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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: NOVEMBER 30, 2002
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 Number: 000-14356
HEALTHTRAC, INC.
(Exact name of registrant as specified in its charter)
CANADA
(State or other jurisdiction of incorporation or organization)
911353658
(I.R.S Employer Identification No.)
539 MIDDLEFIELD ROAD, REDWOOD CITY, CA 94063
(Address of principal executive offices and Zip Code)
650-839-5500
(Registrant's telephone number, including area code)
VIRTUALSELLERS.COM, INC.
SUITE 1000 - 120 NORTH LASALLE STREET, CHICAGO, IL, 60602
(Former name, former address and former fiscal year, if changed since last
report)
________________________________________________________________________________
Indicate by check mark whether the registrant (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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of January 14, 2003, there were 221,024,251 shares of the Registrant's common
shares issued and outstanding.
-2-
Consolidated Financial Statements
(Expressed in United States dollars)
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Three months ended November 30, 2002 and 2001
Nine months ended November 30, 2002 and 2001
(Unaudited)
DRAFT - JANUARY 14, 2003
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Balance Sheets
(Unaudited)
(Expressed in United States dollars)
- -----------------------------------------------------------------------------------------------------------------
November 30, February 28,
2002 2002
- -----------------------------------------------------------------------------------------------------------------
(restated
-note 2)
ASSETS
Current assets:
Cash and cash equivalents $ 191,649 $ 248,391
Accounts receivable, net of allowance of $9,649
(February 28, 2002 - $34,578) 239,345 271,302
Employee receivable 30,775 26,417
Inventories 40,869 48,834
Prepaid expenses and deposits 134,217 256,953
Assets of discontinued operations (note 4) 50,000 259,604
--------------------------------------------------------------------------------------------------------
Total current assets 686,855 1,111,501
Equipment 262,431 754,241
Intellectual property, net of $1,613,018 accumulated
amortization (February 28, 2002 - $705,695) 4,435,801 5,343,123
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 5,385,087 $ 7,208,865
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,564,026 $ 1,398,861
Accrued liabilities 562,583 383,670
Deferred revenue 285,367 456,025
Notes payable 183,720 150,000
Deposit 53,299 --
Current portion of obligations under capital lease 29,583 43,129
Liabilities of discontinued operations (note 4) 283,283 387,671
--------------------------------------------------------------------------------------------------------
Total current liabilities 2,961,861 2,819,356
Obligations under capital lease -- 23,176
Stockholders' equity:
Common shares, no par value (note 3):
Authorized: 300,000,000 common shares
Issued and outstanding: 219,574,251 shares (199,034,013
shares at February 28, 2002) 121,572,069 120,685,444
Shares to be issued 289,751 754,213
Accumulated deficit (119,438,594) (117,073,324)
--------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,423,226 4,366,333
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 5,385,087 $ 7,208,865
=================================================================================================================
Future operations (note 1)
Commitment and contingencies (note 7)
Subsequent events (note 8)
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
DRAFT - JANUARY 14, 2003 1
/s/ Robert Maul Chairman /s/ Edward W. Sharpless President & CEO
DRAFT - JANUARY 14, 2003 2
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Statements of Operations
(Unaudited)
(Expressed in United States dollars)
- --------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
November 30 November 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
(restated (restated
-note 2) -note 2)
Revenue $ 780,010 $ 963,052 $ 2,626,694 $ 1,724,246
Costs and expenses:
Direct costs 29,921 153,072 456,170 162,813
Selling, general and administrative
expenses 630,029 1,205,509 3,050,402 3,212,583
Amortization 307,776 218,800 1,013,553 352,750
Write down of equipment -- -- 397,150 --
-----------------------------------------------------------------------------------------------------------------
967,726 1,577,381 4,917,275 3,728,146
- --------------------------------------------------------------------------------------------------------------------------
Loss before the undernoted items (187,716) (614,329) (2,290,581) (2,003,900)
Other Income (expense):
Interest revenue (450) 551 -- 5,921
Lawsuit settlement -- 17,393 -- 113,921
Miscellaneous -- (1,425) -- 23,140
-----------------------------------------------------------------------------------------------------------------
(450) 16,519 -- 142,982
- --------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (188,166) (597,810) (2,290,581) (1,860,918)
Loss from discontinued operations (note 4) (55,198) (407,637) (74,689) (5,514,699)
- --------------------------------------------------------------------------------------------------------------------------
Loss for the period $ (243,364) $ (1,005,447) $ (2,365,270) $ (7,375,617)
==========================================================================================================================
Basic and diluted loss per common share:
Continuing operations $ 0.00 $ 0.00 $ 0.01 $ 0.01
Discontinued operations 0.00 0.00 0.00 0.04
- --------------------------------------------------------------------------------------------------------------------------
$ 0.00 $ 0.00 $ 0.01 $ 0.05
==========================================================================================================================
Weighted average number of shares outstanding,
basic and diluted loss per share 218,110,190 164,843,970 212,734,705 144,368,863
==========================================================================================================================
See accompanying notes to consolidated financial statements.
DRAFT - JANUARY 14, 2003 3
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Statements of Stockholders' Equity
(Expressed in United States dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Common shares
----------------------------
Assigned Shares to Accumulated
Number Value be issued deficit Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance, February 28, 2001 127,834,749 $ 107,521,482 $ 4,705,000 $(107,156,515) $ 5,069,967
Shares issued during the year:
Exercise of CCAA warrants 732,433 -- -- -- --
Issued for acquisition of Sullivan Park 6,500,000 2,210,000 (2,700,000) -- (490,000)
Shares issued and to be issued for
acquisition of Healthtrac 13,212,976 4,492,412 107,588 -- 4,600,000
Issued on acquisition of Med Wire
assets 241,935 150,000 -- -- 150,000
Issued on acquisition of specific
assets of Healthscape 631,579 240,000 -- -- 240,000
Shares issued for cash received
pursuant to private placements 42,985,717 4,744,125 (2,005,000) -- 2,739,125
Shares to be issued for settlement
of debt -- -- 6,000 -- 6,000
Shares issued for settlement of debt 3,716,090 971,767 -- -- 971,767
Shares issued for services 1,425,777 123,658 -- -- 123,658
Shares issued for employees' and
directors' compensation 1,018,181 566,000 -- -- 566,000
Shares issued for severance pay 1,000,000 100,000 -- -- 100,000
Shares returned to treasury and
cancelled (265,424) -- -- -- --
Shares to be issued for cash received
pursuant to private placements -- -- 640,625 -- 640,625
Share issue costs -- (24,000) -- -- (24,000)
Subscription receivable -- (410,000) -- -- (410,000)
Loss for the year -- -- -- (9,916,809) (9,916,809)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, February 28, 2002 199,034,013 120,685,444 754,213 (117,073,324) 4,366,333
Shares issued during the period:
Shares to be issued for settlement of debt -- -- 57,163 -- 57,163
Shares to be issued for cash received pursuant
to private placements -- -- 15,000 -- 15,000
Shares issued for cash received pursuant to
private placements 19,540,238 834,125 (536,625) -- 297,500
Shares issued for employee compensation 1,000,000 130,000 -- -- 130,000
Subscription receivable -- (77,500) -- -- (77,500)
Loss for the period -- -- -- (2,365,270) (2,365,270)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2002 219,574,251 $ 121,572,069 $ 289,751 $(119,438,594) $ 2,423,226
===============================================================================================================================
See accompanying notes to consolidated financial statements
DRAFT - JANUARY 14, 2003 4
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Statements of Cash Flow
(Unaudited)
(Expressed in United States dollars)
- -----------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
November 30, November 30,
------------------------ --------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
(restated (restated
- note 2) - note 2)
Cash provided by (used in):
Operating activities:
Loss for the period $(243,364) $(1,005,447) $(2,365,270) $(7,375,617)
Items not involving cash:
Loss from discontinued operations 55,198 407,637 74,689 5,514,699
Amortization 307,776 218,800 1,103,553 352,750
Write-down of equipment -- -- 397,150 --
Non-cash compensation expense -- -- 80,000 --
Inventory obsolescence provision -- -- (30,768) --
Changes in non-cash operating working capital:
Accounts receivable (104,443) (18,501) 31,957 341,981
Employee receivable (4,358) (2,221) (4,358) 4,968
Prepaid expenses and deposits 73,416 29,171 122.735 85,715
Inventories 728 (3,646) 38,733 32,402
Accounts payable 139,140 532,524 222,328 14,294
Accrued liabilities (137,415) (289,179) 178,913 92,773
Deferred revenue (61,665) -- (170,658) --
Deposit -- -- 53,299 --
- -----------------------------------------------------------------------------------------------------------
Cash flow used in continuing operations 25,013 (271,506) (357,697) (936,037)
Cash flow used in discontinued operations 3,998 (39,827) (4,740) (1,846,984)
- -----------------------------------------------------------------------------------------------------------
29,011 (311,333) (362,437) (2,783,021)
Investments:
Acquisition of equipment (net) 4 (3,353) (11,571) (82,559)
Acquisition costs -- (132,038) -- (283,562)
Cash acquired on acquisition -- -- -- 57,091
- -----------------------------------------------------------------------------------------------------------
Cash flow used in investing activities 4 (135,391) (11,571) (309,030)
Financing:
Cash received for shares issued 62,500 741,250 270,000 2,501,250
Repayment of capital lease obligation, net (1,698) -- (36,722) --
Long-term debt -- -- -- --
Note payable -- -- 33,720 --
Cheques issued in excess of funds on deposit -- (74,065) -- --
Cash received for shares to be issued -- -- 15,000 205,000
-----------------------------------------------------------------------------------------------------
Cash flow provided by financing activities 60,802 667,185 281,998 221,196
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 89,817 220,461 (92,010) (385,801)
Cash and cash equivalents, beginning of period 101,832 -- 283,659 606,262
Cash of discontinued operations -- 29,930 -- 29,930
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 191,649 $ 190,531 $ 191,649 $ 190,531
===========================================================================================================
Non-cash transactions and supplemental disclosures (note 6)
See accompanying notes to consolidated financial statements.
DRAFT - JANUARY 14, 2003 5
-6-
1. FUTURE OPERATIONS:
These financial statements have been prepared on the going concern basis,
which assumes the realization of assets and the settlement of liabilities
in the normal course of business. The application of the going concern
concept is dependent on the Company's ability to generate future
profitable operations and receive continued financial support from its
shareholders and from external financing. The Company incurred a loss from
operations of $2,365,270 for the nine months ended November 30, 2002 and
has an accumulated deficit of $119,438,594 at November 30, 2002. For the
nine months ended November 30, 2002, the Company used $362,437 in cash to
fund operations, and as at November 30, 2002, the Company has a working
capital deficiency of $2,275,006.
Management projects that the Company will require additional cash and
working capital for fiscal 2003 to manage prior liabilities of
approximately $400,000 (unaudited). Although management is of the opinion
that sufficient cash will be obtained from operations or external
financing to meet the Company's liabilities and commitments as they become
due in fiscal 2003, there can be no assurance that funds from external
financings will be available when required on an economical basis to the
Company. The ability of the Company to continue as a going concern and
realize the carrying value of its assets is dependent on the Company's
ability to increase its revenues by increasing its customer base and
reducing its operating costs so that the Company achieves profitable
operations. To date, subsequent to November 30, 2002 the Company has
raised no funding through external common share private placements. If the
Company is unable to obtain sufficient funds for operations, it will be
required to reduce operations or liquidate assets.
