAL-ASSETS> 4,430,313
<CURRENT-LIABILITIES> 178,874
<BONDS> 0
0
0
<COMMON> 32,340
<OTHER-SE> 4,200,467
<TOTAL-LIABILITY-AND-EQUITY> 4,430,313
<SALES> 84,402
<TOTAL-REVENUES> 84,402
<CGS> 73,506
<TOTAL-COSTS> 73,506
<OTHER-EXPENSES> 2,157,919
<LOSS-PROVISION> 22,000
<INTEREST-EXPENSE> 71,463
<INCOME-PRETAX> (1,987,184)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,987,184)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,987,184)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
