HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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 JUNE 30, 1999 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 August 13, 1999, 3,183,000 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]
-1-
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet as of June 30, 1999 ....................... 3
Statement of Operations for the quarter and nine months
ended June 30, 1999 and 1998 ........................ 4
Statement of Cash Flows for the nine months
ended June 30, 1999 and 1998 ........................ 5
Notes to the Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis ............................. 11
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ......................... 15
Item 5. Other Information ................................................. 15
Item 6. Exhibits and Reports on Form 8-K .................................. 15
SIGNATURES ................................................................ 16
-2-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
BALANCE SHEET
(UNAUDITED)
ASSETS JUNE 30, 1999
------------
Current Assets:
Cash & cash equivalents $2,330,495
Note receivable - Adatom $250,000
Prepaid expenses and other current assets $176,376
-----------
Total current assets $2,756,871
-----------
Property and equipment, net $146,760
Other assets $3,570
-----------
$150,330
-----------
TOTAL $2,907,201
===========
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $169,175
Deferred Income $41,672
Current portion-long term debt $36,260
Deferred business disposal costs $66,251
-----------
Total Current Liabilities $313,358
-----------
Obligations under capital lease $0
-----------
Total Liabilities $313,358
-----------
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 3,183,000 shares $30,180
Class B, authorized, 216,000 shares;
Issued and outstanding 216,000 shares $2,160
Additional paid in capital $11,207,963
Accumulated deficit ($8,646,460)
-----------
Total Shareholders Equity $2,593,843
-----------
TOTAL $2,907,201
===========
SEE NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Membership revenues $61,894 $32,948 $146,478 $69,281
-------- -------- ---------- ----------
Costs & Expenses:
Costs of memberships
44,722 20,460 110,918 46,184
Selling and marketing
76,818 264,125 548,653 523,692
General and administrative
338,779 373,480 1,079,466 980,253
Interest expense
4,366 8,934 11,977 65,714
-------- -------- ---------- ----------
Total
464,685 666,999 1,751,014 1,615,843
-------- -------- ---------- ----------
Loss before other income (402,791) (634,051) (1,604,537) (1,546,562)
-------- -------- ---------- ----------
Other income - interest 28,914 63,695 110,645 197,478
Gain/Loss from disposal of business (66,251) (66,251)
Other expenses (489,228) (525,228)
-------- -------- ---------- ----------
Net other income/expense (526,565) 63,695 (480,834) 197,478
-------- -------- ---------- ----------
Net loss (929,356) (570,356) (2,090,995) (1,349,084)
======== ======== ========== ==========
Net loss per share: ($0.38) ($0.25) ($0.89) ($0.61)
======== ======== ========== ==========
Weighted average number of
common shares outstanding:
2,424,396 2,324,110 2,361,181 2,194,113
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
CASH FLOWS USED FOR OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($2,090,995) ($1,349,084)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation & amortization 41,049 38,975
Amortization of discount on notes payable-bridge units 0 31,764
Common stock and warrants issued for services 452,031 8,650
Changes in:
Prepaid expenses and other assets (923) (85,236)
Accounts payable and accrued expenses 54,289 (401,109)
Other liabilities 107,923 (708)
----------- -----------
Net cash used in operating activities (1,436,626) (1,756,748)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,790) (82,398)
Notes receivable - Adatom (250,000)
Write off of obsolete equipment 27,822
----------- -----------
Net cash used in investing activities (226,968) (82,398)
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 (46,360) (39,899)
Net proceeds from private stock transactions 100
Net proceeds from initial public offering 8,747,714
----------- -----------
Net cash used in financing activities (46,360) 6,389,315
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,709,954) 4,550,169
Cash and cash equivalents - beginning of period 4,040,449 147,350
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $2,330,495 $4,697,519
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $11,977 $171,372
</TABLE>
-5-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(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 nine months
ended June 30, 1999 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 is an early
stage enterprise organized to develop, market and administer a health care
benefit services program which is designed to enable participants ("Members") to
obtain discounts on purchases of ancillary health care products and services
through certain networks ("Networks") of health care providers ("Providers").
On July 1, 1999, HealthCore Medical Solutions, Inc., a Delaware corporation
("HealthCore"), and Adatom, Inc., a privately held California corporation
("Adatom"), entered into an Agreement and Plan of Merger (the "Merger
Agreement"), under which Adatom will be merged with and into HealthCore (the
"Merger"), with HealthCore being the surviving corporation under the name
Adatom.com, Inc. (the "Surviving Corporation"). All existing Class A common
stock and warrants of HealthCore will remain outstanding. The Class B common
stock of HealthCore will be eliminated and the Class A common stock of
HealthCore will be retitled as common stock. Adatom stockholders will receive
common stock of the Surviving Corporation representing approximately 77.5% of
the Surviving Corporation subject to adjustment in certain circumstances.
