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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934

     
For the Quarter ended MAY 31, 2003   Commission file number: 000-14356

 

HEALTHTRAC, INC.

(Exact name of Registrant as specified in its charter)
     
CANADA   91-1353658
 
(State of incorporation)   (I.R.S. Employer Identification No.)
 
 
539 MIDDLEFIELD ROAD, REDWOOD CITY, CALIFORNIA    94063 
 
(Address of principal executive offices)   (Zip Code)
 

Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such filing requirements for the past 90 days.

Yes [X] No [   ]

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes [X] No [   ]

 

The number of shares of common stock outstanding as of July 3, 2003 was 223,104,598.

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
Exhibit Index
EXHIBIT 99(A)


Table of Contents

HEALTHTRAC, INC.

TABLE OF CONTENTS

                 
            Page
           
PART I — FINANCIAL INFORMATION
       
Item 1. Condensed Consolidated Financial Statements
       
 
  Condensed Consolidated Balance Sheet at May 31, 2003 (unaudited) and February 28, 2003     4  
 
  Condensed Consolidated Statements of Operations (unaudited) for the three months ended May 31, 2003 and 2002     5  
 
  Condensed Consolidated Statements of Stockholders Equity     6  
 
  Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended May 31, 2003 and 2002     7  
 
  Notes to Condensed Consolidated Financial Statements (unaudited)     8  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    15  
Item 3. Not applicable
       
Item 4. Controls and Procedures
    18  
PART II — OTHER INFORMATION
       
Item 1. Legal Proceedings
    18  
Item 2 to 5 - Not applicable
       
Item 6. Exhibits and reports on Form 8K
    19  
SIGNATURES
    20  
CERTIFICATIONS
    21  

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SPECIAL NOTE REGARDING INDEPENDENT ACCOUNTANTS REVIEW

Our independent accountants, KPMG LLP, have not completed their review procedures at the time of filing this quarterly report on Form 10-Q for the three months ended May 31, 2003, as required under Article 10 of Regulation S-X. We expect completion by KPMG LLP by the end of this week and we will file an amended 10Q to remove this statement at that time

INTRODUCTORY NOTE

The Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by the context of the statement which may include words such as the Company “believes,” “anticipates,” “expects,” “forecasts,” “estimates,” or other words of similar meaning and context. Similarly, statements that describe future plans, objectives, outlooks, targets, models or goals are also deemed forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those forecasted or anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements and elsewhere in this report, including Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Stakeholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements or construe such statements to be a representation by the Company that the objectives or plans of the Company will be achieved. The forward-looking statements included in this report are made only as of the date of this report, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)

                       
          May 31, 2003   February 28, 2003
         
 
          (Unaudited)        
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 150,007     $ 186,873  
 
Accounts receivable, net of allowance of $4,469 (Feb 28, 2003 - $4,469)
    308,796       406,095  
 
Inventories
    128,454       121,435  
 
Prepaid expenses and deposits
    146,263       146,263  
 
   
     
 
   
Total current assets
    733,520       860,666  
Equipment, net
    157,635       169,994  
Intellectual property, net of $2,217,902 accumulated amortization (Feb 28, 2003 - $1,915,459)
    3,830,916       4,133,359  
 
   
     
 
 
  $ 4,722,071     $ 5,164,019  
 
   
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 1,323,134     $ 1,216,043  
 
Accrued liabilities
    714,764       714,974  
 
Deferred revenue
    209,207       328,826  
 
Current portion of obligations under capital lease
    17,656       19,470  
 
Liabilities of discontinued operations (note 3)
    175,000       200,000  
 
   
     
 
   
Total current liabilities
    2,439,761       2,479,313  
 
Obligations under capital lease
    9,344       9,344  
 
Shareholders’ equity:
               
   
Common shares, no par value (note 4):
               
     
Authorized: 300,000,000 (Feb 28, 2003 - 300,000,000) common shares Issued and outstanding: 223,104,598 (Feb 28, 2003 - 223,104,598)
    121,809,921       121,809,921  
 
