U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 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.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1771999
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11904 BLUE RIDGE BOULEVARD, GRANDVIEW, MISSOURI 64030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 763-4900
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. YES [X] NO [__]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
As of February 12, 1999, 3,018,000 shares of Class A Common Stock, $.01 par
value, and 216,000 shares of Class B Common Stock, $.01 par value, of the
registrant were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
YES [__] NO [X]
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet as of December 31, 1998 ................. 3
Statement of Operations for the quarter
ended December 31, 1998 and 1997 .................. 4
Statement of Cash Flows for the quarter
ended December 31, 1998 and 1997 .................. 5
Notes to the Financial Statements...................... 6
Item 2. Management's Discussion and Analysis ........................... 9
PART II.
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 12
Item 5. Other Information................................................ 12
Item 6. Exhibits and Reports on Form 8-K ................................ 13
SIGNATURES .............................................................. 14
Page 2
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
BALANCE SHEET
(unaudited)
ASSETS December 31,
1998
------------
Current assets:
Cash and cash equivalents $3,487,171
Prepaid expenses and other current assets 170,215
------------
Total current assets 3,657,386
------------
Property and equipment, net 200,463
Other assets 15,570
------------
216,033
------------
TOTAL $3,873,418
============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $82,445
Deferred income 20,866
Current portion-long term debt 63,987
------------
Total current liabilities 167,298
------------
Obligations under capital lease 4,390
------------
Total liabilities 171,688
------------
Commitments and other matters
SHAREHOLDERS' 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 (7,086,542)
------------
Total shareholders equity 3,701,730
------------
TOTAL $3,873,418
============
See notes to financial statements
Page 3
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HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31,
1998 1997*
----------- -----------
<S> <C> <C>
Revenues:
Membership revenues $29,903 $8,351
Costs & expenses:
Costs of memberships 23,510 7,068
Selling and marketing 218,139 83,166
General and administrative 359,172 277,986
Interest expense 5,174 49,643
----------- -----------
Total
605,995 417,863
----------- -----------
Loss before other income (576,092) (409,512)
----------- -----------
Other income - interest 45,015 62,555
----------- -----------
Net loss (531,077) (346,957)
Net loss per share: ($0.23) ($0.18)
=========== ===========
Weighted average number of commons shares outstanding 2,334,000 1,938,529
=========== ===========
</TABLE>
* 1997 Quarter revised to reflect change in revenue recognition of annual
contracts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
See notes to financial statements
Page 4
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HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31,
1998 1997*
----------- -----------
<S> <C> <C>
Cash flows used for operating activities:
Net loss ($531,077) ($346,957)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization 13,683 13,514
Amortization of discount on notes payable-bridge units 31,764
Changes in:
Prepaid expenses and other assets (6,762) (47,580)
Accounts payable and accrued expenses (32,442) (445,842)
Other liabilities 20,866 2,419
----------- -----------
Net cash used in operating activities (535,732) (792,682)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (3,304) (43,201)
----------- -----------
Cash flows from financing activities:
Decrease in restricted cash 85,000
Principal payments on notes payable-bridge units (2,300,000)
Net change in notes payable-banks (103,600)
Principal payments on obligation under capital lease (14,242) (14,244)
Net proceeds from initial public offering 8,747,714
Net cash used in financing activities (14,242) 6,414,870
----------- -----------
Net increase in cash and cash equivalents (553,278) 5,578,987
Cash and cash equivalents - beginning of period 4,040,449 147,350
----------- -----------
Cash and cash equivalents - end of period $3,487,171 $5,726,337
=========== ===========
Supplemental disclosure of cash flow information: Cash paid for:
Interest $5,174 $177,700
</TABLE>
* 1997 Quarter revised to reflect change in revenue recognition of annual
contracts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
See notes to fonancial statements
Page 5
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HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
Notes to Financial Statements
December 31, 1998
(unaudited)
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
General
These financial statements have been prepared by HealthCore Medical Solutions,
Inc. ("HealthCore" or the "Company") in accordance with generally accepted
accounting principles for interim financial reporting and in accordance with
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position, the
results of operations and the statement of cash flows for the periods presented.
The unaudited financial statements presented herein were prepared using the
underlying accounting principles utilized in the Company's September 30, 1998
audited financial statements filed on Form 10-KSB with the Securities and
Exchange Commission on December 29, 1998. Operating results for the three months
ended December 31, 1998 are not necessarily indicative of the results that may
be expected for the year ending September 30, 1999.