Consummation of the Merger is subject to a number of conditions including,
without limitation, approval of the Merger by the stockholders of HealthCore and
Adatom, and sale or liquidation of the healthcare discount benefits business
operated by HealthCore.
To satisfy the condition to consummation of the Merger that HealthCore liquidate
or sell its discount healthcare business, on July 28, 1999 HealthCore sold
certain of its assets related to its discount healthcare business to Randolph &
Associates, Inc., a Texas corporation ("Randolph") and discontinued the
operation of its healthcare discount benefits business. The assets sold included
membership contracts, network access agreements, broker contracts, a computer
hardware lease, certain other miscellaneous contracts, furniture and fixtures,
software and trade names. Randolph agreed to assume performance of HealthCore's
obligations under the assigned contracts as of August 1, 1999. The purchase
price for the purchase of the assets was $4,090.64 in cash, the assumption of a
computer hardware lease for $45,909.36 and the assumption of HealthCore's
obligations under the other assigned contracts arising on or after August 1,
1999 together with all refund obligations due Members requested on or after
August 1, 1999 (regardless of the date(s) to which such refunds relate).
-6-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
The Networks with which the Company maintained contracts as of August 1, 1999
comprised an aggregate of approximately 450,000 participating Providers of eye
care, dental, hearing, pharmacy, physical and occupational therapy, chiropractic
benefits, hospital and physician services and retail consumer purchases
throughout the United States. Members can access the Networks through the use of
discount membership cards. These discount membership cards have been 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] REVENUE AND COST OF SALES RECOGNITION:
All monthly and single annual payment sales and their corresponding expenses,
including the costs of issuance of HealthCare Solutions Cards, 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
which the card sale is billed. Annual card sales are recognized ratably over the
term of the membership. The Company currently offers a full money-back guarantee
to Members who are not satisfied with the HealthCare Solutions Card.
-7-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
[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
common shares held in escrow are to be released (see Note F).
NOTE C - NOTES PAYABLE - BRIDGE UNITS
In February and March 1997, the Company sold 46 Bridge Units, each consisting of
(i) a $50,000 10% subordinated note and (ii) warrants to purchase 25,000 shares
of Class A common stock. The notes, aggregating $2.3 million in principal amount
and $142,979 in accrued interest, were repaid on October 17, 1997 from the
proceeds of the Company's initial public offering ("IPO"). Concurrently 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 notes
were discounted by the value of the warrants and the offering costs. The
discount was amortized as additional interest expense from the date of issuance
to October 17, 1997, when these notes were repaid.
NOTE D - CAPITAL STOCK
[1] STOCK OPTION PLAN:
In February 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 non-incentive stock options which may be granted from time to time
by the board of directors to 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.
-8-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE D - CAPITAL STOCK (CONTINUED)
[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.
Prior to the execution of a non-binding letter of intent on April 27, 1999,
relative to the Adatom, Inc. merger the Company employed Polan under an
employment agreement (the "Employment Agreement") expiring on November 30, 2000,
providing for an annual base salary of two hundred thousand ($200,000) dollars,
together with other compensation and benefits. The Employment Agreement made no
provision for the termination thereof without cause. In furtherance of the
transaction contemplated by the letter, by letter amendment dated April 27,
1999, the Employment Agreement was amended to provide the Company with the right
to terminate the Employment Agreement at any time, without cause, upon the
expiration of one hundred twenty (120) days following the date of the execution
of the letter amendment, whereupon the Company will pay to Polan the lesser of
(a) one hundred fifty thousand ($150,000) dollars, or (b) sixty (60%) percent of
the present value of the remaining compensation and benefits due under the terms
of the employment agreement on the date of its termination. In consideration for
the amendment, the Company issued Polan 165,000 shares of Class A Common Stock
of the Company.
On April 27, 1999, the Company engaged Jesup & Lamont as exclusive financial
adviser to the Company in connection with the Merger, and as the Company's
exclusive placement agent with respect to a contemplated private placement (the
"Placement") of approximately six million ($6,000,000) dollars in equity
securities of the Company following the consummation of the Merger, the Company,
pursuant to the terms of an engagement letter (the "Engagement Letter") among
the Company, Adatom, and Jesup & Lamont. As partial consideration for such
services, the Company has agreed to issue to Jesup & Lamont (a) upon the signing
of the Engagement Letter, five-year warrants to purchase two hundred thousand
(200,000) shares of the Class A Common Stock of the Company at an exercise price
of one ($1.00) per share (one hundred thousand (100,000), of which vested upon
the execution of the Engagement Letter, and the remaining one hundred thousand
(100,000) to vest only upon the closing of the Merger), and (b) five-year
warrants to purchase up to ten (10%) percent of the securities sold in the
Placement at an exercise price equal to the price at which the securities are
sold in the Placement.