These financial statements do not reflect any adjustments that would be
necessary should the Company be unable to continue as a going concern and
therefore be required to realize its assets and discharge its liabilities
in other than the normal course of operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted
in the United States of America. Except as disclosed in note 22 of
the Company's annual audited consolidated financial statements as at
February 28, 2002, these principles do not differ materially from
accounting principles generally accepted in Canada.
-7-
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(a) Basis of presentation (continued):
These consolidated financial statements do not include all
disclosures required by accounting principles generally accepted in
the United States or required by Canadian generally accepted
accounting principles for annual financial statements, and
accordingly, these consolidated financial statements should be read
in conjunction with the Company's most recent annual consolidated
financial statements. In the opinion of management, all adjustments,
consistently solely of normal recurring adjustments, necessary for
the fair presentation of these unaudited financial statements have
been made. These consolidated financial statements follow the same
accounting policies and methods of application used in the Company's
audited annual consolidated financial statements as at and for the
year ended February 28, 2002.
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All subsidiaries were
acquired from unrelated parties and have been accounted for using
the purchase method. Their results of operations have been included
from the respective effective dates of acquisition. All significant
intercompany balances and transactions have been eliminated.
====================================================================================
Canadian subsidiaries United States subsidiaries
------------------------------------------------------------------------------------
Canadian-American Communications Inc. Northnet Telecommunications Inc.
Canadian Northstar Transmission Systems Ltd. eCommerce Solutions inc.
Preferred Telemangement Inc. ("PTI) Sullivan Park, Inc. ("Sullivan Park")
Cam-Net Cellular Inc. Healthtrac Corporation
====================================================================================
On February 28, 2002, the Company closed its catalogue sales
division. During the third quarter of fiscal 2003, the Company
discontinued its e-commerce segment segment, which been
substantially curtailed in fiscal 2002. As a result, the catalogue
and e-commerce divisions represent discontinued operations to the
Company. In accordance with generally accepted accounting principles
in the United States, prior period figures have been reclassified in
the consolidated financial statements to separately reflect the
assets, liabilities, revenues and expenses under discontinued
operations accounting.
(b) Loss per share:
Loss per share has been calculated using the weighted average number
of shares outstanding during the period. Diluted loss per
share does not differ from basic loss per share as the impact
of all outstanding convertible securities would be to reduce
the loss per share.
-8-
3. SHARE CAPITAL:
(a) Authorized:
300,000,000 common stock without par value
150,000,000 class A preference stock without par value
150,000,000 class B preference stock without par value
(b) Commitments to issue common shares:
The Company has committed to issue 13,000,000 shares to former
creditors under a reorganization plan. As at November 30, 2002,
10,581,455 (February 28, 2002 - 10,581,455) shares have been issued
to creditors leaving an outstanding commitment to issue 2,418,545
(February 28, 2002 - 2,418,545) shares.
(c) Warrants:
On June 4, 2001, the Company issued 65,000 share purchase warrants
which expire June 4, 2004. Each warrant entitles the holder to
purchase one common share for $0.56. As at November 30, 2002, 65,000
(February 28, 2002, 65,000) of these warrants were unexercised.
On July 16, 2001, the Company issued 20,000 share purchase warrants
which expire July 16, 2003. Each warrant entitles the holder to
purchase one common share for $0.40. As at November 30, 2002, 20,000
(February 28, 2002, 20,000) of these warrants were unexercised.
On August 3, 2001, the Company issued 50,000 share purchase warrants
to a former employee in place of 45,000 options previously granted
to that employee. The warrants expire on August 3, 2003. Each
warrant entitles the holder to purchase one common share for $0.24.
As at August 31, 2002, 50,000 (February 28, 2002, 50,000) of these
warrants were unexercised.
On January 2, 2002, the Company issued 6,000,000 share purchase
warrants to the former President as part of his severance package.
The warrants expire on January 2, 2007. Each warrant entitles the
holder to purchase one common share for $0.10, the market price of
the Company's common shares at the time of the issuance of the share
purchase warrants. As at November 30, 2002, 6,000,000 (February 28,
2002, 6,000,000) of these warrants were unexercised. The company has
cancelled these share purchase warrants.
(d) Stock options:
The Company has a stock option plan, which allows the Company, at
the discretion of the Board of Directors, to issue options to
employees, directors and consultants to purchase common shares of
the Company. Stock purchase options are granted having exercise
prices based on the market price at the date of grant. The stock
options expire at various dates ranging from April 11, 2003 to
November 5, 2011. The stock options vest in accordance with each
individual stock option agreement.
-9-
3. SHARE CAPITAL (CONTINUED):
(d) Stock options (continued):
The following summarizes changes in stock options since February 28,
2002:
==================================================================================
Weighted average
Nine months ended November 30, 2002 Shares exercise price
----------------------------------------------------------------------------------
Outstanding, beginning of period 6,776,000 $ 0.14
Repriced -- --
Granted 6,000,000 0.10
Forfeited (3,000,000) (0.10)
----------------------------------------------------------------------------------
Outstanding, end of period 9,776,000 $ 0.13
==================================================================================
------------------------------------------------------------------
Number Price Expiry
------------------------------------------------------------------
Employees 350,000 0.11 March 6, 2004
Director 1,000,000 0.15 July 28, 2010
Employees 1,590,000 0.15 July 28, 2010
Directors 300,000 0.15 September 25, 2010
Employee 775,000 0.15 October 23, 2010
Directors 400,000 0.15 November 1, 2010
Employees 25,000 0.15 November 1, 2010
Employees 65,000 0.15 January 2, 2011
Directors 1,200,000 0.15 April 24, 2011
Employees 70,000 0.15 April 24, 2011
Employee 26,000 0.15 July 16, 2011
Employees 775,000 0.09 October 22, 2011
Director 200,000 0.15 November 5, 2011
Consultant 2,000,000 0.10 April 11, 2003
Employee 1,000,000 0.10 April 1, 2004
------------------------------------------------------------------
Total 9,776,000 0.13
==================================================================
On June 10, 2002, President and Chief Executive Officer resigned
from the Company and consequently, forfeited the 3,000,000 unvested
options at $0.10 (note 7(c)).
During the period, the expiry date was extended for 350,000 options
held by former employees. No additional compensation is required to
be recognized as a result of this modification.
On April 1, 2002, 2,000,000 stock options were granted to a
consultant of the Company which vest in accordance with certain
performance criteria and expire on April 1, 2003. No compensation
was required to be recorded to November 30, 2002, for this award.
(e) Issuance of shares for non-monetary consideration:
Shares issued for employee and director compensation, to third
parties for services rendered, for settlement of debt and for the
acquisition of assets or businesses are recorded based upon the
market trading value of the shares at the date of the related
agreements to issue the shares.
-10-
4. DISCONTINUED OPERATIONS:
On February 28, 2002, the Company closed its catalogue sales division.
During the third quarter of fiscal 2003, the Company discontinued its
e-commerce segment which had been substantially curtailed in fiscal 2002.
As a result, the catalogue and e-commerce divisions represent discontinued
operations to the Company. In accordance with generally accepted
accounting principles in the United States, prior year and current year
figures have been reclassified in the consolidated financial statements to
separately reflect the assets, liabilities, revenues and expenses under
discontinued operations accounting.
SUMMARIZED FINANCIAL INFORMATION FOR THE DISCONTINUED OPERATIONS IS AS
FOLLOWS:
===================================================================================
November 30, 2002 February 28, 2002
- -----------------------------------------------------------------------------------
Assets
Cash $ -- $ 35,267
Accounts and employee receivables -- 34,557
Inventory -- 544
Prepaid expenses -- 28,522
Equipment, net of accumulated amortization 50,000 160,715
- -----------------------------------------------------------------------------------
Assets of discontinued operations $ 50,000 $259,605
===================================================================================
Liabilities
Accounts payable $180,861 $287,604
Accrued liabilities 102,422 100,067
- -----------------------------------------------------------------------------------
Liabilities of discontinued operations $283,283 $387,671
===================================================================================
================================================================================
Nine months ended Nine months ended
November 30, 2002 November 30, 2001
--------------------------------------------------------------------------------
Revenue $ 50,304 $ 844,573
Expenses:
Direct costs 21,540 612,619
Selling and administrative costs 54,139 2,213,268
Amortization 26,201 636,152
Write-down of equipment 139,533 1,330,000
Impairment of goodwill -- 1,522,758
Other -- 44,475
Gain on forgiveness of debt (116,420) --
--------------------------------------------------------------------------------
Loss from discontinued operations $ 74,689 $5,514,699
================================================================================
-11-
5. SEGMENTED INFORMATION:
The Company has two continuing operating segments - a health promotion
division (Healthtrac Corp.) and a call center division (NorthStar
TeleSolutions, Inc.). The health promotion and call center segments are
located in the United States. Segmented information for the nine months
ended November 30, 2002 with comparative figures for November 30, 2001 are
as follows:
Operating segments:
=================================================================================================
Health
promotion Call Centre
NOVEMBER 30, 2002 segment segment Total
- -------------------------------------------------------------------------------------------------
Gross revenue $ 1,760,955 $ 865,739 $ 2,626,694
Corporate -- -- --
- -------------------------------------------------------------------------------------------------
$ 1,760,955 $ 865,739 $ 2,626,694
=================================================================================================
Segment income (loss) $ (872,089) $ 14,731 $ (857,358)
Corporate -- -- (1,433,223)
- -------------------------------------------------------------------------------------------------
Income (loss) for the period $ (872,089) $ 14,731 $(2,290,581)
=================================================================================================
Segment assets $ 4,966,196 $ 265,190 $ 5,231,386
Assets of discontinued operations -- -- 50,000
Corporate assets -- -- 103,701
- -------------------------------------------------------------------------------------------------
Total assets $ 4,966,196 $ 265,190 $ 5,385,087
=================================================================================================
Equipment additions:
Equipment $ 5,385 $ 5,075 $ 10,460
Corporate -- -- 1,111
- -------------------------------------------------------------------------------------------------
$ 5,385 $ 5,075 $ 11,571
=================================================================================================
Amortization expense:
Equipment $ 13,946 $ 20,183 $ 34,129
Intellectual property 907,322 -- 907,322
Corporate assets -- -- 72,102
- -------------------------------------------------------------------------------------------------
$ 921,322 $ 20,183 $ 1,013,553
=================================================================================================
-12-
5. SEGMENTED INFORMATION (CONTINUED):
Operating segments (continued):
- ---------------------------------------------------------------------------------------------------
Health
promotion Call Centre
NOVEMBER 30, 2001 segment segment Total
- ---------------------------------------------------------------------------------------------------
Gross revenue $ 717,827 $ 1,006,419 $ 1,724,246
===================================================================================================
Segment loss $ (494,443) $ (209,425) $ (703,868)
Corporate -- -- (1,157,050)
- ---------------------------------------------------------------------------------------------------
Loss from continuing operations $ (494,443) $ (209,425) $(1,860,918)
===================================================================================================
Segment assets $ 6,099,774 $ 212,553 $ 6,312,327
Assets of discontinued operations -- -- 705,339
Corporate assets -- -- 727,276
- ---------------------------------------------------------------------------------------------------
Total assets $ 6,099,774 $ 212,553 $ 7,744,942
===================================================================================================
Equipment additions:
Equipment $ 491,033 $ 30,277 $ 521,310
Discontinued operations -- -- 11,332
Corporate -- -- 3,977
- ---------------------------------------------------------------------------------------------------
$ 491,033 $ 30,277 $ 536,619
===================================================================================================
Amortization expense:
Equipment $ 247,140 $ 30,590 $ 277,730
Corporate assets -- -- 75,020
- ---------------------------------------------------------------------------------------------------
$ 247,140 $ 30,590 $ 352,750
===================================================================================================
----------------------------------------------------------------
Nine months ended Nine months ended
November 30, 2002 November 30, 2001
----------------------------------------------------------------
Call center service $ 865,739 $1,006,419
Healthcare:
Book sales 368,753 88,101
Programs revenue 1,392,202 629,726
----------------------------------------------------------------
$2,626,694 $1,724,246
================================================================
-13-
6. NON-CASH TRANSACTIONS AND SUPPLEMENTAL DISCLOSURES:
- ---------------------------------------------------------------------------------------------------
Nine months ended Nine months ended
November 30, 2002 November 30, 2001
- ---------------------------------------------------------------------------------------------------
Issuance of shares for:
Employee and director compensation $80,000 $ --
Settlement of debt 57,163 971,767
Acquisition of Med Wire assets -- 150,000
Acquisition of Healthtrac -- 4,600,000
Acquisition of Healthscape assets -- 240,000
Additions to capital assets financed by capital leases 42,481 --
- ---------------------------------------------------------------------------------------------------
7. COMMITMENT AND CONTINGENCIES:
(a) Rolling Meadows Premises:
The Company moved its e'commerce operations from Rolling Meadows,
Illinois to the Greenwood, Indiana offices in October 2001. A
complaint was filed for rent and damages in the amount of
$859,512. The Company's position on this proceeding is that
the building has been sublet and deny that they owe the
Plaintiff any money. The outcome of this complaint is
currently uncertain and consequently no amounts have been
accrued as at November 30, 2002. Management is in current
discussions with the plaintiff to settle the dispute.