HealthCore was organized as a Delaware corporation in February 1997 as a
business successor to MegaVision, L.C. ("MegaVision"). The Company markets and
administers Consumer and health care benefit services programs which are
designed to enable participants ("Members") to obtain discounts on purchases of
consumer, medical and ancillary health care products and services through
certain networks ("Networks") of providers ("Providers"). The Networks with
which the Company currently maintains contracts comprise an aggregate of
approximately 450,000 participating Providers of medical services, eye care,
dental, hearing, pharmacy, physical and occupational therapy, chiropractic
benefits and consumer purchases throughout the United States. Members can access
the Networks through the use of a discount membership card ("Cards"). The Cards
are currently being marketed, directly and through independent brokers,
insurance agents and consumer marketing organizations, to individuals and to
employers, health maintenance organizations and businesses and other
associations who may either purchase the Cards for, or offer it to, their
employees or members.
In February 1997, MegaVision, L.C., a Missouri limited liability company in the
development stage, merged into HealthCore. 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.
HealthCore and MegaVision have been principally devoted to organizational
activities, raising capital, marketing, building a sales network and negotiating
provider agreements.
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.
[2] 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.
Page 6
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HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
Notes to Financial Statements
December 31, 1998
(unaudited)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] Revenue and costs recognition:
The Company currently offers a full money-back guarantee to Members who, after
the first 90 days of enrollment, are not satisfied with the Card.
All monthly and single annual payment sales and their corresponding expenses,
including sales commissions, provider fees and a provision for cancellations
from potential guarantee-related refunds incurred by the Company at the time of
sale, are recognized in the monthly period after the expiration of the guarantee
period. Annual card sales are recognized ratably over the term of the membership
following the expiration of the guarantee period.
[4] 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.
[5] Net loss per share:
Net loss per share was computed based upon the weighted average number of shares
of common stock outstanding during each year presented, excluding the 900,000
shares placed in escrow. Upon the Company exceeding certain income levels or the
common stock exceeding certain market prices per share, some or all of the
shares of common stock held in escrow are to be released (see Note E).
NOTE C - CAPITAL STOCK
[1] Stock option plan:
The Company adopted a stock option plan,as amended, under which 500,000 shares
of Class A common stock are reserved for issuance upon exercise of either
incentive or non-incentive stock options which may be granted from time to time
by the board of directors to the Company's officers, directors, employees and
others. The Company has granted options to purchase 172,500 shares of Class A
common stock at prices ranging from $.875 per share to $5.00 per share. Of the
options granted, 15,000 have been forfeited by resignation of the grantees and
are available for future grants. The remaining 157,500 options granted and
outstanding will fully vest during the period from August 1997 through June 2001
and will expire ten years from the date of grant.
[2] Shares reserved for issuance:
The Company has reserved 3,849,000 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.
[3] 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 stockholder has 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 thereof, (iii) termination of employment of
the stockholder by the Company for any reason 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.
Page 7
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
Successor to MegaVision, L.C.
Notes to Financial Statements
December 31, 1998
(unaudited)
NOTE D - INCOME TAXES
The Company's deferred tax asset as of September 30, 1998 represented a benefit
from net operating loss carryforwards of $1,504,500. This deferred tax asset has
been 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 had 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.
NOTE E - 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 stockholders
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 346,500 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.
Page 8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Form 10-QSB that are not descriptions of historical facts
are forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth under "Risk Factors" in the
Company's Form 10-KSB for the year ended September 30, 1998, and including, in
particular, 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.
General
The Company develops, markets and administers a benefit services program
designed to enable members to obtain discounts on purchases of consumer and
medical products and services through networks of providers with which the
Company has executed provider agreements. The Company currently offers three
products: The HealthCare Solutions Card, offering discounts for ancillary
medical services; the Medical Solutions Card, providing discounts on physicians
and hospital medical expenses: and the Saving Solutions Card, offering discounts
on ancillary medical and consumer purchases.
Page 9
<PAGE>
The Company's revenues are derived from the receipt of annual or monthly
enrollment fees paid by or on behalf of Members for the right to obtain
discounts from Providers in the Networks. The Company receives a significant
portion of its revenue in the form of monthly bank drafts and monthly payroll
deductions made by employers on behalf of their employees. The Company currently
offers a money-back guarantee. All monthly payment sales and their corresponding
expenses, including sales commissions and provider fees, are recognized in the
monthly periods after which the guarantee expires. Since the initial cost of
delivery the cards to the customers is incurred and expensed in the first month,
the gross profit associated with each new individual card issued is 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 are subject to the same
costs of issuance, this twelve month pattern of lower gross profits in the first
month continues for renewal periods.