NOTE E - INCOME TAXES
The Company's deferred tax asset as of September 30, 1998 represented a benefit
from net operating loss carryforward of $1,504,500. This deferred tax asset has
been reduced by a valuation allowance of $1,504,500 since the future realization
-9-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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 F - 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 June 30, 1999, 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.
NOTE G - NOTE RECEIVABLE FROM ADATOM, INC.:
On April 28, 1999 a note in the value of $250,000 was executed with Adatom, Inc.
The note is payable on demand 90 days after the termination of the merger
agreement should that agreement be terminated.
-10-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RECENT DEVELOPMENTS.
On July 1, 1999, HealthCore Medical Solutions, Inc., a Delaware corporation
("HealthCore"), and Adatom, Inc., a privately held California corporation
("Adatom"), entered into an Agreement and Plan of Merger (the "Merger
Agreement"), under which Adatom will be merged with and into HealthCore (the
"Merger"), with HealthCore being the surviving corporation under the name
Adatom.com, Inc. (the "Surviving Corporation"). All existing Class A common
stock and warrants of HealthCore will remain outstanding. The Class B common
stock of HealthCore will be eliminated and the Class A common stock of
HealthCore will be retitled as common stock. Adatom stockholders will receive
common stock of the Surviving Corporation representing approximately 77.5% of
the Surviving Corporation subject to adjustment in certain circumstances.
Consummation of the Merger is subject to a number of conditions including,
without limitation, approval of the Merger by the stockholders of HealthCore and
Adatom, and sale or liquidation of the healthcare discount benefits business
operated by HealthCore.
To satisfy the condition to consummation of the Merger that HealthCore liquidate
or sell its discount healthcare business, on July 28, 1999 HealthCore sold
certain of its assets related to its discount healthcare business to Randolph &
Associates, Inc., a Texas corporation ("Randolph") and discontinued the
operation of its healthcare discount benefits business. The assets sold included
membership contracts, network access agreements, broker contracts, a computer
hardware lease, certain other miscellaneous contracts, furniture and fixtures,
software and trade names. Randolph agreed to assume performance of HealthCore's
obligations under the assigned contracts as of August 1, 1999. The purchase
price for the purchase of the assets was $4,090.64 in cash, the assumption of a
computer hardware lease for $45,909.36 and the assumption of HealthCore's
obligations under the other assigned contracts arising on or after August 1,
1999 together with all refund obligations due Members requested on or after
August 1, 1999 (regardless of the date(s) to which such refunds relate).
While the Company expects to complete the Merger in the next several months, the
Company cannot assure that it will be completed in a timely manner or at all. In
the event the Merger is not consummated, the Company intends to seek other
merger candidates.
GENERAL.
THE FOLLOWING DISCUSSION RELATES TO THE BUSINESS THAT HEALTHCORE HAS
OPERATED SINCE 1995. AS A CONDITION OF THE MERGER, IN JULY 1999 HEALTHCORE SOLD
THIS BUSINESS. APPROVAL OF THE MERGER AGREEMENT CONSTITUTES RATIFICATION OF THE
SALE OF THIS BUSINESS.
The Company developed, marketed and administered a benefit services program
designed to enable members to obtain discounts on purchases of medical and
consumer products and services through networks of providers with which the
Company has executed provider agreements. The Company offered three products:
The HealthCare Solutions card, offering discounts for ancillary medical
services; the Medical Solutions Card, providing discounts on major medical
expenses: and the Saving Solutions Card, offering discounts on ancillary medical
and consumer purchases.
The Company's revenues were 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 received a significant
-11-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
portion of its revenue 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, are recognized in the monthly periods for which
they are billed. Since the initial cost of delivering the cards to the customers
is incurred and expensed in the first month, the gross profit associated with
each new individual card issued was 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 were subject to the same costs of issuance, this twelve-month
pattern of lower gross profits in the first month continued for renewal periods.
In those instances when a sale of the Company's discount cards is collected as a
single annual fee, the Company recognized 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 incurred 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 was 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 offered a money-back
guarantee to Members who, within ninety days or after twelve months (depending
on the product), are not satisfied with the discount card and the Company has
established reserves therefor.
