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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: August 31, 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 October 4, 2002, there were 218,804,251 shares of the Registrant's common
shares issued and outstanding.
- 1 -
Consolidated Financial Statements
(Expressed in United States dollars)
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Three months ended August 31, 2002 and 2001 Six months
ended August 31, 2002 and 2001
(Unaudited)
- 2 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Balance Sheets
(Unaudited)
(Expressed in United States dollars)
=========================================================================================================
August 31, February 28,
2002 2002
- ---------------------------------------------------------------------------------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 105,920 $ 283,659
Accounts receivable, net of allowance of $13,314
(February 28, 2002 - $235,847) 153,389 300,262
Employee receivable 29,917 29,917
Inventories 41,597 49,378
Prepaid expenses and deposits 232,955 285,474
Assets of discontinued operations 2,097 2,097
-------------------------------------------------------------------------------------------------
Total current assets 565,875 950,787
Capital assets 360,254 914,955
Intellectual property, net of $1,310,579 accumulated
amortization (February 28, 2002 - $705,695) 4,738,239 5,343,123
- ---------------------------------------------------------------------------------------------------------
Total assets $ 5,664,368 $ 7,208,865
=========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,579,524 $ 1,665,946
Accrued liabilities 802,419 483,737
Deferred revenue 347,032 456,025
Notes payable 183,720 150,000
Deposit 53,299 --
Current portion of obligations under capital lease 30,000 43,129
Liabilities of discontinued operations 20,519 20,519
-------------------------------------------------------------------------------------------------
Total current liabilities 3,016,513 2,819,356
Obligations under capital lease 43,762 23,176
Stockholders' equity:
Common shares, no par value (note 3):
Authorized: 300,000,000 common shares
Issued and outstanding: 217,654,251 shares (199,034,013
shares at February 28, 2002) 121,483,569 120,685,444
Shares to be issued 315,751 754,213
Accumulated deficit (119,195,227) (117,073,324)
-------------------------------------------------------------------------------------------------
Total stockholders' equity 2,604,093 4,366,333
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 5,664,368 $ 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:
"Judy Holland" Director "Raymond Mol" Director
- --------------------- --------------------
- 3 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Statements of Operations
(Unaudited)
(Expressed in United States dollars)
===================================================================================================================
Three months ended Six months ended
August 31, August 31,
-------------------------------- --------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Revenue $ 811,684 $ 778,176 $ 1,896,991 $ 1,292,557
Costs and expenses:
Direct costs 76,336 241,868 447,789 451,238
Selling, general and
administrative expenses 1,169,984 2,052,408 2,474,334 3,668,548
Amortization 367,601 229,289 731,978 630,210
Write down of equipment 481,663 1,330,000 481,663 1,330,000
Impairment provision for
goodwill -- 1,522,758 -- 1,522,758
-----------------------------------------------------------------------------------------------------------
2,095,584 5,376,323 4,135,764 7,602,754
- -------------------------------------------------------------------------------------------------------------------
Loss before the undernoted items 1,283,900 4,598,147 2,238,773 6,310,197
Other expenses (income):
Interest revenue (450) (1,633) (450) (5,370)
Lawsuit settlement -- (96,528) -- (96,528)
Forgiveness of debt (116,420) -- (116,420) --
Miscellaneous 8,815 (14,560) -- (1,668)
-----------------------------------------------------------------------------------------------------------
(108,055) (112,721) (116,870) (103,566)
- -------------------------------------------------------------------------------------------------------------------
Loss from continuing operations 1,175,845 4,485,426 2,121,903 6,206,631
- -------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations -- 123,520 -- 163,540
- -------------------------------------------------------------------------------------------------------------------
Loss for the period $ 1,175,845 $ 4,608,946 $ 2,121,903 $ 6,370,171
===================================================================================================================
Basic and diluted loss per common share:
Continuing operations $ 0.01 $ 0.03 $ 0.01 $ 0.05
Discontinued operations -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
$ 0.01 $ 0.03 $ 0.01 $ 0.05
===================================================================================================================
Weighted average number of shares
outstanding, basic and diluted
loss per share 215,018,640 136,173,813 210,073,299 132,028,217
===================================================================================================================
See accompanying notes to consolidated financial statements.