Shares to be issued
    100,000       100,000  
 
Accumulated deficit
    (119,636,955 )     (119,234,559 )
 
   
     
 
   
Total shareholders’ equity
    2,272,966       2,675,362  
 
   
     
 
 
  $ 4,722,071     $ 5,164,019  
 
   
     
 

Future operations (note 1)
Commitment and contingencies (notes 4 and 7)

See accompanying notes

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in United States dollars)

                     
        Three Months Ended
       
        May 31, 2003   May 31, 2002
       
 
        (unaudited)
Revenue
  $ 843,489     $ 1,029,087  
Costs and expenses
               
 
Direct costs
    222,156       350,269  
 
Selling, general and administrative
    721,298       1,278,404  
 
Amortization
    314,802       351,276  
 
   
     
 
 
    1,258,256       1,979,949  
Operating income (loss)
    (414,767 )     (950,862 )
Other income (expense)
               
 
Gain on forgiveness of debt
    12,371        
 
Miscellaneous
          8,815  
 
   
     
 
 
    12,371       8,815  
Loss from continuing operations
    (402,396 )     (942,047 )
Loss from discontinued operations
          (4,011 )
 
   
     
 
Loss for the period
  $ (402,396 )   $ (946,058 )
 
   
     
 
Basic and diluted loss per common share (note 2) Continuing operations
  $     $ (0.01 )
   
Discontinued operations
         
 
   
     
 
Loss for the period
  $     $ (0.01 )
 
   
     
 
Weighted average number of shares outstanding
    223,104,598       205,087,585  

See accompanying notes

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(Expressed in United States dollars)
(Unaudited)

                                           
      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 year
                                       
 
For cash pursuant to private placements
    20,040,238       859,124       (561,625 )           297,499  
 
Shares to be issued for cash received pursuant to private placements
                15,000             15,000  
 
Shares issued for employee compensation ($50,000 cash received from private placement)
    1,000,000       130,000                   130,000  
 
Subscription receivable
          (77,500 )                 (77,500 )
 
Shares issued for services
    1,450,000       45,500                   45,500  
 
Shares issued and to be issued for acquisition of Healthtrac
    431,293       107,588       (107,588 )            
 
Shares to be issued for settlement of debt
    1,149,054       59,765                   59,765  
 
Loss for the year
                      (2,161,235 )     (2,161,235 )
 
   
     
     
     
     
 
Balance, February 28, 2003
    223,104,598       121,809,921       100,000       (119,234,559 )     2,675,362  
 
Loss for the period
                      (402,396 )     (402,396 )
 
   
     
     
     
     
 
Balance, May 31, 2003
    223,104,598     $ 121,809,921     $ 100,000     $ (119,636,955 )   $ 2,272,966  
 
   
     
     
     
     
 

See accompanying notes

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)

                     
        Three Months Ended
       
        May 31, 2003   May 31, 2002
       
 
        (unaudited)
Cash flows from operating activities:
               
 
Loss for the period
  $ (402,396 )   $ (946,058 )
 
Items not involving cash Loss from discontinued operations
          4,011  
   
Non-cash compensation expense
          80,000  
   
Amortization
    314,802       351,276  
 
Changes in non-cash operating working capital:
               
   
Accounts receivable
    97,299       128,090  
   
Prepaid expenses and deposits
          27,515  
   
Inventories
    (7,019 )     16,010  
   
Accounts payable
    107,091       (211,139 )
   
Accrued liabilities
    (210 )     318,637  
   
Deferred revenue
    (119,619 )     (5,348 )
   
Deposit
          53,299  
 
 
   
     
 
 
Cash flow used in continuing operations
    (10,052 )     (183,707 )
 
Cash used in discontinued operations
    (25,000 )     8,069  
 
 
   
     
 
 
    (35,052 )     (175,638 )
Investments:
               
 
Acquisition of equipment
          (7,248 )
Financing:
               