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
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998.
Operating revenues for the quarter ended June 30, 1999 (the "1999 Quarter")
increased by approximately 88% from approximately $33,000 for the quarter ended
June 30, 1998 (the "1998 Quarter") to approximately $62,000. Operating revenue
for the 1999 Quarter includes income recognition of approximately $11,000 in
annual membership fees received in prior quarters that were deferred until after
the expiration of the money back guarantee period. The deferred revenue is being
deferred as a result of a 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. 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 decreased by approximately 35% from approximately
$638,000 in the 1998 Quarter to approximately $416,000 in the 1999 Quarter. The
decrease was due primarily to the termination of the internal sales force.
Interest expense decreased by approximately 51% from approximately $9,000 for
the 1998 Quarter to approximately $4,000 for the 1999 Quarter due to decreased
interest costs on a current equipment lease. Interest income decreased
approximately 55% from approximately $64,000 for the 1998 Quarter to
approximately $29,000 for the 1999 Quarter due to decreased investments effected
by corporate needs. The loss from disposal of business of approximately $66,000
represents an accrual of anticipated costs arising from the sale of the core
business to Randolph & Associates (see Recent Developments). Other expense in
the 1999 Quarter reflects (i) write off of obsolete and salvaged computer
equipment, (ii) write off of a bad debt from prior year owed by a former
officer, (iii) stock warrants issued to a former employee in settlement of
acquiring proprietary software, and (iv) the market value of 165,000 shares of
common stock awarded to Neal Polan, Chairman in partial settlement of his
employment agreement with HealthCore Medical Solutions related to the Adatom
merger. Net loss increased by approximately 63% from approximately $570,000 for
the 1998 Quarter to approximately $929,000 for the 1999 Quarter as a result of
the foregoing factors.
-12-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1998.
Operating revenues for the nine months ended June 30, 1999 (the "1999 Nine
Months") increased by approximately 111% from approximately $69,000 for the nine
months ended June 30, 1998 (the "1998 Nine Months") to approximately $146,000.
Operating revenue for the 1999 Nine Months does not include approximately
$42,000 in annual membership fees received that were deferred until after the
expiration of the money back guarantee period. In addition, operating income
does include recognition of approximately $20,000 in revenues that were deferred
from Fiscal Year 1998. The deferred revenue is being deferred as a result of an
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. The overall increase in revenue was a result of
increased sales and marketing efforts to promote the Company's products.
Selling, general and administrative expenses increased by approximately 8% from
approximately $1,504,000 in the 1998 Nine Months to approximately $1,628,000 in
the 1999 Nine Months. The increase was 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
82% from approximately $66,000 for the 1998 Nine Months to approximately $12,000
for the 1999 Nine Months due to the completion of the bridge financing in the
1998 Nine Months and the repayment of the notes issues in the bridge financing
in October 1997. Interest income decreased approximately 44% from approximately
$197,000 for the 1998 Nine Months to approximately $111,000 for the 1999 Nine
Months due to decreased investments effected by corporate needs. Other expense
(in addition to the entries made in the 3rd quarter, see above), also included
additional settlement costs related to proprietary software purchase from a
former employee. Net Loss increased 55% from approximately $1,349,000 for the
1998 Nine Months to approximately $2,091,000 for the 1999 Nine Months 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 June 30, 1999, the Company had working
capital of approximately $2,444,000 including cash and cash equivalents of
approximately $2,330,000.
Net cash used in operating activities was approximately $1,437,000 for the 1999
Nine Months compared to approximately $1,756,000 for the 1998 Nine Months. Net
cash used in investing activities was approximately $227,000 for 1999 Nine
Months compared to approximately $82,000 for the 1998 Nine Months. Net cash used
in investing activities includes a Notes Receivable to Adatom that was executed
on April 28th and is payable upon demand 90 days after the termination of the
merger agreement should that agreement be terminated.
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 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.
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
-13-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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. For additional
disclosure about Year 2000 issues related to the Company see the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1998.
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.
It is anticipated that in the event the proposed transaction with Adatom is
consummated, the Company expects to exchange the escrow shares for shares of
Class A common stock at an exchange rate of less than one share of Class A
common stock for each escrow share.
-14-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the 1999 quarter, the Company (i) granted an aggregate of 30,000 options
to two directors of the Company at an exercise price of $1.09 per share (the
fair market value of the Class A Common Stock on the date of grant) under the
Company's 1997 Stock Option Plan, which options vested on the date of grant and
(ii) issues a warrant to purchase 12,500 shares of Class A common Stock at an
exercise price of $1.0625 per share (the fair market value of the Class A common
stock on the date of issuance) to a former employee of the Company in settlement
of acquiring proprietary software.