- 4 -
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
acquistion 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 17,620,238 745,625 (510,625) -- 235,000
Shares issued for employee
compensation 1,000,000 130,000 -- -- 130,000
Subscription receivable -- (77,500) -- -- (77,500)
Loss for the period -- -- -- (2,121,903) (2,121,903)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2002 217,654,251 $ 121,483,569 $ 315,751 $(119,195,227) $ 2,604,093
================================================================================================================================
See accompanying notes to consolidated financial statements
- 5 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in United States dollars)
=======================================================================================================================
Three months ended August 31, Six months ended August 31,
----------------------------- ---------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $(1,175,845) $(4,608,946) $(2,121,903) $(6,370,171)
Items not involving cash:
Loss from discontinued
operations -- 123,520 -- 163,540
Write-down of equipment 481,663 1,330,000 481,663 1,330,000
Impairment provision for
goodwill -- 1,522,758 -- 1,522,758
Non-cash compensation
expense -- -- 80,000 --
Forgiveness of debt (116,420) -- (116,420) --
Inventory obsolescence
provision (30,768) -- (30,768) --
Amortization 367,601 229,289 731,978 630,210
Changes in non-cash operating working capital:
Accounts receivable 30,334 579,235 146,873 602,265
Employee receivable -- 3,692 -- 2,171
Prepaid expenses and
deposits 21,104 29,040 52,519 77,869
Inventories 22,539 278,019 38,549 9,142
Accounts payable 291,670 (472,302) 87,161 (592,330)
Accrued liabilities 45 16,355 318,682 292,937
Deferred revenue (103,645) -- (108,993) --
Deposit -- -- 53,299 --
-----------------------------------------------------------------------------------------------------------------
Cash flow used in continuing
operations (211,722) (969,340) (387,360) (2,331,609)
Cash flow used in
discontinued
operations -- (126,014) -- (140,079)
-----------------------------------------------------------------------------------------------------------------
(211,722) (1,095,354) (387,360) (2,471,688)
Investments:
Acquisition of equipment (net) (4,327) (28,639) (11,575) (79,206)
Acquisition costs -- (151,524) -- (151,524)
Cash acquired on acquisition -- 57,091 -- 57,091
-----------------------------------------------------------------------------------------------------------------
Cash flow used in investing
activities (4,327) (123,072) (11,575) (173,639)
Financing:
Cash received for shares
issued -- 675,000 207,500 1,760,000
Repayment of capital lease
obligation, net (18,886) -- (35,024) --
Long-term debt -- 205,000 -- 205,000
Note payable 44,999 -- 33,720 --
Cheques issued in excess of
funds on deposit -- 74,065 -- 74,065
Cash received for shares to
be issued -- -- 15,000 --
-----------------------------------------------------------------------------------------------------------------
Cash flow provided by
financing activities 26,113 954,065 221,196 2,039,065
- -----------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash
equivalents (189,936) (264,361) (177,739) (606,262)
Cash and cash equivalents,
beginning of period 295,856 264,361 283,659 606,262
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 105,920 $ -- $ 105,920 $ --
=======================================================================================================================
Non-cash transactions and supplemental disclosures (note 6)
See accompanying notes to consolidated financial statements.
- 6 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
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 $2,121,903 for the six months ended August 31, 2002 and has
an accumulated deficit of $119,195,227 at August 31, 2002. For the six
months ended August 31, 2002, the Company used $387,360 in cash to fund
operations, and as at August 31, 2002, the Company has a working capital
deficiency of $2,450,638.
Management projects that the Company will require additional cash and
working capital to fund planned operations and capital asset additions for
fiscal 2003 of approximately $600,000 (unaudited). 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 August 31, 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 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
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. As a result, the catalogue sales division business
activity represents discontinued operations to the Company. In
accordance with generally accepted accounting principles in the
United States, prior year 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 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
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 August 31, 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 August 31, 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 August 31, 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 August 31, 2002, 6,000,000 (February 28,
2002, 6,000,000) of these warrants were unexercised.