8. SUBSEQUENT EVENTS:
Subsequent to November 30, 2002, the Company issued 1,450,000 common
shares to consultants for services rendered.
- 14 -
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
All figures are in United States Dollars unless otherwise stated.
Within 90 days prior to the filing of this quarterly report on Form 10-Q, our
chief executive officer and chief financial officer evaluated the effectiveness
of our disclosure controls and procedures and have concluded that these controls
and procedures effectively ensure that the information required to be disclosed
by us in the reports that we file or submit under the Securities and Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported in a
timely manner. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
GENERAL OVERVIEW
Healthtrac provides health management services to health plans, self-insured
employers and government agencies via programs designed to postpone disease and
disability through preventive practices and chronic disease self-management. Our
health risk assessment identifies high-risk constituents prior to high claims
utilization, our tailored interventions reduce health risks and costs by
supporting healthy changes and condition management, and our reporting
capabilities track changes over time and evaluate each program's impact.
Healthtrac measures return on investment, participant and group changes in
health risks, health consumerism, and productivity, and tracks reductions in
healthcare usage.
Healthtrac's products and services are designed to enhance the quality of care
while reducing the overall cost of health care. Our programs are intended to not
only lead the way to better health but to do so in a way that can be continually
measured in terms of effectiveness and results.
The fundamental mission of Healthtrac -- to improve the health status of the
population -- is reflected in all of our programs. Our goals are to reduce
health risks and improve health status, reduce health care costs, and provide
sound data on program impact.
Healthtrac offers a variety of programs ranging from minimal intervention
(Healthtrac 101) for the entire client population, to intensive interventions
for those at greatest risk (Healthtrac High Risk). Our products are available to
participants through the mail or via the Internet.
The core components of the Healthtrac programs are:
- Health Assessments (i.e. the tool used to measure and monitor
the population's health risks, and to identify those
individuals at greatest risk for poor health status);
- Self-Care (e.g. Take Care of Yourself Online and book
versions, health promotion newsletter, self-care books, online
medical encyclopaedia, medical Libraries, health news and
content);
- Health Education and Promotion (e.g. health education
materials, personalized letters and reports summarising health
assessment responses and providing encouragement to take
action to improve health, online Learning Centres)
- 15 -
- High Risk Identification and Intervention (e.g., targeted risk
and condition-specific health education materials and health
education telephone counselling).
Healthtrac 101 reduces the need and demand for health care services by helping
participants increase their personal health self-confidence and their ability to
employ effective self-management practices. This program provides essential
health promotion intervention to participants through universal health
information, education, and support to help participants achieve and maintain
the highest possible level of well-being. Tailored and targeted feedback
reinforces healthy changes based on their self-efficacy and readiness to make
changes, wherever they may be on the health continuum. The results are
reinforcement of gradual progress toward goals, improvements in health status
and reductions in health risks, accompanied by a decrease in unnecessary and
inappropriate use of medical care resources.
The Healthtrac High Risk program provides an intensive health education
intervention for those who are at greatest risk to utilize high cost services.
Effective interventions targeted to this high cost population can yield
substantial savings. With proactive, early intervention, what might otherwise
become major medical problems, with associated expenses, absenteeism and loss of
productivity, can be minimized or, in some cases, completely avoided. As
evidence of the effectiveness of this approach, the Healthtrac High Risk program
yields ROI's as high as 8:1, as proven through published research.
There are twelve risk modules in the High Risk Program, more being developed in
2003, each emphasizing a specific lifestyle-related or chronic condition.
The lifestyle risk modules are:
- Cigarette smoking
- Stress
- Overweight
- Combined lifestyle risks: high stress, sedentary lifestyle,
poor nutrition
The chronic condition modules are:
- Arthritis
- Asthma
- Back Pain
- Diabetes
- Heart Disease
- High Blood Pressure
- Lung/Respiratory Disease
- Stroke
Our supporting services include:
- Client Services (e.g. assists with the day-to-day management
of the program)
- Account Management (e.g. consults with the client to determine
strategic needs and meet objectives)
- 16 -
- Medical Consultation (e.g. James Fries, MD, Medical Director
for Healthtrac provides demand management, research, and other
consultation for clients)
- Health Education Consultation (e.g. our health educators
provide consultation on health promotion programs and
educational materials)
- Claims Analysis (e.g. evaluation and comparison of healthcare,
workers compensation, disability claims, and personnel
measures with Healthtrac data).
- Call Center Counseling (e.g. health decision support -- 24
hours a day, seven days a week)
All Healthtrac programs employ four essential strategies:
1. Analysis of the participant's health status through health
assessment questionnaires
2. Development of a personal action plan -- tailored to the
individual's needs and readiness to change -- that is designed
to increase self-efficacy and reduce health risks
3. Education in wise and appropriate medical care decision-making
4. Ongoing reinforcement of positive health habit changes through
periodic health assessment, serial tracking of changes in
health status and health risks, and targeted health promotion
messages
CALL CENTER OPERATIONS
We operate one call center through our subsidiary, NorthNet Telecommunications,
Inc. doing business as NorthStar TeleSolutions. Our call center is located at
125 Airport Parkway, Greenwood, Indiana. Our call center provides back office
services such as outbound and inbound customer support, centralized customer
billing, customer sales and support, order entry, order fulfillment, bill
collection, IT help desk support, as well as management reporting, database
management, service scheduling and dispatch, marketing services and remote
service maintenance. Our call center currently has the capacity for over 80 call
center representatives and offers customer service support 24-hours a day, seven
days a week. We provide our services for a flat monthly rate or on a
per-transaction basis depending on the scope of services required.
In the past, we have provided services to a limited number of cable television
operators and Internet service providers in the United States. Even though we
have recently lost some small clients primarily due to economic conditions, we
have expanded our client base and now service over 60,000 homes with cable
television and/or other broadband services. We target businesses that have a
customer base of up to 20,000 customers, as we have found that businesses with
more than 20,000 customers typically have well established in-house call
centers. We market our call center services through periodic advertising, direct
mail, strategic partnerships and outbound telemarketing, as well as by
appearances at industry trade-shows.
We concentrate our call center services on customer support and transaction
processing, allowing our clients to concentrate on the marketing and growth of
their businesses while still maintaining a high level of customer care and
service. We are cultivating new customers for the call center, which have also
begun to provide cable-related services such as local and long distance
telecommunications and Internet access. By utilizing our service we are able to
bundle and/or market together the services provided by our clients. We have also
had quite a bit of success with our newest service that enables us to remotely
control the services of our client's subscribers. This service greatly reduces
the operating cost to our clients by eliminating truck rolls while improving
customer satisfaction as they are able to receive immediate service and enhanced
service offerings.
- 17 -
We are continuing to expand our scope of service that we provide. In the past,
we provided limited services to cable television operators and Internet service
providers in the United States. We have expanded the scope of our call center
operations and are better positioned to support new and existing clients that
offer the latest services and technologies. We currently handle approximately
45,000 transactions and 16,000 calls per month and have the resources to
significantly increase each of these.
OTHER OPERATIONS
On September 23, 2002, the PSSP Group division was discontinued. Management
distributed the company's information technology resources between its
Greenwood, Indiana data center and Redwood City, California headquarters where
the information technology staff has assumed full responsibility for all
Healthtrac's IT products and services.
- 18 -
RESULTS OF OPERATIONS
During the quarter ended November 30, 2002, we continued to concentrate on the
development of our health promotion business, on the development of the
Healthtrac name and on our call center business.
Some of our recent highlights and accomplishments include:
- We reduced headcount by consolidating the investor relations
area with existing resources, closing the PSSP/e-commerce
division, terminating a vendor contract and internally
consolidating public relations efforts, outsourcing the
accounting functions, and consolidating technology into the
Redwood City office, resulting in savings of $1.7 million
annually.
- We shut down our Chicago (120 North LaSalle) and South
Carolina offices and consolidated operations in our Redwood
City headquarters. We maintain a satellite sales and client
service office in Chicago.
- We implemented a Web-based interactive CRM package to allow
for better tracking of prospects and proposals, along with
forecasting tools for improved financial planning.
- We retained new counsel in both Canada and the United States.
- Due to new compliance requirements mandated in the recent
Sarbanes-Oxley Act of 2002, we made considerable changes in
our internal policies and controls relating to accounting
policies, disclosure and other governance and share issuance
matters.
- Healthtrac renewed its service agreement with Monterey County
Health Promotion Partnership.
- Caterpillar Inc. based in Peoria, Illinois has renewed its
contract with Healthtrac Corporation to continue to use
Healthtrac's programs and services at the core of
Caterpillar's Healthy Balance(R) program.
- Healthtrac signed a three-year agreement to offer its products
and services to the members of the Employers' Association.
Employers' Association is a management-oriented service
organization structured to complement the human resource
management of member firms and inform them on related
regulatory matters. EA members are located throughout Illinois
with the majority comprising manufacturing and service
industries.
- NorthStar TeleSolutions signed service agreements with three
new clients, including Broadband Concepts, Inc., Satellite
Management Services, Inc., and Visions Stores Corporation,
d/b/a Visions Communications.
On October 2, 2002, the company implemented a comprehensive restructuring plan
in an effort to reduce expenses, improve client service and increase sales. The
board approved the measure to close the Chicago office and consolidate
operations in Redwood City, California.