 
Notes payable
          (11,279 )
 
Repayment of capital lease obligation, net
    (1,814 )     (16,138 )
 
Issuance of common shares for cash
          175,000  
 
Cash received on shares to be issued
          47,500  
 
 
   
     
 
 
    (1,814 )     195,083  
Increase (decrease) in cash and cash equivalents
    (36,866 )     12,197  
Increase (decrease) in cash of discontinued operations
          26,541  
Cash and cash equivalents at beginning of period
    186,873       248,391  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 150,007     $ 287,129  
 
 
   
     
 

Non-cash transactions and supplemental disclosures (note 6)

See accompanying notes

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HEALTHTRAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2003
(Unaudited)

1.     Description of the Company and Summary of Significant Accounting Policies

The Company

Healthtrac Inc. is primarily engaged in providing health management designed to improve the quality of care while reducing overall healthcare costs and the operation of a call center. The Company 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. Healthtrac operates one call center through its subsidiary, NorthNet Telecommunications, Inc., doing business as NorthStar TeleSolutions. It operates two segments: Health Management and Call center.

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 $402,396 for the three months ended May 31, 2003 and has an accumulated deficit of $119,636,955 at May 31, 2003. For the period ended May 31, 2003, the Company used $35,052 in cash to fund operations and $1,814 to fund financing activities resulting in a decrease in cash of $36,866. As at May 31, 2003, the Company has a working capital deficiency of $1,706,241 including cash of $150,007.

Management projects that the Company will require additional cash and working capital to fund planned operations and capital asset additions for fiscal 2004 of approximately $500,000. Although management is of the opinion that sufficient cash will be obtained from operations and 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 May 31, 2003 the Company has raised $nil in external financings through 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.

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 17 of the Company’s annual audited consolidated financial statements as at February 28, 2003, these principles do not differ materially from accounting principles generally accepted in Canada.

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, 2003.

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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

Use of estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in preparing these financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates. In these consolidated financial statements, significant areas requiring the use of management estimates relate to the determination of collectibility of accounts receivable, the recoverability of equipment and intellectual property and rates for depreciation and amortization.

Recent Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, to clarify under what circumstances a contract with an initial net investment meets the characteristics of a derivative, to clarify when a derivative contains a financing component, to amend the definition of an underlying to conform it to language in FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and to amend certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and is to be applied prospectively. Implementation of SFAS No. 149 is not expected to have a material effect on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments issued in the form of shares that are mandatorily redeemable as well as certain other financial instruments be classified as liabilities in the financial statements. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective beginning the Company’s second quarter of 2004. The provisions of this statement are not expected to have a material impact on the Company’s consolidated financial position or results of operations.

Stock-based compensation plans:

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principle Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations to account for its employee stock options plans. Under the method, compensation expense is recorded on the measurement date, which is generally the date of grant, only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation”, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123 for employee stock option grants. Option grants to non-employees will be recognized at their fair value as the services are provided and the options earned.

Had the Company determined employee compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net loss would have been increased to the pro forma amounts indicated below (no compensation expense for the three months ended May 31, 2003 as no additional option grants and no outstanding vesting for prior options at the beginning of the period):

                 

    Three months   Three months
    ended May 31,   ended May 31,
    2003   2002

Compensation expense
  $     $  
Pro forma loss
    402,396       1,041,408  
Pro forma loss per share
          0.01  

The weighted average fair value of employee options granted during the period ended May 31, 2002 was $0.08 estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

         

    Three months
    ended May 31,
    2002

Risk free interest rate
    4.07 %
Annual dividends
     
Expected lives
    1.25 years  
Volatility
    11.9 %

2.   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.

3.   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.

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Summarized financial information for the discontinued operations is as follows:

                 
    May 31, 2003   February 28, 2003
   
 
Accrued liabilities of discontinued operations
  $ 175,000     $ 200,000  

The Company expects to settle the remaining liabilities from discontinued operations in 2004. The Company is negotiating the settlements with the intention of settling at less than the recorded amount of $175,000. However, there can be no certainty that this will be achieved.