(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 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
4. Share capital (continued):
(d) Stock options (continued):
The following summarizes changes in stock options since February 28,
2002:
====================================================================
Weighted average
Six months ended August 31, 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 August 31, 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 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
5. Segmented information:
The Company has three operating segments - a health promotion division
(Healthtrac Corp.) - a call center division (NorthStar TeleSolutions,
Inc.) and an e'commerce division. The health promotion, call center and
e'commerce segments are located in the United States. Segmented
information for the six months ended August 31, 2002 with comparative
figures for August 31, 2001 are as follows:
Operating segments:
===========================================================================================
Health
promotion Call Centre E'commerce
August 31, 2002 segment segment segment Total
Gross revenue $ 1,280,797 $565,890 $ 50,304 $ 1,896,991
Corporate -- -- -- --
-------------------------------------------------------------------------------------------
$ 1,280,797 $565,890 $ 50,304 $ 1,896,991
===========================================================================================
Segment income (loss) $ (523,369) $ 4,856 $ (19,491) $ (538,004)
Corporate -- -- -- (1,583,899)
-------------------------------------------------------------------------------------------
Income (loss) for the period $ (523,369) $ 4,856 $ (19,491) $(2,121,903)
===========================================================================================
Segment assets $ 5,159,382 $273,521 $ 101,396 $ 5,534,299
Assets of discontinued
operations -- -- -- 2,097
Corporate assets -- -- -- 127,972
-------------------------------------------------------------------------------------------
Total assets $ 5,159,382 $273,521 $ 101,396 $ 5,664,368
===========================================================================================
Equipment additions:
Equipment $ 5,385 $ 5,075 $ -- $ 10,460
Corporate -- -- -- 1,115
-------------------------------------------------------------------------------------------
$ 5,385 $ 5,075 $ -- $ 11,575
===========================================================================================
Amortization expense:
Capital assets $ 10,141 $ 22,526 $ 26,201 $ 58,868
Intellectual property 604,884 -- -- 604,884
Corporate assets -- -- -- 68,226
-------------------------------------------------------------------------------------------
$ 615,025 $ 22,526 $ 26,201 $ 731,978
===========================================================================================
- 11 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
5. Segmented information (continued):
Operating segments (continued):
======================================================================================
Healthcare Call Centre E'commerce
August 31, 2001 segment segment segment Total
--------------------------------------------------------------------------------------
Gross revenue 145,823 $ 590,590 $ 556,144 $1,292,557
======================================================================================
Segment loss 152,951 $ 170,902 $4,895,847 $5,219,700
Corporate -- -- -- 986,931
--------------------------------------------------------------------------------------
Loss from continuing
operations 152,951 $ 170,902 $4,895,847 $6,206,631
======================================================================================
Segment assets $6,197,364 $ 302,331 $ 783,134 $7,282,829
Assets of discontinued
operations 86,471
Corporate assets -- -- -- 424,250
--------------------------------------------------------------------------------------
Total assets $6,197,364 $ 302,331 $ 783,134 $7,793,550
======================================================================================
Equipment additions:
Equipment $ 36,131 $ 30,277 $ 8,680 $ 75,088
Corporate -- -- -- 4,118
--------------------------------------------------------------------------------------
$ 36,131 $ 30,277 $ 8,680 $ 79,206
======================================================================================
Amortization expense:
Equipment $ 1,474 $ 30,467 $ 556,571 $ 588,512
Corporate -- -- -- 41,698
--------------------------------------------------------------------------------------
$ 1,474 $ 30,467 $ 556,571 $ 630,210
======================================================================================
======================================================================================
2002 2001
--------------------------------------------------------------------------------------
Call center service $ 565,890 $ 590,590
Healthcare:
Book sales 333,193 --
Programs revenue 947,604 145,823
E'Commerce:
Consulting 47,804 422,462
Product sales -- 132,432
Licensing 2,500 1,250
--------------------------------------------------------------------------------------
$1,896,991 $1,292,557
======================================================================================
- 12 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
6. Non-cash transactions and supplemental disclosures:
====================================================================================
2002 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 August 31, 2002. Management is in
current settlement discussions with the Plaintiff.
(b) Globalcom:
One of the Company's former suppliers has filed a lawsuit against
the Company for services rendered of $32,557 and liquidating damages
of $273,618. The Company's position is that the liquidating damages
claim has no merit. By agreement dated October 15, 2002, the parties
agreed upon a settlement whereby we would (1) deliver a consent
judgment for $70,000; (2) deliver an initial payment of $10,000 on
or before November 1, 2002 together with a promise to pay $5,000 per
month during each of the following twelve months; and (3) if payment
is made in full, then Globalcom will return the consent judgment,
and any claim against the company.
(c) Executive compensation:
On April 1, 2002, the Company entered into a two year employment
agreement with the President for management services. Under the
terms of the agreement, the President will receive $12,500 per month
for the first six months and $25,000 per month for the remainder of
the term. The President was also to receive 1,000,000 fully vested
stock options on the date of the agreement, 1,000,000 stock options
which vest after six months, and 2,000,000 stock options which vest
upon meeting certain profitability criteria. The President resigned
from his position on June 10, 2002 and all stock options other than
the initial 1,000,000 granted were forfeited.
- 13 -
HEALTHTRAC, INC.
(Formerly Virtualsellers.com, Inc.)
Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
Three months ended August 31, 2002 and 2001
Six months ended August 31, 2002 and 2001
================================================================================
7. Commitment and contingencies (continued):
(c) Executive compensation (continued):
On April 11, 2002, the Company entered into a five year consulting
agreement with the former President. Under the terms of the
agreement, the former President will receive $12,500 per month for
the first twelve months, $6,250 per month for the following twelve
months, and $1,000 per month for the remaining term. The former
President will also receive 2,000,000 stock options upon meeting
certain profitability criteria. As a result of the President
resigning from his position as President, Chief Executive Officer,
Secretary and a member of the Board of Directors, the former
President was also appointed as a Managing Director of the Company.
At that time, the former President's compensation was reinstated at
$25,000 per month until September 30, 2002 and on a month-to-month
basis thereafter. Current management is reviewing the validity of
the manner in which the Consulting Agreement was entered into by the
Company and currently intends to nullify the Consulting Agreement if
it is determined that the Consulting Agreement was not duly
authorized.
8. Subsequent events:
Subsequent to August 31, 2002, the Company granted to employees and
directors 8,100,000 stock options to acquire common shares of the Company
with an exercise price of $0.05 per share.
- 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
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. We have expanded
the scope of our call center operations and now service over 55,000 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. We anticipate that the services offered
by our customers can be bundled and/or marketed together. We have also had
success with our newest service that enables us to remotely control the services
of our client's subscribers. This service greatly
- 15 -
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.
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
40,000 transactions and 14,000 calls per month and have the resources to
significantly increase each of these.
Professional Services and Software Products Group
Through the Professional Services and Software Products (PSSP) Group we provided
businesses with customized e-commerce solutions based primarily on our TAME
development platform so that these businesses could retail their products and
services over the Internet. PSSP was capable of providing some of the services
that were previously offered by our VirutualSellers.com operation. In this
regard, PSSP was able to provide e-commerce applications, Web site development,
maintenance and hosting services, customized Internet application design,
deployment and project management services.
On September 23, 2002, the PSSP Group division was discontinued and the
Chicago-based and South Carolina staff dedicated to this division were
subsequently released.
On October 4, 2002, 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.
Healthtrac Corporation
We operate a health promotion and disease management business through our
wholly-owned subsidiary Healthtrac Corporation. Healthtrac Corporation provides
its products and services to health plans and self-insured employers. Its
products include health risk assessment tools, participant health status
reports, tailored health education tools, general health promotion information,
individual programs for self-management of individual health, disease management
interventions, the means of measuring and reporting results, and need and demand
reduction programs.
Our Healthtrac programs are designed to postpone the onset of morbidity (e.g.
disease and disability) through healthy preventive practices, and to encourage
and support self-management of chronic disease. Healthtrac offers population
health management tools for organizations at risk for health care costs. These
tools help identify potential high-risk constituents prior to high claims
utilization, reduce health risks and costs by supporting healthy changes and
management of chronic conditions, track and reinforce changes over time, and
evaluate the impact of these efforts. Our Healthtrac product line includes:
- Basic Program (low risk)
- 16 -
- High Risk Program
- Chronic Disease Management for:
Arthritis
Asthma
Back Pain
Diabetes
Heart Disease
High Blood Pressure
Lung/Respiratory Disease
Stroke
- Lifestyle Management Programs for:
Cigarette Smoking
Obesity
Stress
Combined Lifestyle Risk
- Babytrac(R)
Preconception
Prenatal
Postnatal
- Programs for Seniors
Other Healthtrac products and services include:
- Predictive algorithm - identifies individuals with higher health risk
who are more likely to incur high health costs.
- Questionnaire Summary Reports for case managers, Primary Care Physician.
- Babytrac Preconception and Prenatal educational programs with
questionnaires and feedback each trimester and postpartum.
- Outbound phone calls by health educators to high risk participants with
questionnaires and feedback.
- Aggregate reports for sponsoring organizations to assist them in
planning additional interventions and activities based on the risks of
population, and to assist them in evaluating the impact of their efforts
(reductions in costs - health care utilization, absenteeism, workers comp
and disability; retention of employee/members; satisfaction with
sponsoring organization). Link to resources for comparison with actual
claims and personnel measures to validate self-report data.
- Online Option for all products.
- Links with additional online resources provided by strategic partners.
- Healthtrac provides participants with other information intended to help
guide their health improvement efforts through self care books. These
books include:
- 17 -
- "Take Care of Yourself," by Donald M. Vickery, M.D. and James F. Fries,
M.D.
- "Taking Care of Your Child," by Robert H. Pantell, M.D., James F. Fries,
M.D., and Donald M. Vickery, M.D.