Three Months Ended November 30, 2002 Compared to Three Months Ended November 30,
2001
Revenues for the three months ended November 30, 2002 ("Third Quarter 2003") of
$780,010 decreased $183,042, a decrease of 19% from revenues of $963,052 for the
three months ended November 30, 2001 ("Third Quarter 2002"). The decrease in
revenues in Third Quarter 2003
- 19 -
over Third Quarter 2002 is primarily due to a break in billing our large
customers during the transition of client programs to our new system.
At the call center, the Third Quarter 2003 revenues were $299,849 compared to
$415,829 for Third Quarter 2002 and $291,222 for Second Quarter 2003. The call
center generates revenue providing transaction processing and backroom services
including inbound and outbound telemarketing, customer and technical support,
customer order entry, centralized billing and collection, order fulfilment,
customer dispatch functions and other related services. The revenues were
consistent with Second Quarter 2003 and the decline from Third Quarter 2003 was
due to the loss of a major account from 2002 at the beginning of the fiscal
year.
Healthtrac Corporation earned revenues of $480,158 for Third Quarter 2003
compared to $572,004 for Third Quarter 2002 and $526,646 for Second Quarter
2003. The decrease is due to the division focusing on the implementation of its
new software versus marketing for new customers, a decline in revenues from
existing customers due to processing delays caused by the new software
implementation and an overall decline in book and processing revenues due to
lower customer demand as a result of the customer cost containment initiatives.
Healthtrac Corporation generates revenues by providing health promotion and
disease management services to self-funded employers and health insurance plans.
Direct product costs in Third Quarter 2003 were $29,921 compared to direct costs
of $153,072 in Third Quarter 2002, a decrease of $123,151. The call center
division primarily sells services and thus has no direct product costs. The
decrease in direct product costs is due to the lower book sales at Healthtrac
during the quarter.
Selling, general and administrative expenses decreased to $630,029 from
$1,205,509 in Third Quarter 2002, a decrease of $575,480. The decrease is due to
streamlining processes and procedures to reduce the number of people that we
employ at the divisions but primarily at head office.
Depreciation and amortization increased from $218,800 to $307,776, an increase
of $88,976. The increase is due to the amortization of the intellectual property
of Healthtrac.
Other income (expense) decreased from income of $16,519 in Third Quarter 2002 to
expense of $450 in Third Quarter 2003, a decrease of $16,969. Other income in
Third Quarter 2002 related primarily to a gain on the settlement of a lawsuit
against one of the Company's former business suppliers.
The Company had recorded a loss of $407,637 in Third Quarter 2002 compared to a
loss in Third Quarter 2003 of $55,198 relating to its e'commerce and catalogue
divisions which have been reclassified to discontinued operations due to the
shut-down of the catalogue division in fiscal 2002 and the e'commerce division
in Third Quarter 2003. These divisions had no activity in Third Quarter 2003 and
the loss is due to the write-down of assets no longer in use nor recoverable.
For Third Quarter 2003, we recognized a loss of $243,364 or $0.00 per share,
compared to a loss of $1,005,447 or $0.00 per share for Third Quarter 2002. The
decrease in the loss is due to the factors explained above.
- 20 -
Nine Months Ended November 30, 2002 Compared to Nine Months Ended November 30,
2001
Revenues for the Nine Months ended November 30, 2002 ("Nine Months 2003") of
$2,626,694 increased $902,448, an increase of 52% from revenues of $1,724,246
for the Nine Months ended November 30, 2002 ("Nine Months 2002"). The increase
in revenues in Nine Months 2003 over Nine Months 2002 is primarily due to the
health promotion segment, which we acquired in the late Second Quarter of fiscal
2002.
At the call center, the Nine Months 2003 revenues were $865,739 compared to
$1,006,419 for Nine Months 2002. The call center generates revenue providing
transaction processing and backroom services including inbound and outbound
telemarketing, customer and technical support, customer order entry, centralized
billing and collection, order fulfilment, customer dispatch functions and other
related services. The revenues declined with Nine Months 2002 due to the loss of
a major customer at the beginning of the fiscal year.
Healthtrac Corporation earned revenues of $1,760,955 for Nine Months 2003
compared to $717,827 for the Nine Months 2002. The increase was due to the Nine
Months 2002 only having four reporting months due to the acquisition compared to
nine months for 2003. On an annualized basis, revenues have declined due to the
division focusing on the implementation of its new software versus marketing for
new customers, a decline in revenues from existing customers due to processing
delays caused by the new software implementation and an overall decline in book
and processing revenues due to lower customer demand as a result of the customer
cost containment initiatives. Healthtrac Corporation generates revenues by
providing health promotion and disease management services to self-funded
employers and health insurance plans.
Direct product costs in Nine Months 2003 were $456,170, compared to direct costs
of $162,813 in Nine Months 2002, an increase of $283,357. The call center
division primarily sells services and thus has no direct product costs. The
increase in direct product costs is due to books and other direct costs at
Healthtrac, which included nine months in 2003 compared to only four months in
2002.
Selling, general and administrative expenses decreased to $3,050,402 from
$3,212,583 in Nine Months 2002, a decrease of $162,181. The decrease is due to
lower expenses for the last three months of this period. There was an increase
in the expenses due to the inclusion of the expenses of Healthtrac for nine
months in 2003 compared to only four months in 2002, but this was more than
offset by cost cutting measures implemented in Third Quarter 2003.
Depreciation and amortization increased from $352,750 to $1,103,553, an increase
of $750,803. The increase is due to the amortization of intellectual property
that arose from the acquisition of our Healthtrac subsidiary, partially offset
by the lower amortization of goodwill from the Sullivan Park acquisition due to
the write-off of the Sullivan Park goodwill in Nine Months 2002.
In the Nine Months 2003, the Company abandoned certain assets acquired in 2002
resulting in a write-down of $397,150. These assets were abandoned as they did
not fit in with the long-term
- 21 -
goals and direction of the Company. The assets abandoned included the assets
acquired from Healthscape and Medwired in 2002.
Other income (expense) decreased from income of $142,982 in Nine Months 2002 to
income of $nil in Nine Months 2003, a decrease of $142,982. Other income in Nine
Months 2002 related primarily to a gain on the settlement of a lawsuit against
one of the Company's former business suppliers.
The Company recorded a loss of $74,689 in Nine Months 2003 compared to a loss of
$5,514,699 relating to its catalogue and e-commerce divisions which have been
reclassified to discontinued operations due to the shut-down of the catalogue
division in fiscal 2002 and the e'commerce division in Third Quarter 2003. These
divisions had minimal activity in Nine Months 2003 and the loss represents a
write-down of the remaining e-commerce assets. For the Nine Months 2002, the
loss included $2,852,758 for the write-down of goodwill and fixed assets and
$2,661,911 for operations. These divisions were shut-down due to their continued
incurrence of operating losses and due to the substantial decline in the
prospects for e'commerce and telecommunications companies.
For Nine Months 2003, we recognized a loss of $2,365,270 or $0.01 per share,
compared to a loss of $7,375,617 or $0.05 per share for Nine Months 2002. The
decrease in the loss is due to the factors explained above.
LIQUIDITY AND CAPITAL RESOURCES
As at November 30, 2002, we had a net working capital deficiency of $2,275,006
including cash resources of $191,649.
During Third Quarter 2003, we generated $29,015 in cash from operations and
investing activities and received $60,802 in cash from financing activities for
a net increase in cash of $89,817. During Nine Months 2003, we used $362,437 in
cash to fund operations, used $11,571 in cash to fund investing activities which
consisted solely of capital asset additions and received $281,998 in cash from
financing activities for a net decrease in cash of $92,010.
We have historically funded operations through the issuance of our common
shares. We expect to fund future operations and investments through the issuance
of common shares. We estimate our cash requirements for capital asset additions
for the remainder of fiscal 2003 to be approximately $25,000. We also estimate
that, due to unforeseen circumstances, cash flow from operations may be negative
in fiscal 2003, and thus, we may require additional financing in order to
continue operations. At this time, we do not know if additional capital will be
required to fund operations. There is no guarantee that we will be able to
obtain the additional cash resources if necessary, or if available, resources
can be obtained at reasonable terms. If the Company is unable to obtain
sufficient funds for operations, it will be required to reduce operations or
liquidate assets. Management believes that the additional cash resources will be
available from private placements.
CRITICAL ACCOUNTING POLICIES
- 22 -
Our discussion and analysis of our financial condition and results of
operations, including the discussion of liquidity and capital resources, are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that our company
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, management re-evaluates its estimates and
judgments. Actual results could differ from the estimates. We believe the
following critical accounting policies require greater judgment and estimates
used in the preparation of the consolidated financial statements.
The consolidated financial statements have been prepared on the going concern
basis, which assumes that our company will be able to realize its assets and
discharge its obligations in the normal course of business. If we were not to
continue as a going concern, we would likely not be able to realize on our
assets at values comparable to the carrying value or the fair value estimates
reflected in the balances set out in the consolidated financial statements. We
incurred a loss for the nine month period of $2,365,270 and used $362,437 in
cash to fund operations for the period ended November 30, 2002.
Our Company's management has estimated the useful life of the intellectual
property that was acquired through the acquisition of Healthtrac as being five
years. We have yet to realize profits from this acquisition and may not be able
to realize these assets in the normal course of operations over the next five
years. In estimating the fair value of intellectual property, our company's
management estimates their value at the segment level. The fair value of the
definite life intangible will be impacted by general economic conditions, demand
for the segment's services and other factors. To the extent that fair value is
reduced in future periods, we may be required to record an impairment charge
against the carrying value of the intellectual property.
We recognize revenue in the Healthcare segment for the health assessment
questionnaires as the services are provided and the revenues earned. In
estimating the revenues earned, our management estimates the percentage of work
completed based on historical experience of proportional costs incurred by us to
perform the services. To the extent we have received funds for services that
have not been completed they will be deferred until realized.
RISK FACTORS
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains both historical and forward-looking
statements. All statements other than statements of historical facts are, or may
be deemed to be, forward-looking statements within the meaning of section 27A of
the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended and are subject to the "safe harbor" created by
those sections. These forward-looking statements are not based on historical
facts, but rather reflect management's current expectations concerning future
results and events. These forward-looking statements generally can be identified
by use of statements that include phrases such as "believe," "expect,"
"anticipate," "intend," "plan," "foresee," "likely," "will" or other similar
words or phrases. Similarly, statements that describe our objectives, plans or
goals are or may be forward-looking statements. These forward-looking
- 23 -
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be different
from any future results, performance and achievements expressed or implied by
these statements.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on the assumption that the Company will not lose a
significant customer or customers, that the Company's markets will continue to
grow, that the Company's products will remain accepted, that competitive
conditions within the Company's markets will not change materially or adversely,
that the Company will retain key personnel, that the Company's forecasts will
accurately anticipate market demand, and that there will be no material adverse
change in the Company's operations or business. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks, which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below and those discussed in our
Form 10-K Annual Report for the year ended February 28, 2002. The cautionary
statements made in this document and in our Form 10-K Annual Report should be
read as being applicable to all related forward-looking statements wherever they
appear in this document. We caution the readers that important factors in some
cases have affected and, in the future, could materially affect actual results
and cause actual results to differ materially from the results expressed in any
such estimates, projections or other "forward-looking statements." Readers
should carefully consider the following factors in evaluating our company, our
business and any investment in our company:
Risks Related to Our Business
We Have A Limited Operating History, Which Makes It Difficult To Evaluate Our
Future Prospects.