                   
      Three months ended   Three months ended
      May 31, 2003   May 31, 2002
     
 
Revenue
  $     $ 56,220  
Expenses
               
 
Direct costs
          21,184  
 
Selling and administrative costs
          25,946  
 
Amortization
          13,101  
 
   
     
 
Loss from discontinued operations
  $     $ (4,011 )
 
   
     
 

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4.   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 May 31, 2003, 10,581,455 (February 28, 2003 — 10,581,455) shares have been issued to creditors leaving an outstanding commitment to issue 2,418,545 (February 28, 2003 — 2,418,545) shares.
 
  c.   Reduction of common share stated capital
 
      On August 22, 1996, the shareholders of the Company passed a special resolution to reduce the stated capital of the Company’s common shares by $86,729,000 (CDN $117,535,000). For accounting purposes, the recorded amounts for common shares and deficit have not been adjusted.
 
  d.   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 May 31, 2003, 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 May 31, 2003, 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 May 31, 2003, 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. These warrants have been cancelled by the Company and are no longer outstanding.

  e.   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 July 28, 2010 to November 5, 2011. The stock options vest in accordance with each individual stock option agreement.
 
      The following summarizes changes in stock options since February 28, 2003:

                 
    May 31, 2003
   
            Weighted average
    Shares   exercise price
   
 
Outstanding, beginning of period
    260,000     $ 0.15  
Granted
           
Forfeited
           
 
   
     
 
Outstanding, end of period
    260,000     $ 0.15  
 
   
     
 

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    The Company has the following stock purchase options outstanding and vested at May 31, 2003:

                         
    Number   Price   Expiry
   
 
 
Employees
    60,000     $ 0.15     July 28, 2010
Director
    200,000       0.15     November 5, 2011
 
   
     
   
Total
    260,000     $ 0.15          
 
   
     
     

  f.   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.

5.   Segmented information

The Company’s continuing operations have two — a health promotion division (Healthtrac Corp.) and a call center division (NorthStar TeleSolutions, Inc.). The segments are located in the United States. Segmented information for the three months ended May 31, 2003 with comparative figures for May 31, 2002 are as follows:

                         
    Healthcare                
    promotion   Call Centre        
May 31, 2003   segment   segment   Total

 
 
 
Gross revenue
  $ 563,159     $ 280,330     $ 843,489  
Corporate
                 
 
   
     
     
 
 
  $ 563,159     $ 280,330     $ 843,489  
 
   
     
     
 
Segment income (loss)
  $ (311,712 )   $ 7,171     $ (304,541 )
Corporate
                (97,855 )
 
   
     
     
 
Income (loss) for the period
  $ (311,712 )   $ 7,171     $ (402,396 )
 
   
     
     
 
Segment assets
  $ 4,412,986     $ 253,814     $ 4,666,800  
Assets of discontinued operations
                 
Corporate assets
                55,271  
 
   
     
     
 
Total assets
  $ 4,412,986     $ 253,814     $ 4,722,071  
 
   
     
     
 
Amortization expense
                       
Capital assets
  $ 3,201     $ 9,158     $ 12,359  
Intellectual property
    302,443             302,443  
Corporate assets
                 
 
   
     
     
 
 
  $ 305,645     $ 9,158     $ 314,802  
 
   
     
     
 

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      Healthcare                
      promotion   Call Centre        
May 31, 2002   segment   segment   Total

 
 
 
Gross revenue
  $ 754,151     $ 274,668     $ 1,028,819  
Corporate
                268  
 
   
     
     
 
 
  $ 754,151     $ 274,668     $ 1,029,087  
 
   
     
     
 
Segment income (loss)
  $ (376,305 )   $ 5,279     $ (371,026 )
Corporate
                (571,021 )
 
   
     
     
 