- "Living Well," by James F. Fries, M.D.
During the quarter ended August 31, 2002, we continued to concentrate on the
development of our health promotion business, on the development of the
Healthtrac name generally, and on our call center business. We also continued to
concentrate on developing our proprietary software language, TAME.
Some of our recent highlights and accomplishments include:
o Healthtrac's client, Blue Care Network of Michigan (BCN), which is
an affiliate of Blue Cross Blue Shield of Michigan, has been awarded
the Michigan Association of Health Plans' Pinnacle Award for Best
Practices in Health Care Programs for their use of the Healthtrac
Health Risk Assessment program.
o Healthtrac upgraded its health risk assessment software system and
renewed service agreements with 90 percent of its client base. Since
its acquisition in August of last year, Healthtrac has effectively
re-designed and implemented its system, which has been
enthusiastically endorsed by its client base through the renewal of
its multi-year agreements.
o Healthtrac signed a three-year agreement to offer its products and
services to the members of the Employers' Association, a
management-oriented service organization structured to complement
the human resource management of member firms and inform them on
related regulatory matters. Our potential eligibles in this contract
are 330,000 which could generate $7,900,000 in revenue per year. We
expect to attract at least 30,000 eligibles in the program for
revenues of $720,000 per year.
o NorthStar TeleSolutions, Inc., signed service agreements with three
new clients, including Advanced Satellite and Telecommunications,
C-Comm Systems, and Harbour Breeze Broadband. We expect to increase
revenues by $130,000 per year through these contracts.
o Healthtrac's development of its Web-based health risk assessment was
completed and has made available to clients and prospects.
o Edward Sharpless was named President on September 18, 2002 and CEO
on September 23, 2002.
o Richard Kessler and Robert Maul were elected to the board of
directors on August 22, 2002.
- 18 -
o Healthtrac consolidated its South Carolina and Chicago offices to
Redwood City, California during October 2002.
o Healthtrac reduced operating expenses by $1.5 million annually
through consolidation and headcount reduction.
On June 11, 2002, Thomas V. Kalebic resigned from his position as president and
chief executive officer of the company, and from his board position. With Mr.
Kalebic's resignation, Dennis Sinclair assumed the position of Managing
Director. Mr. Sinclair resigned from his positions as managing director and
chairman of the board on September 27, 2002.
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.
Results of Operations
Three Months Ended August 31, 2002 Compared to Three Months Ended August 31,
2001
Revenues for the three months ended August 31, 2002 ("Second Quarter 2003") of
$811,684 increased $33,508, an increase of 4.3% from revenues of $778,176 for
the three months ended August 31, 2001 ("Second Quarter 2002"). The increase in
revenues in Second Quarter 2003 over Second Quarter 2002 is primarily due to the
health promotion segment, which we acquired in the second quarter of fiscal
2002.
At the call center, the Second Quarter 2003 revenues were $291,222 compared to
$291,767 for Second Quarter 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 remained consistent with Second Quarter 2002.
Healthtrac Corporation earned revenues of $526,646 for Second Quarter 2003
compared to $145,823 for Second Quarter 2002. The increase was due to the Second
Quarter 2002 only having one reporting month due to the acquisition. Healthtrac
Corporation generates revenues by providing health promotion and disease
management services to self-funded employers and health insurance plans.
The e'commerce ("PSSP") segment earned no revenues for Second Quarter 2003
compared to revenues from Second Quarter 2002 of $229,234. The PSSP Group was
substantially discontinued on September 23, 2002.
Direct product costs in Second Quarter 2003 were $76,336, compared to direct
costs of $241,868 in Second Quarter 2002, a decrease of $165,532. The call
center division primarily sells services and thus has no direct product costs.
The decrease in direct product costs is due to the substantial discontinuance of
the e-commerce division activities offset by an increase in costs at Healthtrac
Corporation due to the acquisition.
- 19 -
Selling, general and administrative expenses decreased to $1,169,984 from
$2,052,408 in Second Quarter 2002, a decrease of $882,424. The decrease is due
to streamlining processes and procedures to reduce the number of people that we
employ and the substantial restructuring and discontinuance of the e-commerce
division.
Depreciation and amortization increased from $229,289 to $367,601, an increase
of $138,312. 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 Second Quarter 2002.
In Second Quarter 2002, the Company recorded a write-down of assets of
$1,330,000 and goodwill of $1,522,758 to reflect the Company's decision to close
its Sullivan Park operations and substantially scale back its e'commerce
operations. In Second Quarter 2003, a further write-down of assets of $481,663
has been recorded related to the e'commerce operations and other recent
acquisitions whereby the Company has decided not to pursue the businesses
related to these assets.