Although we were incorporated in 1982, we have a lack of history regarding our
newly created health promotion business. Accordingly, we have a limited
operating history and limited financial data upon which you may evaluate our
business and prospects. Our potential for future profitability must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets. Some of these risks
relate to our potential inability to:
- acquire and maintain a sufficient number of customers for each
of our business divisions to achieve profitability;
- 24 -
- successfully provide high levels of service quality to our
existing customers as we expand the scale of our business;
- develop new service offerings that complement our existing
offerings;
- increase our brand awareness for all of our operations.
We may not successfully address these risks. If we do not successfully address
these risks, we may not realize sufficient revenues or net income to reach or
sustain profitability, which would adversely affect our continuing business
operations.
We Have A History Of Losses And Expect To Continue To Incur Significant
Operating Losses And Negative Cash Flow, And We May Never Be Profitable.
We have incurred substantial net losses and have a substantial net operating
loss carryover. A significant component of these losses were incurred in
operations, which we no longer operate but we have spent significant funds to
develop our current business divisions, procure hardware, software and
networking products and develop our operations, research and development and
sales and marketing operations. For the nine month period ended November 30,
2002, we incurred losses of $2,365,270. As of November 30, 2002, we had an
accumulated deficit of $119,438,594. We have incurred significant operating
losses and have not achieved profitability. While we feel confident that we can
secure additional funds through private placement financing if necessary and
successfully carry out our business plan, there can be no assurance that we will
accomplish these tasks and achieve profitability. If we cannot successfully
carry out our business plan, then our continuing business operations would be
adversely affected.
To achieve operating profitability, we will need to increase our customer base
and revenue and decrease our costs. We may not be able to increase our revenue
or increase our operating efficiencies in this manner. If our revenue grows more
slowly than we anticipate or if our operating or capital expenses increase more
than we expect, our operating results will suffer. The auditors' report on our
annual consolidated financial statements for the year ended February 28, 2002,
contains an explanatory paragraph that states that our recurring losses from
operations raise substantial doubt about our ability to continue as a going
concern. The financial statements do not include any adjustments that might
result in the change of this uncertainty.
Our Financial Results May Fluctuate Significantly Which Could Cause Our Stock
Price To Decline.
Our revenue and operating results may vary significantly from quarter to
quarter. These fluctuations could cause our stock price to fluctuate
significantly or decline. Important factors that could cause our quarterly
results to fluctuate materially include:
- the timing of obtaining new customers for each one of our
business divisions;
- the timing of deploying new services for our current and
prospective customers;
- the timing and magnitude of operating expenses and capital
expenditures;
- 25 -
- changes in our pricing policies or those of our competitors;
and
- changes in technology or government regulation.
Our current and future levels of operating expenses and capital expenditures are
based largely on our growth plans and estimates of future revenue. These
expenditure levels are, to a large extent, fixed in the short term. We may not
be able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall, and any significant shortfall in revenue relative to planned
expenditures could negatively impact our business and results of operations. In
addition, if our customer base expands rapidly or unpredictably, we may not be
able to efficiently utilize our infrastructure or we may not have sufficient
capacity to satisfy our customers' requirements, which could harm our operating
results. Moreover, because many of our expenses are components of our cost of
revenues, our gross margins may remain negative in the future.
Due to these and other factors, quarter-to-quarter comparisons of our operating
results may not be meaningful. Readers of this report should not rely on our
results for any one quarter as an indication of our future performance. In
future quarters, our operating results may fall below the expectations of public
market analysts or investors. If this occurs, the market price of our common
stock would likely decline.
We Have Grown Very Rapidly And Our Ability To Achieve Profitability Will Suffer
If We Fail To Manage Our Growth.
We have rapidly expanded our business during the transition to becoming a health
promotion/customer service and Internet software and development company,
although we have decreased our number of employees from 79 at February 28, 2001
to 52 at February 28, 2002. As of August 31, 2002, we had 52 employees, and as
at November 30, 2002 we had 37. Staff reductions were made in Healthtrac Inc.'s
administrative and PSSP areas. These changes have placed, and will continue to
place, a significant strain on our employees, management systems and other
resources. We expect our business to continue to grow in terms of geographic
scope, number of customers and the scope of services we offer. There will be
additional demands on our customer service support, research and development,
sales and marketing and administrative resources as we try to increase our
service offerings, expand our geographic scope and expand our target markets.
The strains imposed by these demands are magnified by our limited operating
history. We may not be able to successfully manage our growth. In order to
manage our growth successfully, we must:
- improve and add to our management, financial and information
systems and controls and other elements of our business
process infrastructure;
- maintain a high level of customer service and support; and
- expand, retain, train, manage and integrate our employee base
appropriately and effectively.
Any failure by us to effectively manage our growth could disrupt our operations
or delay execution of our business plan and consequently harm our business.
- 26 -
We Operate In A New, Highly Competitive Market, And Our Inability To Compete
Successfully Against New Entrants And Established Companies Would Limit Our
Ability To Increase Our Market Share And Would Harm Our Financial Results.
The markets related to each of our business divisions are rapidly evolving and
highly competitive. Some of these will likely be characterized by an increasing
number of market entrants, as there are few barriers to entry, and by industry
consolidation. We expect that we will face competition from both existing
competitors and new market entrants in the future.
Our competitors and other companies may form strategic relationships with each
other to compete with us. These relationships may take the form of strategic
investments, joint-marketing agreements, licenses or other contractual
arrangements, any of which may increase our competitors' ability to address
customer needs with their product and service offerings. In addition, we believe
that there will be continued consolidation within the markets in which we
compete. Our competitors may consolidate with one another, or acquire other
technology providers, enabling them to more effectively compete with us. This
consolidation could affect prices and other competitive factors in ways that
would impede our ability to compete successfully and harm our business. To the
extent that these providers expand the scope of these new services to address
some of the functionality we currently provide, some of these companies may be
unwilling to provide services to us or to enter into relationships with us.
Our success is dependent upon achieving significant market acceptance of our
products and services by employers, healthcare organizations, physicians,
healthcare professionals and, now that we have adapted the Healthtrac products
for use on the Internet, Internet consumers. We cannot guarantee that employers,
healthcare organizations, medical professionals or Internet consumers will
accept Healthtrac, or even the Internet, as a replacement for traditional
sources of healthcare information. Market acceptance of our products and
services depends upon continued growth in the use of the Internet generally and,
in particular, as a source of healthcare information services for medical
professionals and consumers. The Internet may not prove to be a viable channel
for these services because of inadequate development of necessary
infrastructure, such as reliable network backbones, or complementary services,
such as high-speed modems and security procedures for the transmission of
confidential and private healthcare information, the implementation of
competitive technologies, government regulation or other reasons. Failure to
achieve and maintain market acceptance would seriously harm our business.
We will compete with other companies providing or maintaining online services or
Web sites targeted to the health promotion and disease management industry,
companies providing or maintaining online general health promotion and disease
management information and related services, companies providing or maintaining
public sector and non-profit Web sites that contain health-related information
and services, companies providing or maintaining Web search services
particularly geared to medical and healthcare Web sites, and publishers and
distributors of traditional media targeted to doctors and the healthcare
industry. Many of our competitors are larger than we are and have significantly
greater financial resources and marketing capabilities than we do, together with
better name recognition. It is also possible that new competitors may emerge and
acquire significant market share. Competitors with superior resources and
capabilities may be able to utilize such advantages to market their Web site,
products and
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services better, faster and/or cheaper than we can. Increased competition is
likely to result in reduced gross margins and loss of market share, either of
which could have a material adverse effect upon our business, results of
operations and financial condition. Because of these competitive factors and due
to our comparatively small size and limited financial resources, we may be
unable to compete successfully.
The call center, telemarketing and customer relationship management industries
are intensely competitive. We compete with numerous independent call centers,
telemarketing and customer relationship management firms as well as the in-house
operations of many of our existing or prospective clients. We compete for call
center, telemarketing and customer relationship management services based on
quality, technological expertise, customer service, price, value, range of
service offerings, and available capacity.
Most businesses that are significant consumers of call center, telemarketing and
customer relationship management services utilize more than one firm to
outsource their business and often reallocate work among various firms from time
to time. Clients often request call center, telemarketing and customer
relationship management services to be provided on an individual project basis
and we frequently are required to compete for individual projects as they are
initiated.
If We Are Unable To Retain Our Executive Officers And Key Personnel, We May Not
Be Able To Successfully Manage Our Business Or Achieve Our Objectives.
Our business and operations are substantially dependent on the performance of
our key employees. Effective September 18, 2002, Edward Sharpless was appointed
as President and CEO of our company. Although we believe that the loss of Mr.
Sharpless will not have a materially adverse impact upon our company, there can
be no assurance in this regard, nor any assurance that we will be able to find a
suitable replacement for Mr. Sharpless. Furthermore, we do not maintain "key
man" life insurance on the lives of any of our officers. If we lose the services
of one or more of our executive officers or key employees or if one or more of
them decides to join a competitor or otherwise compete directly or indirectly
with us, we may not be able to successfully manage our business or achieve our
business objectives.
Our Business Will Suffer If We Are Unable To Hire, Train And Retain Highly
Qualified Employees.
Our future success depends on our ability to identify, hire, train, integrate
and retain highly qualified technical, sales and marketing, managerial and
administrative personnel. Our success is therefore dependent upon our ability to
identify, hire and retain such qualified personnel, for whose services we will
be in competition with other prospective employers, many of which may have
significantly greater resources than we do. Additionally, demand for qualified
personnel conversant with certain technologies is intense and may outstrip
supply as new and additional skills are required to keep pace with evolving
computer technology. As our customer base and revenue continue to grow, we will
need to hire a significant number of qualified personnel. In particular, we may
need to hire a sufficient number of technical operations personnel in order to
deploy customers on a timely basis. Competition for qualified personnel is
intense in some sectors, and we may not be able to attract, train, integrate or
retain a sufficient number of
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qualified personnel in the future. As we grow, it will become more difficult to
identify qualified personnel to fill technical positions, which will cause us to
rely increasingly on internal training programs. Our failure to attract, train,
integrate and retain qualified personnel could seriously disrupt our operations
and increase our costs by forcing us to use more expensive outside consultants
and reduce the rate at which we can increase revenue.
Important components of the compensation of our personnel are stock options and
restricted stock, which vest typically over an extended period. We face a
significant challenge in retaining our employees if the value of these stock
options and restricted stock is either not substantial enough or so substantial
that the employees leave after their stock options or restricted stock have
vested. To retain our employees, we expect to continue to grant new options
subject to vesting schedules, which could be dilutive to investors. If our stock
price does not increase significantly above the prices of our options, we may
also need to issue new options or grant additional shares of stock in the future
to motivate and retain our employees.
We Rely Upon Technology And Computer Systems And The Temporary Or Permanent Loss
Of Such Equipment Or Systems, Through Casualty, Operating Malfunction Or
Otherwise, Could Have A Materially Adverse Effect Upon Our Company.