Income (loss) for the period
  $ (376,305 )   $ 5,279     $ (942,047 )
 
   
     
     
 
Segment assets
  $ 5,499,678     $ 223,764     $ 5,723,442  
Assets of discontinued operations
                226,949  
Corporate assets
                749,578  
 
   
     
     
 
Total assets
  $ 5,499,678     $ 223,764     $ 6,699,969  
 
   
     
     
 
Equipment additions:
                       
Equipment
  $ 5,382     $ 751     $ 6,133  
Corporate
                1,115  
 
   
     
     
 
 
  $ 5,382     $ 751     $ 7,248  
 
   
     
     
 
Amortization expense:
                       
Capital assets
  $ 5,719     $ 9,002     $ 14,721  
Intellectual property
    302,442             302,442  
Corporate assets
                34,113  
 
   
     
     
 
 
  $ 308,161     $ 9,002     $ 351,276  
 
   
     
     
 
 
 
          May 31, 2003   May 31, 2002
 
         
 
Call center service
          $ 280,330     $ 274,668  
Other
                  268  
Healthcare:
                       
 
Book sales
            202,161       301,373  
 
Programs revenue
            360,998       452,778  
 
           
     
 
 
          $ 843,489     $ 1,029,087  
 
           
     
 

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6.   Non-cash transactions and supplemental disclosures

                   
      May 31, 2003   May 31, 2002
     
 
Supplemental disclosures:
               
 
Interest paid
  $ 1,655     $ 17,739  
 
Taxes paid
           
Issuance of shares for:
               
 
Settlement of debt
          57,163  
 
Acquisition of MedWire
           

7.   Commitment and contingencies
 
a.   The company is committed to annual office and equipment rental payments under operating leases for the next four years as follows:

         
2004
  $ 239,300  
2005
    220,911  
2006
    224,308  
2007
    118,195  
 
   
 
 
  $ 802,714  
 
   
 

b.   Legal proceedings:

  (i)   Rolling Meadows Premises
 
      The Company moved its e-commerce operations from Rolling Meadows, Illinois to the Greenwood, Indiana offices during 2002. 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.
 
  (ii)   Other Litigation
 
      The Company is involved in other legal proceedings and claims arising in the ordinary course of business including claims for outstanding payments for goods and services received and taxation claims. The Company does not believe that any liabilities related to the proceedings to which it is a party are likely to be, individually, or in the aggregate, material to the Company’s consolidated financial statements. The Company has accrued for any amounts it considers likely in the consolidated financial statements.

8.   Comparative figures

Certain prior year figures have been reclassified to conform to the current year’s financial statement classification

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HEALTHTRAC, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of certain significant factors, which have affected the consolidated results of operations, and the consolidated financial position of the Company during the periods included in the accompanying condensed consolidated financial statements. This discussion should be read in conjunction with the related condensed consolidated financial statements and associated notes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of its accounting policies that currently affect its consolidated financial condition and results of operations.

Revenue Recognition

Healthcare division

Service fees for the evaluation of health assessment questionnaires and the development and monitoring of health education plans are initially deferred and recognized as services are provided and the revenues earned. Sales of publications and written materials are recognized upon shipment, at which time title is transferred to the customer. Royalty revenue from licensing of the Company’s software is recognized in accordance with the provisions of SOP 97-2 “Software Revenue Recognition”, as amended.

Call Center division

The Call Center provides transaction processing, centralized billing, customer and technical support, order entry, order fulfillment, bill collection, help desk services and dispatch functions. Revenue is recognized based on monthly per customer transactions for standard services in accordance with contractual arrangements.

Accounts Receivable

The Company is required to estimate the collectibility of its trade receivables and unbilled costs and fees. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer. Significant changes in required reserves may occur in the future depending on future market conditions.

Inventory

The Company is required to state its inventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company is required to exercise judgment in its assessment of future demand requirements and compare that with the current or committed inventory levels. It is possible that changes in required inventory reserves may continue to occur in the future due to market conditions.