Other income (expense) decreased from income of $112,721 in Second Quarter 2002
to income of $108,055 in Second Quarter 2003, a decrease of $4,666. Other income
in Second Quarter 2002 related primarily to a gain on the settlement of a
lawsuit against one of the Company's former business suppliers. Other income in
Second Quarter 2003 related primarily to a credit received from one of the
Company's e'commerce suppliers for debt forgiveness.
The Company recorded a loss of $123,520 in Second Quarter 2002 relating to its
catalogue division which has been reclassified to discontinued operations due to
the shut-down of this division in fiscal 2002. This division had no activity in
Second Quarter 2003.
For Second Quarter 2003, we recognized a loss of $1,175,845 or $0.01 per share,
compared to a loss of $4,608,946 or $0.03 per share for Second Quarter 2002. The
decrease in the loss is due to the factors explained above.
Six Months Ended August 31, 2002 Compared to Six Months Ended August 31, 2001
Revenues for the six months ended August 31, 2002 ("Six Months 2003") of
$1,896,991 increased $604,334, an increase of 47% from revenues of $1,292,557
for the six months ended August 31, 2001 ("Six Months 2002"). The increase in
revenues in Six Months 2003 over Six Months 2002 is primarily due to the health
promotion segment, which we acquired in the second quarter of fiscal 2002.
At the call center, the Six Months 2003 revenues were $565,890 compared to
$590,590 for Six 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 remained consistent with Six Months 2002 with a
slight decrease due to an increased customer base offset by slightly lower
rates.
- 20 -
Healthtrac Corporation earned revenues of $1,280,797 for Six Months 2003
compared to $145,823 for the Six Months 2002. The increase was due to the Six
Months 2002 only having one reporting month due to the acquisition. Healthtrac
Corporation generates revenues by providing health promotion and disease
management services to self-funded employers and health insurance plans.
The e'commerce ("PSSP") segment earned $50,304 for Six Months 2003 compared to
revenues from Six Months 2002 of $556,144. The PSSP Group was substantially
restructured in the second quarter of 2002 and the Company's internet sales
division and Sullivan Park operations were discontinued. Revenues in fiscal 2003
related to the Company's internet consulting practice.
Direct product costs in Six Months 2003 were $447,789, compared to direct costs
of $451,238 in Six Months 2002, a decrease of $3,449. The call center division
primarily sells services and thus has no direct product costs. The decrease in
direct product costs is due to the substantial discontinuance of the e-commerce
division activities offset by an increase in costs at Healthtrac Corporation due
to the acquisition.
Selling, general and administrative expenses decreased to $2,474,334 from
$3,668,548 in Six Months 2002, a decrease of $1,194,214. The decrease is due to
streamlining processes and procedures to reduce the number of people that we
employ and the substantial restructuring and discontinuance of substantial
activities of the e-commerce division in 2002.
Depreciation and amortization increased from $630,210 to $731,978, an increase
of $101,768. 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 Six Months 2002.
In Six Months 2002, the Company recorded a write-down of assets of $1,330,000
and goodwill of $1,522,758 to reflect the Company's decision to close its
Sullivan Park operations and substantially scale back its e'commerce operations.
In Six Months 2003, a further write-down of assets of $481,663 has been recorded
related to the e'commerce operations and other recent acquisitions whereby the
Company has decided not to pursue the businesses related to these assets.
Other income (expense) increased from income of $103,566 in Six Months 2002 to
income of $116,870 in Six Months 2003, an increase of $13,304. Other income in
Six Months 2002 related primarily to a gain on the settlement of a lawsuit
against one of the Company's former business suppliers. Other income in Six
Months 2003 related primarily to a credit received from one of the Company's
e'commerce suppliers for debt forgiveness.
The Company recorded a loss of $163,540 in Six Months 2002 relating to its
catalogue division which has been reclassified to discontinued operations due to
the shut-down of this division in fiscal 2002. This division had no activity in
Six Months 2003.
For Six Months 2003, we recognized a loss of $2,121,903 or $0.01 per share,
compared to a loss of $6,370,171 or $0.05 per share for Six Months 2002. The
decrease in the loss is due to the factors explained above.
- 21 -
Liquidity and Capital Resources
As at August 31, 2002, we had a net working capital deficiency of $2,450,638
including cash resources of $105,920.