Our Call Center and Healthtrac systems utilize sophisticated and specialized
telecommunications, network and computer technology and proprietary software and
have focused on the application of these technologies to meet our clients'
needs. We anticipate that it will be necessary to continue to invest in and
develop new and enhanced technology on a timely basis to maintain our
competitiveness. Significant capital expenditures may be required to keep our
technology up to date. Investments in technology and future investments in
upgrades and enhancements to software for such technology may not necessarily
maintain our competitiveness. Our future success will also depend in part on our
ability to anticipate and develop information technology solutions which keep
pace with evolving industry standards and changing client demands.
In addition, our business is highly dependent upon our computer and telephone
equipment and software systems, and the temporary or permanent loss of such
equipment or systems, through casualty, operating malfunction or otherwise,
could have a materially adverse effect upon our company. Our business systems
depend on the smooth operation of computer systems that may be affected by
circumstances beyond our control. Events that could cause system interruptions
are:
- fire;
- earthquake;
- hurricane;
- power loss;
- telecommunications failure; and/or
- unauthorized entry or other events.
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Although we back up data as a matter of course, and take other measures to
protect against loss, there is still a certain degree of risk of such losses. A
system outage or data loss could adversely affect our business.
Despite the security measures that we maintain, our systems may be vulnerable to
computer viruses, hackers, rogue employees or similar sources of disruption. Any
interruptions in our operations could have a materially adverse effect on our
business. Any problem of this nature could result in significant liability to
customers or financial institutions and may deter potential customers from using
its services. We attempt to limit this sort of liability through back-up
systems, contractual provisions and insurance. However, there is no assurance
that these contractual limitations would be enforceable, or that our insurance
coverage would be adequate to cover potential liabilities.
Our operations are dependent upon our ability to protect our Healthtrac and Call
Center information databases against damage that may be caused by fire, power
failure, telecommunications failures, unauthorized intrusion, computer viruses
and other emergencies. We have taken precautions to protect our company and our
customers from events that could interrupt delivery of our services. These
precautions include off-site storage of backup data, fire protection and
physical security systems, backup power generators and a disaster recovery plan.
We also maintain business interruption insurance in amounts that we consider
adequate. Notwithstanding such precautions, there can be no assurance that a
fire, natural disaster, human error, equipment malfunction or inadequacy, or
other event will not occur.
Our Call Center Growth Is Dependent Upon The Trend Toward Outsourcing And Any
Significant Change In This Trend Could Have A Materially Adverse Effect On Our
Company.
The growth of our Call Center business depends in large part on the industry
trend toward outsourcing information technology and administrative services.
There can be no assurance that this trend will continue, as organizations may
elect to perform such services in-house. We intend to alleviate our dependence
upon any one revenue stream by expanding our business operations vertically and
horizontally. Nevertheless, a significant change in the direction of this trend
toward outsourcing could have a materially adverse effect on our company.
Our Future Success Will Depend In Large Part Upon Our Ability To Keep Pace With
Technology.
Our future success will depend in large part upon our ability to keep pace with
technology. Rapid changes have occurred, and are likely to continue to occur.
There can be no assurance that our development efforts will not be rendered
obsolete by research efforts and technological advances made by others. The
market for information technology services is characterized by rapid
technological advances, frequent new product introductions and enhancements, and
changes in customer requirements. Although we believe that our Call Center is
sufficient for the present, we believe that our future success will depend in
large part on our ability to service new products, platforms and rapidly
changing technology. These factors will require that we provide adequately
trained personnel to address the increasingly sophisticated, complex and
evolving needs of our customers. Our ability to capitalize on future
acquisitions in the Call Center and health promotion and disease management
industries will depend on our ability to (i) enhance our software and
successfully integrate such software into our technical product support
services,
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(ii) adapt such software to new hardware and operating system requirements and
(iii) develop new software products in an industry characterized by increasingly
rapid product and technological obsolescence. Our success is dependant upon
Healthtrac's ability to upgrade and enhance its existing programs and systems.
Our failure to anticipate or respond rapidly to technological advances, new
products and enhancements, or changes in customer requirements could have a
materially adverse effect on our company.
Our Business Will Suffer If We Do Not Enhance Or Introduce New Services And
Upgrades To Meet Changing Customer Requirements.
The market for Web based products such as our online health management product
is characterized by rapid technological change, frequent new hardware, software
and networking product introductions and Internet-related technology
enhancements, uncertain product life cycles, changes in customer demands and
evolving industry standards. Any delays in responding to these changes and
developing and releasing enhanced or new services could hinder our ability to
retain existing and obtain new customers. In particular, our technology is
designed to support a variety of hardware, software and networking products that
we believe to be proven and among the most widely used. We cannot assure readers
of this report, however, that present and future customers will continue to use
these products. Even if they do, new versions of these products are likely to be
released and we will need to adapt our technology to these new versions. We
must, therefore, constantly modify and enhance our technology to keep pace with
changes made to our customers' hardware and software configurations and network
infrastructures. If we fail to promptly modify or enhance our technology in
response to evolving customer needs and demands, our technology could become
obsolete, which would significantly harm our business. In addition, frequent
changes in the hardware, software and networking components of the systems and
services we provide could adversely affect our ability to automate the
deployment process, a key element of our business strategy.
Our success is dependent upon our ability to provide the latest technology for
our operation processes and our ability to enhance and provide clinical upgrades
in our disease management and health promotion programs based on the latest
research. Our success may also require that we continue to perform science-based
evaluations on the impact of our programs.
If we do not develop, license or acquire new services, or deliver enhancements
to existing products on a timely and cost-effective basis, we may be unable to
meet the growing demands of our existing and potential customers. In addition,
as we introduce new services or technologies into existing customer
architectures, we may experience performance problems associated with
incompatibility among different versions of hardware, software and networking
products. To the extent that such problems occur, we may face adverse publicity,
loss of sales, delay in market acceptance of our services or customer claims
against us, any of which could harm our business.
Most Of Our Agreements For Call Center Services Are Short Term And Our Financial
Performance Could Be Damaged By A Significant Number Of Terminations Or
Non-Renewals.
The standard customer agreement for customers of the Call Center are short-term
and can be terminated without cause by either party. We expect that there will
be terminations and non-renewals from time to time and that we may not be able
to replace all of these clients. Our
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ability to generate revenues and our financial performance could be damaged by a
significant number of terminations or non-renewals of such contracts.
We Could Be Sued For Medical Malpractice
The information provided by us is intended to be in addition to, and not in
substitution for, medical advice from a user's own physician. However, medical
advice may be dispensed both directly by doctors and indirectly through our
Healthtrac products. Damage awards in medical malpractice suits can be very
high, potentially creating a financial burden that we could not withstand if
such a suit were successful and not fully covered by insurance.
Our Success Depends On The Continued Growth In The Usage Of The Internet As A
Communication Medium And As A Vehicle For Commerce.
Use of the Internet by businesses and consumers as a medium for commerce is
still in the early stages of development, and is therefore subject to
uncertainty. E-commerce is a relatively recent development. Rapid growth in the
use of and interest in the Internet has occurred only recently. Acceptance and
use may not continue to develop at historical rates and a sufficiently broad
base of consumers and businesses may not adopt or continue to use the Internet
and other online services as a medium of commerce. The development of the
Internet as a commercial marketplace may occur more slowly than anticipated.
Factors that may affect Internet usage include:
- actual or perceived lack of security of information;
- development of the necessary network infrastructure and
associated technologies;
- delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet
activity;
- congestion of Internet traffic or other usage delays; and
- reluctance to adopt new business methods.
These factors could result in slower response times or adversely affect usage of
the Internet, resulting in lower numbers of e-commerce transactions and
decreased demand for our services. If Internet usage does not continue to
increase, demand for our services may be limited and our business and results of
operations could be harmed.
Because Our Success Depends On Our Intellectual Property, If Third Parties
Infringe Our Intellectual Property, We May Be Forced To Expend Significant
Resources Enforcing Our Rights Or Suffer Competitive Injury.
Our success depends in large part on our intellectual property, including our
proprietary software technology. We currently rely on a combination of
copyright, trademark, trade secret and other laws and restrictions on disclosure
to protect our intellectual property rights. We currently hold the Internet
domain names "www.virtualsellers.com", "www.Healthtrac.com" and
"www.MyHealthtrac.com" as well as various other related names, and we use
"Healthtrac" and
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"TAME" as tradenames. Domain names generally are regulated by Internet
regulatory bodies and are subject to change and may be superseded, in some
cases, by the laws, rules and regulations governing the registration of
tradenames and trademarks with the United States Patent and Trademark Office and
certain other common law rights. In the event that the domain registrars are
changed, new ones are created or we are deemed to be infringing upon another's
tradename or trademark, we could be unable to prevent third parties from
acquiring or using, as the case may be, our domain name, tradenames or
trademarks which could adversely affect our brand name and other proprietary
rights. These legal protections afford only limited protection, and our means of
protecting our proprietary rights may not be adequate.
Our intellectual property may be subject to even greater risk in foreign
jurisdictions, as the laws of many countries do not protect proprietary rights
to the same extent as the laws of the United States. If we cannot adequately
protect our intellectual property, our competitive position may suffer.
We may be required to spend significant resources to monitor and police our
intellectual property rights. We may not be able to detect infringement and may
lose our competitive position in the market before we are able to ascertain any
such infringement. In addition, competitors may design around our proprietary
technology or develop competing technologies. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement. Any such litigation could result in
substantial costs and diversion of resources, including the attention of senior
management. Defending against intellectual property infringement and other
claims could be time consuming and expensive and, if we are not successful,
could subject us to significant damages and disrupt our business.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our services. As a result, we may be found to infringe on the
proprietary rights of others. In the event of a successful claim of infringement
against us and our failure or inability to license the disputed technology, our
business and operating results would be significantly harmed. Intellectual
property litigation has become prevalent in the Internet and software fields.
Any litigation or claims, whether or not valid, could result in substantial
costs and diversion of resources. Intellectual property litigation or claims
could force us to do one or more of the following:
- pay costly damages;
- stop selling services that incorporate the challenged
intellectual property;
- obtain a license from the holder of the infringed intellectual
property right, which may not be available on reasonable terms
or at all; and
- redesign our services or our network, if feasible.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed. In addition, any of these could have the effect of increasing
our costs and reducing our revenue. Our insurance may not cover potential claims
of this type or may not be adequate to indemnify us for all liability that may
be imposed.
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Our Limited Marketing And Sales Resources Could Prevent Us From Effectively
Marketing Our Products And Services
We have limited internal marketing and sales resources and personnel. In order
to market our current products and services and any future products and services
we may develop, we will have to either develop a marketing and sales force with
technical expertise and distribution capability or outsource such duties to
independent contractors. There can be no assurance that we will be able to
establish sales and distribution capabilities or that we will be successful in
gaining market acceptance for our current products or services and any future
products and services we may develop. There can be no assurance that we will be
able to recruit skilled sales, marketing, service or support personnel, that
agreements with distributors will be available on terms commercially reasonable
to us, or at all, or that our marketing and sales efforts will be successful.
Failure to successfully establish a marketing and sales organization, whether
directly or through third parties, would have a materially adverse effect on our
business, financial condition, cash flows, and results of operations. There can
be no assurance that any of our proposed marketing schedules or plans can or
will be met.
Governmental Regulation And The Application Of Existing Laws To The Internet May
Slow The Internet's Growth, Increase Our Costs Of Doing Business And Create
Potential Liability For The Dissemination Of Information Over The Internet.