Intellectual property

The Company’s management has estimated the useful life of the intellectual property that was acquired through the acquisition of Healthtrac in fiscal 2002 as being five years. We have yet to realize net income 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. Management has reviewed recent sales transactions in the Healthcare business and believes that the fair value of this asset is higher than the net book value. The fair value will be impacted by general economic conditions, demand for the segment’s services and other factors. To the extent that the fair value is reduced in future periods, we may be required to record an impairment charge against the carrying value of the intellectual property.

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Contingencies

The Company is involved in legal proceedings as disclosed in note 7 in the consolidated financial statements. The Company has recorded its best estimate of any costs associated with these legal proceedings. The accrual for these types of costs is subject to considerable uncertainty and actual results may differ from the amounts accrued.

Going Concern

Our ability to continue as a going concern and to realize the carrying value of our assets is dependent on our ability to obtain additional financing to fund future operations and on our ability to translate our growth into profitable operations. The outcome of these matters cannot be predicted with any certainty at this time. Accordingly, our consolidated financial statements contain note disclosures describing the circumstances that led there to be doubt over our ability to continue as a going concern that states that the Company has a working capital deficiency of $1,706,241 at May 31, 2003 and the Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements have been prepared without any adjustments that would be necessary if we become unable to continue as a going concern and were therefore required to realize upon our assets and discharge our liabilities in other than the normal course of operations.

RESULTS OF OPERATIONS
(Unaudited)
(Expressed in United States dollars)

                     
        Three Months Ended May 31,
       
        2003   2002
       
 
Revenues
               
 
Healthcare
  $ 563,159     $ 754,151  
 
Call Center
    280,330       274,668  
 
Corporate
          268  
 
   
     
 
   
Total revenues
  $ 843,489     $ 1,029,087  
 
   
     
 
Operating Income (Loss)
               
 
Healthcare
  $ (311,712 )   $ (376,305 )
 
Call center
    7,171       5,279  
 
Corporate
    (97,855 )     (571,021 )
Los from continuing operations
  $ (402,396 )   $ (942,047 )
 
   
     
 

REVENUES

On a consolidated basis, revenues from continuing operations for the three months ended May 31, 2003 decreased by 18% to $843,489 from the same period in the prior year. The decrease was primarily the result of a one time book order of $271,000 in the prior year in the Healthcare Promotion segment which was not repeated in the current quarter. Call Center revenue is consistent in the first quarter fiscal 2004 compared to the first quarter fiscal 2003 due to an increase in customer transactions offset by lower per transaction and customer fees.

OPERATING LOSS

On a consolidated basis, the operating loss decreased 57% for the three months ended May 31, 2003. The reduced operating loss is the result of cost containment initiatives in the Health Management and corporate business segments.

DIRECT COSTS

Direct costs consist primarily of the cost of books at the Health Management segment. The decrease in direct costs from $350,269 to $222,156 is a result of lower book sales in the current quarter compared to first quarter fiscal 2003.

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SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses consist primarily of personnel-related expenses, professional fees, and rent and utilities. Selling, general and administrative expenses for the three months ended May 31, 2003 were $721,298 or 86% of revenues as compared to $1,278,404 or 124% of revenues for the three months ended May 31, 2002. The decrease reflected the overall reduction in expenses in the Health Management and Corporate business segments, as a result of a decrease in staff and lower outside services expenses.

AMORTIZATION

Amortization consists of depreciation on equipment and amortization of the intellectual property. The decrease from $351,276 to 314,802 is due to lower depreciation of equipment as a result of certain equipment being written off in fiscal 2003.

ACCOUNTS RECEIVABLE

Accounts receivable at May 31, 2003 decreased by approximately $97,299 to $308,796 as compared with $406,095 at February 28, 2003. This decrease was due to increased collection activities at the Health Management and Call Center business segments.

INVENTORIES

Inventories consist of various publications and written materials for the Healthcare segment. Inventory levels remained materially unchanged as a result of inventory usage offset by new inventory purchases.