During Second Quarter 2003, we used $211,772 in cash to fund operations, used
$4,327 in cash to fund investing activities which consisted solely of capital
asset additions and received $26,113 in cash from financing activities for a net
decrease in cash of $189,936. During Six Months 2003, we used $387,360 in cash
to fund operations, used $11,575 in cash to fund investing activities which
consisted solely of capital asset additions and received $221,196 in cash from
financing activities for a net decrease in cash of $177,739.
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 $225,000. We also estimate
that cash flow from operations may be negative for the remainder of fiscal 2003,
and thus, we may require additional financing in order to continue operations.
We estimate that further cash requirements of approximately $600,000 will be
required to fund operations. There is no guarantee that we will be able to
obtain the additional cash resources 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
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 six month period of $2,121,903, used $387,360 in cash to
fund operations for the period ended August 31, 2002. For the year ended
February 28, 2003, our management is projecting that we will require $600,000 to
fund operations and capital asset acquisitions, that we will raise $600,000 from
financing activities and that it will cost us approximately $45,000 to raise
this financing. Management expects to use funds raised for liabilities and to
expand our
- 22 -
marketing and operations capacity. There can be no assurance that management's
projections will be achieved.
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
Much of the information included in this quarterly report on Form 10-Q includes
or is based upon estimates, projections or other "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 are subject to the "safe harbor"
created by those sections. When used in this document, the words "expects",
"anticipates", "intends", "plans" and similar expressions are intended to
identify forward-looking statements. While these forward-looking statements, and
any assumptions upon which they are based, are made in good faith and reflect
our current judgment regarding the direction of our business, actual results
will almost always vary, sometimes materially, from any estimates, predictions,
projections, assumptions, or other future performance suggested herein. We
undertake no obligation to update forward-looking statements to reflect events
or circumstances occurring after the date of such statements.
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.
- 23 -
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;
- 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 six month period ended August 31, 2002,
we incurred losses of $2,121,903. As of August 31, 2002, we had an accumulated
deficit of $119,195,227. 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 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.
We expect to increase our operating expenses in the future by increasing our
sales and marketing expenditures. 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. Moreover, because we expect to continue to increase our
investment in our business faster than we anticipate growth in our revenue, we
will continue to incur significant operating losses and negative cash flow for
the foreseeable future. Consequently, it is possible that we will not achieve
profitability, and even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis in the future. The
auditors' report on our annual consolidated financial statements for the year
ended February 28, 2002, contains an explanatory
- 24 -
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 from the
outcome 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;
- 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 are likely to be negative for the foreseeable
future.
Due to these and other factors, quarter-to-quarter comparisons of our operating
results may not be meaningful. You 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 October 4, 2002 we had 42. 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,
- 25 -
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.
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
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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 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 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 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
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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 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.
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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.
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
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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, (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 you,
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.
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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 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;
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- 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 "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
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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.
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
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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.
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.
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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.
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., you may have
difficulty reselling any of the shares your purchase 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.
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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, 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
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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 will require
additional financing. We currently have a working capital deficiency of
$2,450,638. As of August 31, 2002, our accumulated deficit was $119,195,227.
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. Our ability to continue in business depends upon our
continued ability to obtain significant financing from external sources. We are
currently raising additional funds through the sale of additional equity. If
this additional capital were raised through borrowing or other debt financing,
we would incur substantial additional interest expense. 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 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
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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 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. Moreover, we may seek authorization
to increase the number of our authorized common shares and to sell additional
securities and/or rights to purchase such securities at any time in the future.
Dilution of the value of the common shares would likely result from such sales.
In addition, 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
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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 August 31, 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 August 31, 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 is undertaking a complete review of all financial
and disclosure controls and procedures.
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. At a hearing held October 16, 2001, the Court granted possession
of the premises to the Plaintiff. Subsequently, the Plaintiff filed an amended
Complaint asking for $116,762.31 in rent, late fees, costs, interest and
attorneys' fees. Thereafter, the Plaintiff again amended its Complaint to demand
an additional $683,000, for a total claim of $859,512. We deny that we owe the
Plaintiff any money. In addition, we have asserted various affirmative defences
and we have filed a Counterclaim arising out of the Plaintiff/landlord's
interference with our efforts to negotiate a sublease by bypassing us and
negotiating a new lease directly with the company with whom we were negotiating
a sublease, with whom the Plaintiff/landlord did eventually enter into a new
lease. Our affirmative defences include a claim that the demand for the
additional $683,000 constitutes an unlawful claim for liquidated damages, that
the Plaintiff's interference with our efforts to negotiate a sublease caused us
to lose profits in excess of the rent being demanded of us, as well as the
opportunity to be released from the liability that the Plaintiff alleges we have
under the lease. We are also alleging that the Plaintiff waived any right to
seek
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rental payments, and is estopped from doing so, and that the Plaintiff is itself
in material breach of the lease. The company is currently in discussion with the
Plaintiff to settle the lawsuit.