Prior to the execution of a non-binding letter of intent on April 27, 1999,
relative to the Adatom, Inc. merger the Company employed Polan under an
employment agreement (the "Employment Agreement") expiring on November 30, 2000,
providing for an annual base salary of two hundred thousand ($200,000) dollars,
together with other compensation and benefits. The Employment Agreement made no
provision for the termination thereof without cause. In furtherance of the
transaction contemplated by the letter, by letter amendment dated April 27,
1999, the Employment Agreement was amended to provide the Company with the right
to terminate the Employment Agreement at any time, without cause, upon the
expiration of one hundred twenty (120) days following the date of the execution
of the letter amendment, whereupon the Company will pay to Polan the lesser of
(a) one hundred fifty tousand ($150,000) dollars, or (b) sixty (60%) percent of
the present value of the remaining compensation and benefits due under the terms
of the employment agreement on the date of its termination. In consideration for
the amendment, the Company issued Plan 165,000 shares of Class A Common Stock of
the Company.
On April 27, 1999, the Company engaged Jesup & Lamont as exclusive financial
adviser to the Company in connection with the Merger, and as the Company's
exclusive placement agent with respect to a contemplated private placement (the
"Placement") of approximately six million ($6,000,000) dollars in equity
securities of the Company following the consummation of the Merger, the Company,
pursuant to the terms of an engagement letter (the "Engagement Letter") among
the Company, Adatom, and Jesup & Lamont. As partial consideration for such
services the Company has agreed to issue to Jesup & Lamont (a) upon the signing
of the Engagement Letter, five-year warrants to purchase two hundred thousand
(200,000) shares of the Class A Common Stock of the Company at an exercise price
of one ($1.00) per share (one hundred thousand (100,000), of which vested upon
the execution of the Engagement Letter, and the remaining one hundred thousand
(100,000) to vest only upon the closing of the Merger), and (b) five-year
warrants to purchase up to ten (10%) percent of the securities sold in the
Placement at an exercise price equal to the price at which the securities are
sold in the Placement.
The above transactions were private transactions not involving a public offering
and were exempt from the registrations provisions of the Securities Act of 1933
under Section 4(2) or Regulation D of the Securities Act. The sale of the shares
contain a restrictive legend permitting the transfer of such securities only
upon registration of the shares or an exemption under the Securities Act.
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 on share of Class
A Common Stock per unit issued in the UPO were registered under a registration
statement on Forms SB-2 (File No. 333-28233) which was declared effective by the
Securities and Exchange Commission on October 14, 1997
ITEM 5. OTHER INFORMATION.
See "Part I - Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments" for a discussion of
the merger agreement between the Company and Adatom dated as of July 1, 1999 and
the Company's July 28, 1999 sale of certain of its assets related to its
discount healthcare business to Randolph & Associates, Inc., a Texas corporation
("Randolph") and discontinuance of the operation of its healthcare discount
benefits business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------
(a) Exhibits
NO. DESCRIPTION
--- -----------
2 Merger Agreement dated as of July 1, 1999 between HealthCore
and Adatom (1)
2.1 Asset Purchase Agreement dated July 28, 1999, between
HealthCore and Randolph (2)
27 Financial Data Schedule
99 Press release dated July 1, 1999 (1)
99.2 Press release, dated July 30, 1999 (2)
(1) Filed as same numbered exhibit on the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on July 9, 1999 and incorporated herein by reference thereto.
(2) Filed as same numbered exhibit on the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on August 12, 1999 and incorporated herein by reference
thereto.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on May 3, 1999 reporting information under Item 2
of Part I and Item 5 of Part II of this Report.
-15-
<PAGE>
HEALTHCORE MEDICAL SOLUTIONS, INC.
SUCCESSOR TO MEGAVISION, L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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
Date: August 13, 1999
-16-
<PAGE>
NO. DESCRIPTION
- --- -----------
2 Merger Agreement dated as of July 1, 1999 between HealthCore and
Adatom (1)
2.1 Asset Purchase Agreement dated July 28, 1999, between HealthCore
and Randolph (2)
27 Financial Data Schedule
99 Press release dated July 1, 1999 (1)
99.2 Press release, dated July 30, 1999 (2)
- ---------------------------------------
(1) Filed as same numbered exhibit on the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on July 9, 1999
and incorporated herein by reference thereto.
(2) Filed as same numbered exhibit on the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on August 12,
1999 and incorporated herein by reference thereto.
-17-
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
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