LIQUIDITY AND CAPITAL RESOURCES

As at May 31, 2003, the Company had a net working capital deficiency of $1,706,241, capital assets with a book value of $157,635, intellectual property with a book value of $3,830,916 and obligations under long-term capital leases of $9,344 resulting in a net equity of $2,272,966.

During the first quarter fiscal 2004, we used $35,052 in cash to fund operations compared to $175,638 in the first quarter fiscal 2003. $1,814 was utilized to fund financing activities which consisted primarily of payments for capital lease obligations. No cash was obtained or used during the quarter from investing activities for a net decrease in cash of $36,866. Cash at May 31, 2003 was $150,007.

We have historically funded operations through the issuance of common shares. We expect the need to fund our working capital deficit, future operations and investments through the issuance of common shares and from operations. Subsequent to May 31, 2003, there have not been any sales of common shares. There can be no assurance that we will be able to generate proceeds from the sale of common shares during the balance of fiscal 2004.

We estimate our cash requirements for capital asset additions and for operations for fiscal 2004 to be approximately $500,000. These funds are expected to be obtained through external financing and cash flow from operations. There can be no assurance that funds from external financings will be available when required on an economical basis. We will continue to search for appropriate acquisitions to compliment our existing operations. Where possible, we will pay for acquisitions through the issuance of our common shares.

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Item 4. Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer of the Company have concluded, based on their evaluation as of the date within 90 days prior to the date of the filing of this quarterly report on Form 10-Q, the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that all material information required to be filed in this quarterly report have been made known to them, to allow timely decisions regarding required disclosure.

(b)   Changes in Internal Controls

There have been no significant changes in internal controls, or in other factors that could significantly affect internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company moved its e-commerce operations from Rolling Meadows, Illinois to the Greenwood, Indiana offices during 2002. 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 denies that they owe the Plaintiff any money. The outcome of this complaint is currently uncertain.

The Company is involved in other legal proceedings and claims arising in the ordinary course of business including claims for outstanding payments for goods and services received and taxation claims. The Company does not believe than any liabilities related to the proceedings to which its is a party are likely to be, individually or in the aggregate, material to the Company’s consolidated financial condition, operations or cash flows. The Company has accrued for any amounts it considers likely in the consolidated financial statements.

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Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits

     
EXHIBIT    
NUMBER   DESCRIPTION

 
(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,
 
     
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
 
     
(The following exhibits are attached to this quarterly filling)
     
Other
 
99(a)   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Edward Sharpless, President, Chief Executive Officer and Tony Z. DiCostanzo, Vice President, Finance and Operations.

(b)   Reports on Form 8-K
 
    None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

Dated: July 21, 2003

         
    HEALTHTRAC, INC.
         
    By:   /s/      Edward W. Sharpless
       
                  Chief Executive Officer

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CERTIFICATIONS

I, Edward W. 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 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 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

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.

Dated: July 21, 2003

         
    HEALTHTRAC, INC.
         
    By:   /s/      Edward W. Sharpless
       
             President and
     Chief Executive Officer

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CERTIFICATION

I, Tony Z. DiCostanzo, certify that:

  1.   I have reviewed this quarterly report on Form 10-Q of Healthtrac, Inc.;
 
  2.   Based on my knowledge, this annual 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 annual 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 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 annual 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 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

  6.   The registrant’s other certifying officers and I have indicated in this annual report whether 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.

Dated: July 21, 2003

             
    HEALTHTRAC, INC.
             
    By:   /s/   Tony Z. DiCostanzo
       
            VP, Finance & Operations

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Exhibit Index

     
EXHIBIT    
NUMBER   DESCRIPTION

 
(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,
 
     
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
 
 
(The following exhibits are attached to this quarterly filing)
     
Other
 
99(a)   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Edward Sharpless, President, Chief Executive Officer and Tony Z. DiCostanzo, Vice President, Finance and Operations.