Laws and regulations governing Internet services, related communications
services and information technologies and electronic commerce are beginning to
emerge but remain largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing
laws, such as those governing intellectual property, privacy, libel,
telecommunications and taxation, apply to the Internet and to related services
such as ours. Uncertainty and new laws and regulations, as well as the
application of existing laws to the Internet, could limit our ability to operate
in these markets, expose us to compliance costs and substantial liability and
result in costly and time consuming litigation. The international nature of the
Internet and the possibility that we may be subject to conflicting laws of, or
the exercise of jurisdiction by, different countries may make it difficult or
impossible to comply with all the laws that may govern our activities.
Furthermore, the laws and regulations relating to the liability of online
service providers for information carried on or disseminated through their
networks is currently unsettled.
Healthcare Regulation Could Adversely Affect Our Business
The healthcare industry is highly regulated and is subject to changing
political, regulatory and other influences. These factors affect the purchasing
practices and operations of healthcare organizations. Federal and state
legislatures and agencies periodically consider programs to reform or revise the
United States healthcare system. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services. We are unable to predict future proposals with any
certainty or to predict the effect they would have on our business.
-34-
Existing laws and regulations also could create liability, cause us to incur
additional cost or restrict our operations. Many healthcare laws are complex,
applied broadly and subject to interpretation by courts and other governmental
authorities. In addition, many existing healthcare laws and regulations, when
enacted, did not anticipate the methods of healthcare e-commerce and other
products and services that we provide. However, these laws and regulations may
nonetheless be applied to our products and services. Our failure, or the failure
of our business partners, to accurately anticipate the application of these
healthcare laws, or other failure to comply, could create liability for us,
result in adverse publicity and negatively affect our business.
The Effect of The Health Insurance Portability and Accountability Act of 1996
(HIPAA) On Our Business Is Difficult to Predict And Its Implementation May Cause
Unexpected Problems
Although we believe that we are in a position to comply with HIPAA, we are
continuing to develop our HIPAA-ready solutions and our business strategy for
marketing those solutions and services. Changes in compliance deadlines or in
other aspects of the HIPAA regulations may cause us to make changes to our
strategy or require us to develop different solutions. The effect of HIPAA on
our business is difficult to predict and there can be no assurances that we will
adequately address the business risks created by HIPAA and its implementation or
that we will be able to take advantage of any resulting business opportunities.
In addition, we are unable to predict what changes to the HIPAA regulations will
be made in the future or how those changes could affect our business.
The extension of the deadline for complying with the HIPAA transaction standards
will cause us to have a longer period of time in which we must accommodate our
customers' varying states of readiness to test new systems and move to the new
standards. There can be no assurance that we will be able to meet our deadlines
or those of our customers.
The Recent Terrorist Attacks May Have An Adverse Effect On Our Business
The terrorist attacks in New York and Washington, D.C. on September 11, 2001
appear to be having an adverse affect on business, financial and general
economic conditions. This may, in turn, have an adverse effect on our business
and results and operations. At this time, however, we are not able to predict
the nature, extent and duration of these effects on overall economic conditions
or on our business and operating results.
Due To Deteriorated U.S. And World Economic Conditions, Expenditures For
Information Technology Spending Or Health Promotion Products And Services Could
Decline. If Spending Is Reduced, Our Sales And Operating Results Could Be Harmed
Many of our customers are affected by economic conditions in the United States
and throughout the world. Many companies have announced that they will reduce
their spending which may include them spending less on information technology
systems, Internet applications and healthcare promotion products. If such
spending is reduced by customers and potential customers, our sales could be
harmed, and we may experience greater pressures on our gross margins. If
economic conditions do not improve, or if our customers reduce their overall
purchases, our business, sales, gross profits and operating results may be
adversely affected.
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Our Stock Price Is Extremely Volatile
The trading price of our common shares has been, and in the future is expected
to be, volatile and we expect to experience further market fluctuations as a
result of a number of factors. These factors include, but are not limited to,
current and anticipated results of operations as well as changes in our
business, operations or financial results, the timing of sales of common shares
by our shareholders, prospects of general market and economic conditions and
other factors.
Our Common Stock Is Traded On The Over-the-Counter Bulletin Board And As A
Result, It May Be More Difficult To Dispose Of Or To Obtain Adequate Quotations
As To The Prices Of Our Common Stock.
Our common stock is quoted on the OTC Bulletin Board and is thinly traded. In
the past, our trading price has fluctuated widely, depending on many factors
that may have little to do with our operations or business prospects. In
addition, the OTC Bulletin Board is not an exchange and, because trading of the
securities on the OTC Bulletin Board is often more sporadic than the trading of
securities listed on an exchange of the Nasdaq Stock Market, Inc., shareholders
may have difficulty reselling any of the shares purchased from the selling
stockholders.
Our common shares are currently traded on the OTC Bulletin Board and are not
listed for trading on the NASDAQ system. A company must meet certain
quantitative criteria relating to its total assets, its capital and the trading
prices of its securities to be included on the NASDAQ system. In addition, the
NASDAQ staff may consider other factors, such as our company's management and
the circumstances surrounding our company's operations, when determining whether
to approve a company's application for inclusion in the NASDAQ system. We cannot
guarantee that we will ever be listed on NASDAQ or any other stock exchange or
automated quotation system. As a result, it may be more difficult to dispose of,
or to obtain adequate quotations as to the prices of, our common stock.
Trading Of Our Stock May Be Restricted By The SEC's Penny Stock Regulations
Which May Limit A Stockholder's Ability To Buy And Sell Our Stock
The U.S. Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
(as defined) less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. Our securities are covered by the
penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors." The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information,
-36-
must be given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or with the
customer's confirmation. In addition, the penny stock rules require that prior
to a transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules discourage investor interest in and limit the
marketability of, our common stock.
We Rely On Collaborative Relationships And Accordingly Any Termination Of Such
Relationships May Have An Adverse Impact On Our Operations And Business.
We plan to pursue collaborative arrangements with other market leaders to
develop, manufacture and market health promotion and disease management,
application development and telecommunication services. Such agreements already
exist with ASI, a Web hosting company that has 160,000 business available to
market its complete e-commerce solutions, and with World Satellite Network
(WSNet), a provider of programming, hardware and network edge integrated digital
services to private and franchised broadband service providers. Our future
success will depend in large part on our ability to continue to form
collaborative arrangements with third parties, our strategic interest in the
potential products under development and, eventually, our success in marketing
or willingness to purchase any such products. These programs may require that we
share control over our marketing programs or restrict our ability to engage in
certain areas of product development, production and marketing. These programs
may also be subject to unilateral termination by our collaborative partners
without cause or default and without an ability to cure any defaults.
Accordingly, we may compete with our partners (and others to whom disclosure
maybe made) for commercial sales of any products or services developed in these
arrangements. There can be no assurance that we will be able to enter into
collaborative arrangements on commercially reasonable terms, that these
arrangements, if established, will result in successful programs to develop,
manufacture or market products or that, if those programs are successful, our
collaborative partners will not seek to compete directly through jointly
developed products themselves or obtain them from alternative sources.
We May Not Be Able To Obtain The Additional Financing Necessary To Grow Our
Business.
In order to grow our business and finance future acquisitions, we may require
additional financing. We currently have a working capital deficiency of
$2,275,006. As of November 30, 2002, our accumulated deficit was $119,438,594.
Furthermore, we have experienced negative cash flows during each of the last
three years of operations. We have historically depended upon capital infusion
from the issuance of long term debt and equity securities to provide the cash
needed to fund operations. Sales of additional equity securities, through a
traditional underwritten offering, would dilute, on a pro rata basis, the
percentage ownership of all holders of common shares. There can be no assurance
that any such financing would be available upon terms and conditions acceptable
to us, if at all. The inability to obtain additional financing in a sufficient
amount when needed and upon acceptable terms and conditions could have a
material adverse effect upon our company and our revenue growth may be adversely
affected. If adequate
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funds are not available on acceptable terms when needed, we may be required to
delay, scale-back or eliminate marketing of one or more of our products or
development programs or obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or potential products that we would not
otherwise relinquish. Inadequate funding also could impair our ability to
compete in the marketplace and could result in our dissolution.
Our Directors Are Authorized To Issue Preferred Stock Which May Adversely Affect
The Voting Power Of Our Shareholders.
We are authorized to issue 150,000,000 each of Class A and Class B preference
shares, with such designations, rights and preferences as may be determined from
time to time by our board of directors. Accordingly, our board of directors is
empowered, without stockholder approval, to issue such preference shares with
dividend, liquidation, conversion or other rights which could adversely affect
the rights of the our shareholders. The issuance of preference shares could,
among other things, adversely affect the voting power of our shareholders and,
under certain circumstances, make it more difficult for a third party to gain
control of our company, discourage bids for common shares at a premium or
otherwise adversely affect the market price for common shares.
Our Directors, Officers And Others Are Protected By Our Bylaws And Such
Limitations On Liability May Reduce The Likelihood Of Derivative Litigation
Against Our Officers And Directors And May Discourage Or Deter Our Shareholders
From Suing Our Officers And Directors.
Our bylaws contain provisions limiting the liability of our officers and
directors for all acts, receipts, neglects or defaults of themselves and all of
our other officers or directors or for any other loss, damage or expense
happening to our company which shall happen in the execution of the duties of
such officers or directors. Such limitations on liability may reduce the
likelihood of derivative litigation against our officers and directors and may
discourage or deter our shareholders from suing our officers and directors based
upon breaches of their duties to our company, though such an action, if
successful, might otherwise benefit our company and our shareholders.
Our bylaws contain provisions entitling our directors and officers to
indemnification from all costs, charges, expenses, including any amount paid to
settle an action or satisfy a judgment reasonably incurred by such officer or
director with respect to any civil, criminal or administrative action or
proceeding to which such officer or director is made a party by reason of being
or having been an officer or director of our company. We have authorized the
indemnification of our officers and directors in such other circumstances
permitted under the Canadian Business Corporations Act which may reduce the
likelihood of derivative litigation against directors and officers and may
discourage or deter shareholders from suing directors or officers for breaches
of their duties to our company, though such an action, if successful, might
otherwise benefit us and our shareholders. Our bylaws also provide for the
indemnification of our directors and officers from judgments, fines, amounts
paid in settlement and reasonable expenses as a result of an action or
proceeding in which they may be involved by reason of being or having been a
director or officer of our company as long as the acts were done in good faith.
We are not presently aware of any claims which would result in our
indemnification of our directors and officers. Such provisions do not eliminate
the personal liability of our directors and officers for monetary damages as a
result of a breach of fiduciary duty. We will indemnify against reasonable costs
and expenses incurred in connection
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with any action, suit or proceeding to which any of such individuals were made a
party by reason of his or her being or having been such a director of officer,
unless such person has been adjudicated to have been liable for negligence or
misconduct in his or her corporate duties. Although we may obtain an insurance
policy which will cover such indemnity, there can be no assurance that such a
policy will be available or that, if available, it will be adequate. To the
extent that we are required to expend funds to indemnify officers and directors,
it could have a materially adverse effect upon our financial condition.
Furthermore, our bylaws allow for insurance for the benefit of our officers and
directors against such liabilities and in such amounts as the Board of Directors
may determine. We currently subscribe to Directors and Officers Liability
Insurance from Tri-City Brokerage of Illinois, Inc. for $3,000,000 for each
claim and as an annual aggregate.