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 November 9, 2001, Globalcom, Inc. filed a lawsuit against our company in the
Circuit Court of Cook County, Illinois, County Department, Chancery Division
(Case No. 01 L 014565), claiming that they had provided telecommunications
services to our company under a written three year contract and that we were in
default of that contract for non-payment of sums due. In this lawsuit,
Globalcom, Inc. is claiming that we owe them $32,556.73 in damages and
$273,617.68 in liquidated damages (the liquidated damage claim is for the
balance of the monthly service charges that would have been paid if the contract
had remained in effect for the full term). We believe that the liquidated
damages claim is an unenforceable penalty and we have filed a motion to have
this part of the claim dismissed on this ground. This motion was scheduled to be
heard on July 9, 2002 but is now being reset to a new date to be determined. We
dispute the claims made in the lawsuit and we intend to offer a vigorous
defence. By agreement dated October 15, 2002, the parties agreed upon a
settlement whereby we would (1) deliver a Consent Judgment for $70,000; (2)
deliver an initial payment of $10,000.00 on or before November 1, 2002 together
with a promise to pay $5,000 per month during each of the following twelve
months; and (3) if payment is made in full, then Globalcom will return the
Consent Judgment, and any claim against the company.
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.
Other than as set forth above, to our knowledge no other material lawsuits were
commenced against us during the period ended August 31, 2002, nor did we
commence any lawsuits during the same period.
ITEM 2 Changes in Securities and Use of Proceedings
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Recent Sales of Unregistered Securities
During the quarter ended August 31, 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 500,000 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.
Dr. Dennis Sinclair
On April 11, 2002, we entered into a Consulting Agreement with Dr. Sinclair, our
former President and Chief Executive Officer (but who remained a member of our
Board of Directors), pursuant to which Dr. Sinclair has agreed to help us
develop a strategy and business plan and to assist us in developing our
business. As compensation for his services, we agreed to pay Dr. Sinclair a
consulting fee equal to $12,500 per month for the first year of the term of the
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Consulting Agreement, $6,500 per month for the second year and $1,000 per month
plus the cost of health insurance for Dr. Sinclair and his spouse from the
second anniversary of the Consulting Agreement until the earlier of June 22,
2007 or his death. We also agreed to grant Dr. Sinclair options to purchase
2,000,000 common shares in the capital of our company at an exercise price of
$0.10 per share, which options will vest, if at all, if and when our company
achieves certain profitability criteria during the first year of the term of the
Consulting Agreement. The Consulting Agreement will expire on June 22, 2007.
If we terminate the Consulting Agreement for cause, Dr. Sinclair is entitled to
receive all sums due and payable under the Consulting Agreement to the date of
termination for cause. We are not entitled to terminate the Consulting Agreement
without cause. Current management is reviewing the validity of the manner in
which the Consulting Agreement was entered into by the Company and currently
intends to nullify the Consulting Agreement if it is determined that the
Consulting Agreement was not duly authorized.
When Thomas Kalebic resigned from his offices of President, Chief Executive
Officer and Secretary of our company and resigned from his seat on our Board of
Directors on June 10, 2002, we appointed Dr. Sinclair as the Managing Director
of our company and agreed to increase his consulting fee to $25,000 per month
until September 30, 2002. Dr. Sinclair resigned from the positions of Managing
Director and Chairman of the Board on September 27, 2002.
Chicago Lease
On October 2, 2002, we vacated the premises of 120 North LaSalle, Suite 1000 and
moved our remaining Chicago personnel to a new office located at 945 W. Superior
Street, Chicago, Illinois. We entered into a lease agreement with Encore LLC
which provides for a monthly rent of $1,350 from October 1, 2002 until April 30,
2003. The lease is renewable with six month intervals at a monthly rent of
$1,400 through August 31, 2004.
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.
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.
Exhibits
Exhibit
Number Exhibit Title
- ------ -------------
3 Articles of Incorporation and Bylaws
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(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
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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 Sharpless
-----------------------------
Edward Sharpless,
Duly Authorized Officer and Principal Financial Officer
Date: October 21, 2002
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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: October 21, 2002
/S/ Edward Sharpless
- -------------------------------
Edward Sharpless
President, Principal Executive Officer & Principal Financial Officer