In those instances when a sale of the Company's discount cards is collected as a
single annual fee, the Company recognizes all of its single payment sales in the
period in which the card is delivered, since all of the expenses resulting from
the purchase of an annual card, including the costs of issuance, sales
commission, provider fees, and an provision for cancellations from potential
guarantee-related refunds, are incurred by the Company at the time of sale. The
Company incurs only nominal additional direct costs associated with each
cardholder in the following eleven months due to the fact that under all of its
provider network contracts, each provider is obligated to continue to provide
discounts to all cardholders until the annual card expires, even if the provider
network contract has been terminated. The Company also offers a money-back
guarantee to Members who, within ninety days, are not satisfied with the
discount card and the Company has established reserves therefor. The Company has
some existing cards with a 12-month guarantee and respective reserves have been
established.
While most marketing activity has focused primarily on the HealthCare Solutions
Card, the Company has only recently begun to market the Medical Solutions Card
and the Savings Solutions Card. There can be no assurance that the Company will
successfully maintain or expand the Networks and/or market its discount cards.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
Results of Operations
Quarters Ended December 31, 1998 and December 31, 1997. Operating revenues for
the quarter ended December 31, 1998 (the "1998 Quarter") increased by
approximately 375% from $8,000 (adjusted) for the quarter ended December 31,
1997 (the "1997 Quarter") to approximately $30,000. Operating revenue for the
1998 Quarter does not include approximately $21,000 in annual membership fees
received that were deferred until after the expiration of the 90 day money back
guarantee period. The deferred revenue is being deferred as a result of a recent
Securities and Exchange Commission ("SEC") position that income cannot be
recognized until after the expiration of the guarantee period and income from
annual contracts must be recognized ratably over the life of the membership. For
comparative purposes, the 1997 Quarter revenues have been adjusted to reflect
deferred revenue recognition of $5,565 in annual membership fees. The overall
increase in revenue is a result of increased sales and marketing efforts to
promote the Company's products.
Selling, general and administrative expenses increased by approximately 60% from
approximately $361,000 in the 1997 Quarter to approximately $577,000 in the 1998
Quarter. The increase is due primarily to management level staffing increases in
the sales, marketing and customer service departments and increased program
development costs.
Interest expense decreased by approximately 95% from approximately $50,000 for
the 1997 Quarter to approximately $5,000 for the 1998 Quarter due to the
completion of the bridge financing in the 1997 Quarter. Interest income
decreased approximately 27% from approximately $62,000 for the 1997 Quarter to
approximately $45,000 for the 1998 Quarter due to decreased investments effected
by corporate needs.
Net Loss increased 53% from approximately $347,000 (adjusted) for the 1997
Quarter to approximately $531,000 for the 1998 Quarter as a result of the
foregoing factors.
Liquidity and Capital Resources
The Company utilizes capital resources primarily for general corporate purposes
and to support anticipated growth. As of December 31, 1998, the Company had a
working capital of approximately $3,490,000 including cash and cash equivalents
of approximately $3,487,000.
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<PAGE>
Net cash used in operating activities was approximately $536,000 for the 1998
Quarter compared to approximately $793,000 for the 1997 Quarter. Net cash used
in operating activities consisted primarily of approximately $531,000 as a
result of net loss from operations.
The Company intends to use its cash 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. From time to time the Company also evaluates
potential opportunities outside of its current business operations and intends
to continue to evaluate such opportunities in the future.
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 cannot predict whether it will experience problems, delays
or unanticipated costs in the use of its current system.
The Company continues to review 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.
The Company is utilizing internal personnel, contract programmers and vendors to
review its information and operational systems, including the Data Management
and Systems Design (DMSD) 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
DMSD 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 DMSD
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.
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<PAGE>
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 approximately 90% completed. Of the suppliers who have
responded to our survey, all have indicated that they are Year 2000 Compliant,
although the Company cannot guarantee that there suppliers and the remaining
suppliers are and will be 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 a 100% response rate to date. Two
pharmacy benefits management suppliers with whom the Company has contracts have
indicated that they are Year 2000 compliant.
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 cannot 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 about 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 December 31, 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.
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.
Page 12
<PAGE>
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
Page 13
<PAGE>
PART II
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 1998, the Company granted an aggregate of
10,000 options to employees of the Company at exercise prices ranging from .875
to 1.00 per share (the market value of the Class A Common Stock on the date of
grant) under the Company's 1997 Stock Option Plan, which options will vest at
various times over a three year period.