Grants Of Stock Options, Warrants And Further Issuances Of Our Common Shares
Will Result In Dilution To Our Current And Future Shareholders
The grant and exercise of warrants or stock options would likely result in a
dilution of the value of the common shares.
We may determine to grant additional stock options or other forms of
equity-based incentive compensation to our management and/or employees to
attract and retain such personnel. We also may in the future offer equity
participation in connection with the obtaining of non-equity financing, such as
debt or leasing arrangements accompanied by warrants to purchase equity
securities of our company. Any of these actions could have a dilutive effect
upon the holders of the common shares.
We Do Not Expect To Pay Any Dividends In The Foreseeable Future
We have never paid a cash dividend on our common shares and do not expect to pay
dividends in the foreseeable future.
ITEM 3 Quantitative and Qualitative Disclosure about Market Risk
We do not utilize derivative instruments to manage market related risks. We do
not have any long-term debt instruments so our company is not subject to market
related risks such as interest or foreign exchange on long-term debt. All of our
operations are conducted in the United States.
ITEM 4 Controls and Procedures
As of November 30, 2002, an evaluation was performed under the supervision and
with the participation of our company's management, including our CEO, of the
effectiveness of the design and operation of our company's disclosure controls
and procedures. Based on that evaluation, our company's management, including
the CEO, concluded that our company's disclosure controls and procedures as well
as those of our company's subsidiaries, were effective as of November 30, 2002.
With the appointment of Edward Sharpless to the position of president and CEO,
there have been significant improvements to our company's internal controls.
Additionally, Mr. Sharpless maintains an ongoing review of all financial and
disclosure controls and procedures.
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PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
On September 25, 2001, Rolling Meadows Associates, I, LLC, by Zaragon Holdings,
Inc., filed a Complaint in Cook County, Illinois Circuit Court against
VirtualSellers.com, Inc. for possession of the premises located at 3075 Tollview
Drive, Rolling Meadows Illinois and for rent or damages for withholding
possession of these premises for the period from September 1, 2001 through
September 30, 2001 in the amount of $26,315 plus all rents accruing through the
date of trial. A complaint was filed for rent and damages in the amount of
$859,512. The Company's position on this proceeding is that the building has
been sublet and deny that they owe the Plaintiff any money. The outcome of this
complaint is currently uncertain and consequently no amounts have been accrued
as at November 30, 2002. Management is in current discussions with the plaintiff
to settle the dispute.
On July 25, 2001 in the Vancouver Registry of the Supreme Court of British
Columbia, our company commenced a lawsuit against Telemetrix Solutions Inc.
(formerly Telemetrix Resource Group, Inc.) and Tracy Corporation II dba Western
Total Communications asserting a claim against Telemetrix and Tracy in the
amount of CDN$64,658 jointly and severally (plus pre-judgment interest) pursuant
to a letter agreement entered into between the parties on or about July 14, 1998
with respect to a possible business combination between the parties which was
never completed. A provision in the agreement regarding the proposed business
combination obligated Telemetrix and Tracy to pay our costs in connection with
the proposed business combination. Although no Appearance or Statement of
Defence has been filed on behalf of Telemetrix and Tracy, they have advised us
that they take the position that the British Columbia Court has no jurisdiction
over this matter and further, that any dispute must be dealt with by way of
arbitration to be held in Denver, Colorado.
On October 18, 2001, Steven & Marc Holdings, Inc. filed a lawsuit against our
company in the Supreme Court of the State of New York, Court of New York, Case
No. 604972/01. In this lawsuit, Steven & Marc Holdings, Inc., a public relations
firm, is claiming that we owe them $61,480, plus interest and costs, for
services rendered but not paid for between March and October of 2001. We have
filed an Answer in this lawsuit and we are attempting to settle it at a reduced
amount on a payment plan. The company is currently in discussion with the
Plaintiff to settle the lawsuit.
The Company is also involved in other legal proceedings and claims arising in
the ordinary course of business. The Company does not believe that any
liabilities related to the legal proceedings to which it is a party are likely
to be, individually or in the aggregate, material to the Company's consolidated
financial condition, results of operations or cash flows.
ITEM 2 Changes in Securities and Use of Proceedings
Recent Sales of Unregistered Securities
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During the quarter ended November 30, 2002, we issued the following securities,
none of which were registered under the Securities Act of 1933:
On September 10, 2002, we issued 500,000 common shares at a price of $0.05 per
share to an investor, who we had reasonable grounds to believe was an accredited
investor, capable of evaluating the merits and risks of this investment, and who
acquired the shares for investment purposes. The transaction was private in
nature, and the shares were issued in reliance upon Section 4(2) and/or Rule 506
promulgated under the Securities Act of 1933. The investor is a director of the
company.
On September 11, 2002, we issued 350,000 common shares at a price of $0.035 per
share and to an investor, who we had reasonable grounds to believe was an
accredited investor, capable of evaluating the merits and risks of this
investment, and who acquired the shares for investment purposes. The transaction
was private in nature, and the shares were issued in reliance upon Section 4(2)
and/or Rule 506 promulgated under the Securities Act of 1933. The investor is a
director of the company.
On October 18, 2002, we issued an aggregate of 400,000 common shares at a price
of $0.05 per share to an investor, who we had reasonable grounds to believe were
accredited investors, capable of evaluating the merits and risks of this
investment, and who acquired the shares for investment purposes. The transaction
was private in nature, and the shares were issued in reliance upon Section 4(2)
and/or Rule 506 promulgated under the Securities Act of 1933. The investor is a
director of the company.
ITEM 3 Defaults Upon Senior Securities
Not applicable.
ITEM 4 Submission of Matters To A Vote Of Security Holders
None.
ITEM 5 Other Information
Increase in Number of Directors
On August 20, 2002 our board of directors passed a resolution authorizing an
increase in the number of directors from 7 to 8. Mr. Richard Kessler filled the
vacancy on the board.
ITEM 6 Exhibits and Reports on Form 8-K
Reports on Form 8-K
On August 20, 2002, we filed a Form 8-K Current Report announcing the
appointment of Robert Maul and Richard Kessler as directors of our company.
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On September 18, 2002 we filed a Form 8-K Current Report announcing the
appointment of Edward Sharpless as our company's President to fill the vacancy
created by the resignation of Thomas Kalebic on June 10, 2002.
On November 27, 2002, the Registrant filed a lawsuit in the U.S. District Court
for the Northern District of California against Dennis Sinclair ("Sinclair"),
Raymond Mol ("Mol") and Mel Baillie ("Baillie") (collectively the "Defendants").
The lawsuit is primarily based upon certain sales or acquisitions of the
Registrant's stock engaged in or authorized by the Defendants while they were
directors and/or officers of the Registrant in violation of Section 16(b) of the
Securities Exchange Act of 1934, 15 U.S.C. ss. 78p(b) ("Section 16"). Section 16
generally restricts certain corporate "insiders" from profiting due to the sale
or acquisition of corporate securities within a six month period of the original
transaction, by mandating that all such profits shall inure to, and be
recoverable by, the issuer of the securities. In the lawsuit, the Registrant
seeks the recovery of profits which it believes were received by the Defendants
as a result of securities sales or purchases during the approximate period of
November, 1999 through November, 2001, pursuant to Section 16 and applicable
common law principles governing the conduct of corporate fiduciaries. In
addition to the disgorgement of profits, the Registrant also seeks a complete
accounting by the Defendants for all transactions which they conducted involving
the Registrant's securities or those of its predecessors while holding
corporate office or membership on the Registrant's Board of Directors.
On December 12, 2002 one of the Registrant's directors, Richard Kessler,
resigned from the Board of Directors. Mr. Kessler indicated to the Board that he
resigned for personal reasons.
On December 16, 2002, the Principal Executive Officer and Principal Financial
Officer of the Registrant provided a written statement on the Registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 2002, as amended,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Exhibits
Exhibit
Number Exhibit Title
3 ARTICLES OF INCORPORATION AND BYLAWS
(The following exhibits are incorporated by reference into this Form 10-Q from
reports previously filed by with the Securities and Exchange Commission)
3.1 Certificate of Continuance, dated January 11, 1991
3.2 Certificate of Amendment, dated June 14, 1995
3.3 Certificate of Amendment, dated September 14, 1995
3.4 Certificate of Amendment, dated December 22, 1995
3.5 Certificate of Amendment, dated March 23, 1999
3.6 Certificate of Amendment, dated May 31, 1999
3.7 Certificate of Amendment, dated July 18, 1997
3.8 By-laws
10 MATERIAL CONTRACTS
10.1 Lease agreement between Healthtrac, Inc. and Encore LLC dated October 1,
2002
(21) SUBSIDIARIES
21.1 Canadian-American Communications Inc.
21.2 Canadian Northstar Transmission Systems Ltd.
21.3 Preferred Telemanagement Inc. (formerly Suncom Telemanagement Inc.)
21.4 CAM-NET Cellular Inc. (formerly Direct Advantage, Inc. and Invoice
Reduction Services, Inc.
21.5 NorthNet Telecommunications Inc. (d.b.a. NorthStar Telesolutions)
21.6 eCommerce Solutions Inc. (d.b.a. Professional Services and Software
Products group)
21.7 Healthtrac Corporation
99.1 Certification Pursuant to 180 S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 - Edward W. Sharpless,
President and Chief Executive Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, Healthtrac, Inc.
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEALTHTRAC, INC.
By:/s/ Edward W. Sharpless
Edward Sharpless,
Duly Authorized Officer and Principal Financial Officer
Date: January 14, 2003
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CERTIFICATION
I, Edward Sharpless, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Healthtrac, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
the Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Edward W. Sharpless
- -------------------------------
Edward W. Sharpless
President, Principal Executive Officer & Principal Financial Officer
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Exhibit Index
3 ARTICLES OF INCORPORATION AND BYLAWS
(The following exhibits are incorporated by reference into this Form 10-Q from
reports previously filed by with the Securities and Exchange Commission)
3.1 Certificate of Continuance, dated January 11, 1991
3.2 Certificate of Amendment, dated June 14, 1995
3.3 Certificate of Amendment, dated September 14, 1995
3.4 Certificate of Amendment, dated December 22, 1995
3.5 Certificate of Amendment, dated March 23, 1999
3.6 Certificate of Amendment, dated May 31, 1999
3.7 Certificate of Amendment, dated July 18, 1997
3.8 By-laws
10 MATERIAL CONTRACTS
10.1 Lease agreement between Healthtrac, Inc. and Encore LLC dated October 1,
2002
(21) SUBSIDIARIES
21.1 Canadian-American Communications Inc.
21.2 Canadian Northstar Transmission Systems Ltd.
21.3 Preferred Telemanagement Inc. (formerly Suncom Telemanagement Inc.)
21.4 CAM-NET Cellular Inc. (formerly Direct Advantage, Inc. and Invoice
Reduction Services, Inc.
21.5 NorthNet Telecommunications Inc. (d.b.a. NorthStar Telesolutions)
21.6 eCommerce Solutions Inc. (d.b.a. Professional Services and Software
Products group)
21.7 Healthtrac Corporation
99.1 Certification Pursuant to 180 S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 - Edward W. Sharpless,
President and Chief Executive Officer