The 2,024,000 units of the Company and the underlying securities consisting of
one share of Class A Common Stock and one warrant to purchase one share of Class
A Common Stock per unit issued in the IPO were registered under a registration
statement on Form SB-2 (File No. 333-28233) which was declared effective by the
Securities and Exchange Commission on October 14, 1997.
During the quarter ended December 31, 1998, a portion of the net proceeds from
the IPO were used (i) to make principal and interest payments in the amount of
approximately $19,000 on a capital lease entered into in April 1997; (ii) to
purchase equipment in the amount of approximately $3,000 and (iii) for working
capital purposes in the amount of approximately $535,000. The remaining portion
of the net proceeds from the IPO and other available cash in the amount of
approximately $3,487,000 has been invested in short-term, interest-bearing,
investment grade securities.
Item 5. OTHER INFORMATION
Neal J. Polan, the Chairman and Chief Executive Officer of the Company, devotes
approximately 50% of his business time to other interests 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 from time to time be
presented with various business opportunities in the health care services
industry. Mr. Polan may present certain of these opportunities to the Company,
although Mr. Polan has no agreement to do so and there can be no assurance that
any such opportunities will be presented to the Company. The Company entered
into a one-year consulting agreement with Practice Management, Inc. ("PMI"),
whereby PMI is marketing the Company's 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 PMI,
whereby is marketing, 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 PMI and Mr. Polan provides that PMI shall be
obligated to first present to the Company, prior to Mr. Polan, any business
opportunities that may be appropriate for the Company. The Company is evaluating
its relationship with PMI and has notified PMI of its desire to terminate this
relationship. These arrangements and agreements may give rise to certain
conflicts of interest.
SIGA Pharmaceuticals, Inc. (SIGA) filed a Schedule 13D dated October 15, 1998
stating that it beneficially owned 151,000 shares of the Company's Class A
Common Stock or approximately 5.0% of the outstanding shares of the Company's
Class A Common Stock, and 149,800 Class A Warrants to purchase shares of the
Company's Class A Common Stock. SIGA stated that the securities were acquired
for investment purposes and that it intended to request a meeting with the
Company for the purpose of discussing methods of maximizing or enhancing
stockholder value. SIGA also stated that it had no present intention of
acquiring additional securities. On January 11, 1999, SIGA amended its Schedule
13D to state that it had met with the Company's Chairman of the Board and had
sent a letter dated January 6, 1999 to the Chairman suggesting a possible
combination of the Company and SIGA and outlining the proposed terms of a
possible transaction. The Schedule 13G also stated that no formal offer was made
by SIGA to acquire the Company and that SIGA had no present intention of
acquiring additional securities.
On January 15, 1999, the Company's Board of Directors met to discuss the letter
from SIGA. On January 19, 1999, the Company's Chairman sent a letter to SIGA.
The letter stated that in order for the Board of Directors to fully evaluate a
possible transaction, the Board of Directors required a better understanding of
SIGA's business. The letter also stated that the Board of Directors intended to
fully evaluate a possible transaction with SIGA and retained a consultant to
assist in such evaluation. Based on the Board of Director's analysis of a
proposed transaction with SIGA, including the review of a report delivered by
the consultant engaged by the Company, the Company's Board of Directors has
determined, and has advised SIGA, that the Company will not proceed, at this
time, with a transaction with SIGA.
Page 14
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 15
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
HEALTHCORE MEDICAL SOLUTIONS, INC.
By: /s/ Neal J. Polan
--------------------------------
Neal J. Polan
Chairman and Chief Executive Officer
By: /s/ David L. Mullikin
--------------------------------
David L. Mullikin
President, Chief Operating Officer and
Acting Chief Financial Officer
Date: February 12, 1999
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,487,171
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,657,386
<PP&E> 333,539
<DEPRECIATION> (133,076)
<TOTAL-ASSETS> 3,873,418
<CURRENT-LIABILITIES> 167,298
<BONDS> 0
0
0
<COMMON> 32,340
<OTHER-SE> 3,669,390
<TOTAL-LIABILITY-AND-EQUITY> 3,873,418
<SALES> 29,903
<TOTAL-REVENUES> 29,903
<CGS> 23,510
<TOTAL-COSTS> 23,510
<OTHER-EXPENSES> 577,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,174
<INCOME-PRETAX> (531,077)
<INCOME-TAX> 0
<INCOME-CONTINUING> (531,077)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (531,077)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
